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**SECURITIESAND EXCHANGE COMMISSION****WASHINGTON,D.C. 20549**

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**FORM 10-Q**

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

**For the quarterly period endedJune 30, 2001**

**Commission file number 0-19878**

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**OPTION CARE, INC.**(Exact name of registrant as specified in its charter)
| **Delaware**                                                    | **36-3791193**                     |
|-----------------------------------------------------------------|------------------------------------|
| (State  or other jurisdiction of incorporation or organization) | (IRS  Employer Identification No.) |
|                                                            |                               |
| **100 Corporate North, Suite 212****Bannockburn, Illinois**     | **60015**                          |
| (Address  of principal executive office)                        | (zip  code)                        |

**(847) 615-1690**(Registrant'stelephone number, including area code)

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             Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý  No o

             Indicatethe number of shares outstanding of each of the issuer's classes of commonstock, as of the latest practicable date.

 
|                         |                       |
|------------------------------|----------------------------|
| **Class**                    | **Issued and Outstanding** |
|                         | **as of July 31, 2001**    |
|                         |                       |
| Common Stock - .01 par value | 12,422,206                 |
|                         |                       |

** **

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**INDEX**

**OPTION CARE, INC. ANDSUBSIDIARIES**

 

|        |                                                                                                      |
|-------------|-----------------------------------------------------------------------------------------------------------|
| **PART I**  | **FINANCIAL INFORMATION**                                                                                 |
|        |                                                                                                      |
| Item 1.     | Financial Statements  (Unaudited)                                                                         |
|        |                                                                                                      |
|        | Condensed  consolidated balance sheets—June 30, 2001 and December 31, 2000                 |
|        |                                                                                                      |
|        | Condensed  consolidated statements of income—Three and six months ended June 30,  2001 and 2000 |
|        |                                                                                                      |
|        | Condensed  consolidated statements of cash flows—Six months ended June 30, 2001 and  2000       |
|        |                                                                                                      |
|        | Notes  to condensed consolidated financial statements—June 30, 2001                                  |
|        |                                                                                                      |
| 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                                                                                 |
|        |                                                                                                      |

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

**Option Care, Inc. and SubsidiariesCondensed Consolidated BalanceSheets**(in thousands, except share and per share amounts)

 

|                                       | **June 30, 2001**                                                                                           |   | **December 31, 2000**                                                                                                        |   |
|--------------------------------------------|-------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------|--------|
|                                       | **      (Unaudited)**                                                                   |   | **                 **** (Note 1)** |   |
|                                       |                                                                                                             |   |                                                                                                                              |   |
| Assets                                     |                                                                                                        |   |                                                                                                                         |   |
| Current assets:                            |                                                                                                        |   |                                                                                                                         |   |
|                                       | Cash and cash equivalents                                                                                   | $      | –                                                                                                                       |   | $ | – |   |
|                                       | Accounts receivable, net                                                                                    | 40,353 |                                                                                                                         | 28,845 |   |
|                                       | Inventories, net                                                                                            | 4,398  |                                                                                                                         | 2,320  |   |
|                                       | Deferred tax asset                                                                                          | 2,957  |                                                                                                                         | 3,308  |   |
|                                       | Other current assets                                                                                        | 1,736  |                                                                                                                         | 900    |   |
|                                       |                                                                                                             |   |                                                                                                                              |   |
| Total current assets                       | 49,444                                                                                                      |   | 35,373                                                                                                                       |   |
| Equipment and other fixed assets, net      | 5,615                                                                                                       |   | 4,182                                                                                                                        |   |
| Goodwill, net                              | 31,008                                                                                                      |   | 25,859                                                                                                                       |   |
| Other assets                               | 1,913                                                                                                       |   | 1,411                                                                                                                        |   |
|                                       |                                                                                                             |   |                                                                                                                              |   |
| Total assets                               | $                                                                                                           | 87,980 |                                                                                                                         | $      | 66,825 |   |
|                                            |                                                                                                             |   |                                                                                                                              |   |
| Liabilities and stockholders' equity       |                                                                                                        |   |                                                                                                                         |   |
| Current liabilities:                       |                                                                                                        |   |                                                                                                                         |   |
|                                       | Cash overdraft                                                                                              | $      | 1,352                                                                                                                        |   | $ | 770 |   |
|                                       | Current portion of long-term debt                                                                           | 27,401 |                                                                                                                         | 833    |   |
|                                       | Trade accounts payable                                                                                      | 6,997  |                                                                                                                         | 5,854  |   |
|                                       | Other current liabilities                                                                                   | 5,450  |                                                                                                                         | 6,922  |   |
|                                       |                                                                                                             |   |                                                                                                                              |   |
| Total current liabilities                  | 41,200                                                                                                      |   | 14,379                                                                                                                       |   |
| Long–term debt, less current portion  | 121                                                                                                         |   | 11,951                                                                                                                       |   |
| Other liabilities                          | 2,099                                                                                                       |   | 1,423                                                                                                                        |   |
| Minority interest                          | 427                                                                                                         |   | 404                                                                                                                          |   |
|                                       |                                                                                                             |   |                                                                                                                              |   |
| Total liabilities                          | 43,847                                                                                                      |   | 28,157                                                                                                                       |   |
|                                       |                                                                                                             |   |                                                                                                                              |   |
| Stockholders' equity:                      |                                                                                                        |   |                                                                                                                         |   |
|                                       | Preferred stock, $.01 par value per share, 5,000,000  shares                                                |   |                                                                                                                         |   |   |
|                                       | authorized, no shares issued or outstanding                                                                 | – |                                                                                                                         | – |   |
|                                       | Common stock, $.01 par value per share, 30,000,000  shares                                                  |   |                                                                                                                         |   |   |
|                                       | authorized, 12,415,596 and 12,134,961 shares issued and  outstanding at June 30, 2001 and December 31, 2000 | 124    |                                                                                                                         | 121    |   |
|                                       | Common stock to be issued, 36,773 and 124,901 shares at  June 30,                                           |   |                                                                                                                         |   |   |
|                                       | 2001 and December 31, 2000                                                                                  | 239    |                                                                                                                         | 352    |   |
|                                       | Other stockholders' equity                                                                                  | 43,770 |                                                                                                                         | 38,195 |   |
|                                       |                                                                                                             |   |                                                                                                                              |   |
| Total stockholders' equity                 | 44,133                                                                                                      |   | 38,668                                                                                                                       |   |
|                                       |                                                                                                             |   |                                                                                                                              |   |
| Total liabilities and stockholders' equity | $                                                                                                           | 87,980 |                                                                                                                         | $      | 66,825 |   |
|                                            |                                                                                                             |   |                                                                                                                              |   |
|                                       |                                                                                                        |   |                                                                                                                         |   |
|                                            |                                                                                                             |        |                                                                                                                              |        |  |  |  |  |  |

*See notes to condensed consolidated financial statements*
**Option Care, Inc. and Subsidiaries****CondensedConsolidated Statements of Income**(Unaudited)(in thousands, except per share amounts)

 
 **Three Months Ended** **Six Months Ended**  **June 30,** **June 30,**  **** ****  **2001** **2000** **2001** **2000**      Revenue$49,903 $33,150 $95,808 $65,921 Cost of revenue32,556 20,254 62,845 39,967      Gross profit17,347 12,896 32,963 25,954 Selling, general and administrative expenses11,921 9,125 23,004 18,312 Provision for doubtful accounts847 555 1,411 1,344 Amortization of goodwill237 157 462 314      Total operating expenses13,005 9,837 24,877 19,970          Operating income4,342 3,059 8,086 5,984 Interest expense(413)(198)(754)(449)Other expense, net(73)(112)- (191)     Income before income taxes3,856 2,749 7,332 5,344 Income tax provision1,515 1,027 2,860 2,013      Net income$2,341 $1,722 $4,472 $3,331     Net income per common share:         Basic$0.19 $0.14 $0.36 $0.28        Diluted$0.18 $0.14 $0.35 $0.27     Shares used in computing net income per share:         Basic12,403 11,968 12,324 11,968        Diluted12,967 12,433 12,792 12,434              
*See notes to condensed consolidated financial statements*

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

 
 **Six Months Ended**  **June 30,**  ****  **2001** **2000**    Cash flows from operating activities:     Net income$4,472 $3,331  Adjustments to reconcile net income to net cash  provided (used) by operating activities:     Depreciation and amortization1,794 1,468  Provision for doubtful accounts1,411 1,344  Other514 —  Changes in assets and liabilities:     Accounts receivable(9,585)(2,155) Inventory(457)1,874  Change in other current assets and current liabilities(2,380)(3,663)    Net cash provided (used) by operating activities(4,231)2,199    Cash flows from investing activities:     Purchases of equipment and other, net(1,329)(562) Additions to other assets, net112 (47) Payments for acquisitions, net of cash acquired(10,320)(2,255)    Net cash used in investing activities(11,537)(2,864)   Cash flows from financing activities:     Increase (decrease) in cash overdraft582 (2,405) Net borrowing on credit agreements14,741 2,980  Payments on capital leases and other debt(34)(102) Proceeds from issuance of stock479 192     Net cash provided by financing activities15,768 665    Net increase in cash and cash equivalents— — Cash and cash equivalents, beginning of period— — Cash and cash equivalents, end of period$— $—   
*See notes to condensed consolidated financial statements*

**Option Care, Inc. and Subsidiaries****Notes toCondensed Consolidated Financial Statements****June 30, 2001**(Unaudited)(in thousands, except per share amounts)

**1.  Basis of Presentation**

             Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included. Operating results for the three and sixmonth periods ended June 30, 2001 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2001.

             Thebalance sheet at December 31, 2000 has been derived from the auditedfinancial statements at that date but does not include all of the informationand footnotes required by generally accepted accounting principles for completefinancial statements.

             For further information, refer tothe consolidated financial statements and footnotes thereto included in OptionCare’s Report on Form 10-K for the year ended December 31, 2000. 

             Certainamounts in the period ended June 30, 2000 have been reclassified to conform tothe June 30, 2001 presentation.

 

**2.  Long-Term Debt**

             On February 5, 1999, weentered into a $25,000 Loan and Security Agreement with Banc of AmericaCommercial Finance Corporation. This agreement provided for borrowing up to$25,000 on revolving loans. On June 30, 2000, the agreement wasamended and restated to increase the total facility to $40,000, consisting of$25,000 available on revolving loans, plus $15,000 available underterm loans. The purpose of the amendment was to provide us with the availablecapital to acquire selected franchises and other healthcare companies uponapproval by the lenders and by our board of directors. Under the revisedagreement, we were able to enter into term loans from June 30, 2000through June 30, 2001. Repayment under the term loan will be made on afour-year amortization schedule, with the first payment due July 1,2001.  The entire balance is dueFebruary 2002 and therefore is reflected in the current portion oflong-term debt.  We would be subject toearly termination fees if the loan were terminated prior to its naturalexpiration.

             Availability under the revolvingloan portion of the facility is related to percentages of outstanding accountsreceivable and inventory balances, less certain ineligible amounts, as definedin the facility. Overall borrowings allowable under the revolving creditfacility are limited to the lesser of $25,000 or the total allowable collateralbase.

             The loan facilities require us tomeet certain financial covenants including a fixed charge coverage ratio, adebt ratio, and a debt to operating cash flow ratio.  We are also subject to limitations on annual capitalexpenditures, the ability to make acquisitions, the ability to declare cashdividends and various other matters.

             Under the current facilityagreement, we may elect interest rates on the revolving loan ranging from LIBORplus 2.125%, to the bank's reference rate. Interest on the term loan rangesfrom LIBOR plus 3.200%, to the bank's reference rate plus 1%.

          OnApril 13, 2001, GE Capital Commercial Finance, Inc. became the agent on our$40,000 credit facility, replacing Banc of America Commercial FinanceCorporation in this role.  There were nomaterial changes to the facility agreement resulting from this transaction.

             As of June 30, 2001, we had $17,101outstanding under the revolving credit facility and $10,250 outstanding underthe term loan. The average interest rates for the second quarter of 2001 onoutstanding borrowings under the revolving loan were 6.9% and under the termloan were 7.8%.

**3.  Earnings Per Share Data**

             Thefollowing table sets forth the computation of basic and diluted earnings pershare for the periods indicated:

 
 Three  months ended Six  months ended  June  30, June  30,     2001 2000 2001 2000      Basic:        Net income$2,341 $1,722 $4,472 $3,331      Average shares outstanding12,403 11,968 12,324 11,968          Basic earnings per share$0.19 $0.14 $0.36 $0.28               Diluted:        Net income$2,341 $1,722 $4,472 $3,331      Average shares outstanding12,403 11,968 12,324 11,968 Net effect of dilutive stock options –  Based on the treasury stock method564 465 468 466      Total diluted shares12,967 12,433 12,792 12,434      Diluted earnings per share$0.18 $0.14 $0.35 $0.27      
**4.  Operating Segments**

             As ofJune 30, 2001, we have two identifiable operating segments: the local pharmacydivision (formerly called “infusion and services”) and the regional specialtypharmacy division (formerly called “specialty pharmacy”). The local pharmacydivision derives revenue through our nationwide network of 129 owned andfranchised locations.  Revenue consistsof infusion therapy and specialty pharmaceuticals provided by company-ownedlocations, royalties from franchised pharmacy locations, sales and support ofManagement by Information, Inc. software, and other sources.  The regional specialty pharmacy divisionderives revenue primarily from the dispensing of specialty injectablepharmaceutical products to patients’ homes or physicians’ offices from threeregional distribution centers. Inter-division sales in 2000 were recorded at cost and there was noprofit or loss on inter-division sales or transfers.  In 2001, no inter-division sales have been recorded. Sales fromthe regional specialty pharmacy division to the local pharmacy division arebeing accounted for as cost of goods transfers.

 
 **Three months ended June 30,**  ****  **2001** **2000**  **** ****  **Local**  **Pharmacy** **Regional Specialty Pharmacy** **Total** **Local**  **Pharmacy** **Regional Specialty Pharmacy** **Total**  **** **** **** **** **** **** Net sales to external customers$37,026 $12,877 $49,903 $23,950 $9,200 $33,150 Inter-segment net sales– – – – 1,885 1,885 Gross profit16,045 1,302 17,347 11,713 1,183 12,896 Operating income$3,833 $509 $4,342 $2,583 $476 $3,059              
 
             ** ****Six months ended**** ** ****  **June 30,**  **2001**** ****2000**** ** **** ****  **Local**  **Pharmacy** **Regional Specialty Pharmacy**** ****Total**** ****Local**  **Pharmacy**** ****Regional Specialty Pharmacy**** ****Total**** ** **** **** **** **** **** **** Net sales to external customers$71,115 $24,693 $95,808 $47,880 $18,041 $65,921 Inter-segment net sales– – – – 3,396 3,396 Gross profit30,125 2,838 32,963 23,405 2,549 25,954 Operating income6,672 1,414 8,086 4,813 1,171 5,984              Total assets$82,396 $5,584 $87,980 $54,335 $4,161 $58,496 
 

In the third quarter of 2000, we reclassified certainHuman Growth Hormone operations from the local pharmacy division to theregional specialty pharmacy division. The revenue reclassified for the threemonths ended June 30, 2000 was $1,642 and the six months ended June 30, 2000was $3,274.  The reclassificationincreased regional specialty pharmacy division gross profit by $195 for thethree months ended June 30, 2000 and $415 for the six months ended June 30,2000.  Due to the reclassification,regional specialty pharmacy operating income increased by $81 for the threemonths ended June 30, 2000 and $195 for the six months ended June 30, 2000. Thereclassification had no impact on total division assets.

**5.Significant Customer**

             Wegenerate revenue from managed care contracts and other agreements withcommercial third party payors.  Ourprincipal managed care contract is with Blue Cross Blue Shield of Florida whichcontracts with us through our regional specialty pharmacy located in Miami,Florida.  Approximately 72% of theregional specialty pharmacy revenue and 23% of the total pharmacy revenue(revenue excluding royalties, sale and support of MBI software and otherrevenue) for the three and six months ended June 30, 2001 was related to thiscontract.  In 2000, 1999, and 1998,approximately 27%, 25% and 22% of our total pharmacy revenue and approximately74%, 77% and 76% of our regional specialty pharmacy revenue was related to thiscontract.  The contract is terminable byeither party on 90 days’ notice and, unless terminated, renews annually eachMarch for an additional one-year term. At the beginning of the three months ended June 30, 2001, we agreed toprice reductions under this contract.

**6.Acquisitions**

             Weacquired eight local pharmacies through five separate asset acquisitions in thesecond quarter of 2001. On April 6, 2001, we purchased certain assets and theongoing home infusion operations of American Homepatient, Inc. in the St.Louis, Missouri metropolitan area.  OnApril 10, 2001, we purchased certain assets and the continuing operations ofPark Infusion Services, L.P., a home infusion provider in the St. Petersburg,Florida area.  On May 25, 2001, weacquired selected assets and the ongoing infusion operations of CM HealthcareResources, Inc. in the Chicago, Illinois area. The effective date of this acquisition was May 1, 2001. On June 12,2001, we acquired certain assets and the ongoing home infusion serviceoperations of IVTX, Inc., doing business as Express Scripts Infusion Services,in the following markets: Baltimore, Maryland, Newark, New Jersey, St. Louis,Missouri, Philadelphia, Pennsylvania, and Dallas and Houston, Texas.  Finally, on June 29, 2001, we acquiredselected assets of MedCare@Home, LLC, which operated a home infusion pharmacybusiness in Dallas, Texas.  Theaggregate purchase price for these acquisitions was $8,407 paid in cash at theclosings with up to an additional $2,130 payable in cash through 2003 ifcertain financial targets are met.  Ofthe total cash paid at the closings, $7,250 was paid from borrowings under ourterm loan facility.  The remaining$1,157 was paid for with funds borrowed under our revolving line ofcredit.  Any additional amounts to bepaid out under these agreements will be recorded as additional goodwill in theperiod in which the amounts due become certain.  In addition to the amounts paid for the new acquisitions, we alsopaid $75 in additional consideration for a prior acquisition.

             The purchase method of accounting was used to record thenew acquisitions and $2,504 of goodwill was recorded. The accompanyingcondensed financial statements include the results of operations of allacquired businesses from the effective date of acquisition.

             Ourunaudited pro forma results of operations, presented as if the acquisitionscompleted between January 1, 2000 and June 30, 2001 had occurred as of January1, 2000, were as follows:

 
 **Six Months Ended June 30,**  ****  **2001** **2000**  **** **** Revenue$121,001 $106,588      Net income4,623 4,107      Net income per diluted share$0.36 $0.33 
**7. NewAccounting Pronouncements**

             In June2001, the Financial Accounting Standards Board issued Statements of FinancialAccounting Standards No. 141, *Business Combinations*, and No. 142, *Goodwill andOther Intangible Assets**(SFAS No.141 and SFAS No. 142)*.  Underthe new rules, effective January 1, 2002, goodwill and intangible assets deemedto have indefinite lives, related to acquisitions prior to June 30, 2001, willno longer be amortized but will be subject to annual impairment tests inaccordance with the Statements.  Inaddition, goodwill and intangible assets deemed to have indefinite lives,related to acquisitions subsequent to June 30, 2001, will not be amortized butwill be subject to annual impairment tests in accordance with theStatements.  Other intangible assetswill continue to be amortized over their useful lives.

             If weadopted the non-amortization provisions of SFAS No. 142, effective January 1,2001, net income for the six months ended June 30, 2001 would have beenincreased $312 ($0.02 per share). During 2002, we will perform the first of the required impairment testsof goodwill and indefinite lived intangible assets as of January 1, 2002 and wehave not yet determined what the effect of these tests would be on the earningsand our financial position.

**8.Subsequent Events**

             OnJuly 26, 2001, we filed a Form S-3 Registration Statement with the Securitiesand Exchange Commission for the offer and sale by us of 3,000 shares of ourcommon stock.

 

**Item2. **            **Management'sDiscussion and Analysis of Financial Condition and Results of Operations**

**FORWARD LOOKING STATEMENTS**

The following discussion should be readin conjunction with our Annual Report on Form 10-K for the year endedDecember 31, 2000. The Private Securities Litigation Reform Act of 1995provides 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), salesand 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 pharmacy services to patientson behalf of managed care organizations and other third party payors.  We contract with payors to provide infusiontherapy, specialty pharmacy and other related services to patients at home orat other alternate-site settings, such as physicians’ offices.  As of June 30, 2001, our pharmacy andrelated services are provided locally through our nationwide network of 129owned and franchised pharmacy locations and through our three regionalspecialty pharmacies which operate under the name OptionMedTM.  For the six months ended June 30, 2001,approximately 49.8% of our revenue was generated from home infusion therapy andrelated services (excluding specialty injectable pharmaceuticals, some of whichmay also be infused), 44.3% from the sale of specialty injectablepharmaceuticals, 4.4% in royalties from our franchised pharmacy locations, and1.5% from other sources.

We operate our business in two segments –our local pharmacy division (formerly called “infusion & services”) and ourregional specialty pharmacy division (formerly called “special pharmacy”).  Summarized information about revenue for thethree months ended June 30, 2001 and 2000 and the six months ended June 30,2001 and 2000 in each division is provided in the following table:
 **Three months ended** **Six months ended**  **June 30,** **June 30,**  **** ****  **2001** **2000** **2001** **2000**  **************** ************  Local pharmacy:          Infusion and specialty  pharmacy68.6%63.7%68.3%63.7%  Royalties4.2 6.6 4.4 6.6   Sale and support of  MBI software0.8 1.5 0.9 1.9   Other revenue0.6 0.4 0.6 0.4        Total local pharmacy74.2 72.2 74.2 72.6  Regional specialty  pharmacy25.8 27.8 25.8 27.4        Total revenue100.0%100.0%100.0%100.0%       
Most of our revenue is generated frommanaged care contracts and other agreements with commercial third partypayors.  Our principal managed carecontract is with Blue Cross Blue Shield of Florida which contracts with usthrough our regional specialty pharmacy located in Miami, Florida.  Approximately 72% of our regional specialtypharmacy revenue and 23% of the total pharmacy revenue (revenue excludingroyalties, sale and support of MBI software and other revenue) for the threeand six months ended June 30, 2001 was related to this contract.  The contract is terminable by either partyon 90 days’ notice and, unless terminated, renews annually each March for anadditional one-year term.  At thebeginning of the three months ended June 30, 2001, we agreed to pricereductions under this contract.

For the three and six months ended June30, 2001, approximately 16% of our total pharmacy revenue came fromgovernmental programs such as Medicare and Medicaid.

Many governmental payors reimburse us forsome pharmaceuticals based on that pharmaceutical’s average wholesaleprice.  We have also contracted with anumber of private payors to sell at AWP or a percentage discount off AWP.  AWP for most pharmaceuticals is compiled andpublished by private companies, including First DataBank, Inc. It has beenreported that there are currently several lawsuits pending againstmanufacturers of certain pharmaceuticals. These government investigations and lawsuits involve allegations thatmanufacturers have misrepresented to First DataBank the actual selling price ofcertain pharmaceuticals. First DataBank has announced that it will base AWP onmarket prices certified by the manufacturer. First DataBank has published aMarket Price Survey that reduces the AWP significantly for a number of theproducts we currently supply to patients. We cannot predict the eventualresults of these investigations, nor the changes made in AWP by FirstDataBank.  If AWPs on the products wepurchase were reduced, our gross profit margins could be narrowed.

Since March 31, 2001, we have acquiredeight local pharmacies through five separate asset acquisition agreements.After consolidations with our existing company-owned local pharmacies theseacquisitions will provide us with four new company-owned local pharmacylocations.  The aggregate purchase pricefor these acquisitions was $8,406,694 paid in cash at closing, with up to anadditional $2,130,000 payable in cash through 2003 if certain financial targetsare met.  Acquisitions constitute anintegral part of our long-term growth strategy and we continue to evaluateacquisition opportunities.
**RESULTSOF OPERATIONS**(dollars inthousands, except per share amounts)

The following table shows certainstatement of income items expressed as a percentage of revenue for the threemonths ended June 30, 2001 and 2000 and the six months ended June 30, 2001 and2000.
 **Three months ended** **Six months ended**  **June 30,** **June 30,**  **** ****  **2001** **2000** **2001** **2000**   Revenue100.0%100.0%100.0%100.0%         Cost of revenue:         Local pharmacy42.0%36.9%42.8%37.1% Regional specialty  pharmacy23.2%24.2%22.8%23.5%       Total cost of revenue65.2%61.1%65.6%60.6%               Gross profit34.8%38.9%34.4%39.4%         Operating expenses:         Selling, general and  administrative23.9%27.5%24.0%27.8% Provision for doubtful  accounts1.7%1.7%1.5%2.0% Amortization of goodwill0.5%0.5%0.5%0.5%       Total operating  expenses26.1%29.7%26.0%30.3%               Operating income8.7%9.2%8.4%9.1%         Other expenses:         Interest expense(0.8)%(0.6)%(0.7)%(0.7)% Other income  (expense), net(0.2)%(0.3)%– (0.3)%       Total other expense,  net(1.0)%(0.9)%(0.7)%(1.0)%               Income before income  taxes7.7%8.3%7.7%8.1%Provision for income  taxes3.0%3.1%3.0%3.0%      Net income (loss)4.7%5.2%4.7%5.1%      
**Three Months Ended June 30, 2001 and 2000**

Revenue for the three months ended June30, 2001 was $49,903, which is an increase of $16,753, or 50.5%, over therevenue of $33,150 reported for the three months ended June 30, 2000.

Infusion therapy and specialty pharmacyrevenue from our local pharmacy division in the second quarter of 2001increased $13,137, or 62.2%, over the revenue of $21,112 reported in the secondquarter of 2000.  An increase of $8,673,or 41.1%, was generated by pharmacies acquired during the past twelvemonths.  The remaining increase of$4,464, or 21.1%, is attributable to same-store sales growth generated bycompany-owned local pharmacies.

Regional specialty pharmacy revenue forthe second quarter of 2001 increased by $3,677, or 40.0%, over the revenue of$9,200 reported for the three months ended June 30, 2000.

Royalty fee revenue in the second quarterof 2001 declined by $90, or 4.1%, over the second quarter of 2000.  Termination of certain of our franchiseeagreements and our acquisition of four Option Care franchises over the pasttwelve months were the primary reasons for the decline.

Revenues from sales and support of ourMBI software for the second quarter of 2001 declined by $119, or 23.6%,compared to the second quarter of 2000. The decline was primarily due to a reduction in new sales of the currentMBI products, largely the result of a shift in focus toward developing new andimproved software products.

The gross profit margin for the secondquarter of 2001 was 34.8%, which represents a decrease of 4.1% from the grossprofit margin of 38.9% in the second quarter of 2000.  This decline was due to our overall increase in sales ofspecialty pharmaceuticals, which typically have lower margins, and partially asa result of price reductions which took effect at the beginning of the secondquarter of 2001 under our contract with Blue Cross Blue Shield of Florida.

The gross profit margin realized in thesecond quarter of 2001 from our local pharmacy division (excluding royalties)was 39.9%, representing a decline of 3.8% from the 43.7% margin realized in thesecond quarter of 2000.  The decline,which was anticipated, was primarily due to an increase in the sale of highercost, lower margin specialty pharmaceuticals by our company-owned localpharmacies.

The regional specialty pharmacy grossprofit margin for the second quarter of 2001 declined to 10.1% from 12.9% inthe second quarter of 2000.  This wasprimarily due to in a shift of the specialty pharmacy business from atraditional medical benefit to a pharmacy benefit and price reductions underour contract with Blue Cross Blue Shield of Florida.

Total operating expenses of $13,005 forthe three months ended June 30, 2001 were $3,168, or 32.2%, higher than for thethree months ended June 30, 2000.  Thisincrease is primarily attributable to acquisitions made over the last twelvemonths which account for $2,267, or 71.6%, of the increase.  Much of the remaining increase in operatingexpenses is due to a greater focus on sales and marketing and on technologyimprovements, resulting in increases in staffing to those areas.  An increase in our cost of health insurancebenefits has also contributed to the growth in these expenses.

Despite the overall dollar increase inoperating expenses in the second quarter of 2001 over the second quarter of2000, operating expenses have declined as a percentage of revenue from 29.7% to26.1%.  This is primarily due to theincrease in sales of specialty pharmaceuticals, in both of our divisions.  There are lower operating costs associatedwith the sale of specialty pharmaceuticals than from the sale of our otherpharmaceutical products.

The provision for doubtful accounts wasunchanged for the three months ended June 30, 2001, at 1.7% of revenue,compared to the second quarter of 2000.

Goodwill amortization increased by 51.0%for the three months ended June 30, 2001, compared to the same period in 2000,primarily due to our acquisitions completed over the past twelve months.  However, due to the increase in revenue overthe same period, goodwill amortization remained equal to 0.5% of revenue forthe three months ended June 30, 2001.

Interest expense increased by $215, or 108.6%,to $413 for the three months ended June 30, 2001 from $198 for thecorresponding period in the prior year. This was primarily due to the additional borrowing incurred to fund ouracquisitions made over the past twelve months.

The effective income tax rate for thesecond quarter of 2001 was 39.3%, which represents an increase from the 37.4%effective income tax rate in the second quarter of 2000.  This increase is a result of the growth inour pre-tax income in 2001 versus 2000, which would increase our statutoryfederal income tax rate from 34% to 35%.

Net income improved 35.9% to $2,341, or$0.18 cents per diluted share for the three months ended June 30, 2001,compared to $1,722, or $0.14 cents per diluted share for the three months endedJune 30, 2000.  This was due toincreased revenue and a reduction in selling, general and administrativeexpenses as a percentage of revenue, which decreased from 27.5% to 23.9% forthe three months ended June 30, 2001, more than offsetting the decline inoperating margins and net income as a percentage of revenues.

Total diluted shares for the secondquarter of 2001 increased to 12,967 from 12,433 for the second quarter2000.  This 4.3% increase was primarilydue to two factors: an increase in the number of nonqualified stock optionsthat are “in the money” and the issuance of shares under the 2000 EmployeeStock Purchase Plan.

**Six Months Ended June 30, 2001 and 2000**

Revenue for the six months ended June 30,2001 was $95,808, which is an increase of $29,887, or 45.3%, over the revenueof $65,921 reported for the six months ended June 30, 2000.

Infusion therapy and specialty pharmacyrevenue from our local pharmacy division in the six months ended June 30, 2001increased $23,397, or 55.7%, over the revenue of $41,996 reported for the sameperiod in 2000.  This increase isprimarily attributed to revenue generated by acquisitions, which accounted for$13,989, or a 33.3% revenue increase, over the same period in 2000.  The remaining $9,408, or 22.4% revenueincrease is attributable to same-store sales growth generated by company-ownedlocal pharmacies.

Regional specialty pharmacy revenue forthe six months ended June 30, 2001 increased by $6,652, or 36.9%, over the sameperiod in 2000.  This increase isprimarily due to new managed care contracts and increased orders on existingmanaged care contracts.

Royalty fee revenue in the six monthsended June 30, 2001 declined by $156, or 3.5%, over the same period in2000.  Termination of franchiseagreements and our acquisition of four Option Care franchises over the pasttwelve months were the primary reasons for the decline.

Revenue from sales and support of our MBIsoftware for the six months ended June 30, 2001 declined by $355, or 28.7%,compared to the same period in 2000.  The decline was primarily due to a reduction in new sales of thecurrent MBI products, largely as a result of a shift in focus toward developingnew and improved software products.

The gross profit margin for the sixmonths ended June 30, 2001 was 34.4%, which represents a decline of 5.0% fromthe gross profit margin of 39.4% in the six months ended June 30, 2000.  This decline was primarily due to an overallincrease in sales of specialty pharmaceuticals, which typically have lowermargins, and partially as a result of price reductions which took effect at thebeginning of the second quarter of 2001 under our contract with Blue Cross BlueShield of Florida.

The gross profit margin realized in thefirst six months of 2001 from our local pharmacy division (excluding royalties)was 38.7%, representing a decline of 5.0% from the 43.7% margin realized in thefirst six months of 2000.  This decline,which was anticipated, was primarily due to an increase in the sale of highercost, lower margin specialty pharmaceuticals by our company-owned localpharmacies.

The regional specialty pharmacy grossprofit margin for the six months ended June 30, 2001 declined to 11.5% from14.1% in the six months ended June 30, 2000. This was primarily due to in ashift of the specialty pharmacy business from a traditional medical benefit toa pharmacy benefit and price reductions which became effective at the beginningof the second quarter of 2001 under our contract with Blue Cross Blue Shield ofFlorida.

Total operating expenses of $24,877 forthe six months ended June 30, 2001 were $4,907, or 24.6%, higher than for thesix months ended June 30, 2000.  Thisincrease is primarily attributable to acquisitions made over the last twelvemonths, which account for $3,593, or 73.2%, of the increase.  Much of the remaining increase in operatingexpenses is due to a greater focus on sales and marketing and on technologyimprovements, resulting in increases in staffing to those areas.  An increase in our cost of health insurancebenefits has also contributed to the growth in these expenses.

Despite the overall dollar increase inoperating expenses in the six months ended June 30, 2001 over the six monthsended June 30, 2000, operating expenses have declined as a percentage ofrevenue from 30.3% to 26.0%.  This isprimarily due to the increase in sales of specialty pharmaceuticals, in both ofour divisions.  There are loweroperating costs associated with the sale of specialty pharmaceuticals than fromthe sale of our other pharmaceutical products.

The provision for doubtful accounts forthe six months ended June 30, 2001, was equal to 1.5% of revenue, compared to2.0% for the six months ended June 30, 2000. This reduction was due to an increase in the sale of specialtypharmaceuticals, which incur lower bad debt expense than infusion servicesbecause of increased collectability.

Goodwill amortization increased by 47.1%for the six months ended June 30, 2001, compared to the same period in 2000,primarily due to our acquisitions during the past twelve months.  However, due to the increase in revenue overthe same period, goodwill amortization remained equal to 0.5% of revenue forthe six months ended June 30, 2001.

Interest expense increased by $305, or67.9%, to $754 for the six months ended June 30, 2001 from $449 for thecorresponding period in the prior year. This was primarily due to the additional borrowing incurred to fund ouracquisitions made over the past twelve months.

The effective income tax rate for the sixmonths ended June 30, 2001 was 39.0%, which represents an increase from the37.7% effective income tax rate in the six months ended June 30, 2000.  This increase is a result of the growth inour pre-tax income in 2001 versus 2000, which would increase our statutoryfederal income tax rate from 34% to 35%.

Net income improved 34.3% to $4,472, or$0.35 cents per diluted share for the six months ended June 30, 2001, comparedto $3,331, or $0.27 cents per diluted share for the six months ended June 30,2000.  This was due to increased revenue,and a reduction in selling, general and administrative expense as a percentageof revenue, which decreased from 27.8% to 24.0% for the six months ended June30, 2001, more than offsetting the decline in operating margins and net incomeas a percentage of revenue.

Total diluted shares for the six monthsended June 30, 2001 increased to 12,792 from 12,434 for the six months endedJune 30, 2000.  This 2.9% increase wasprimarily due to two factors: an increase in the number of nonqualified stockoptions that are “in the money” andthe issuance of shares under the 2000 Employee Stock Purchase Plan.

Net cash flow used by operations for the six months endedJune 30, 2001 was $4,321, compared to $2,199 provided by operations during thesame period in 2000.  Of the overall$4,321 cash used in the six months just ended, acquisitions completed over thepast twelve months used $5,769, while existing offices acquired before January1, 2000 provided $1,538 in positive cash flow. The major cause of our overall use of operating cash flow for the sixmonths just ended was an increase in accounts receivable. Of the $9,585increase in accounts receivable in the current year, $6,331 was attributable tonew acquisitions and $3,254 to offices acquired before January 1, 2000.  For most of our recent acquisitions,accounts receivable were not acquired. Therefore, as our new offices generated revenue, their accountsreceivable grew, resulting in negative operational cash flows.  The $3,254 increase in accounts receivablefor offices acquired before January 1, 2000 can be directly attributed to theincreased revenue of those offices for the six months ended June 30, 2001versus the same period in 2000.  

Net cash flow used in investing activities in the sixmonths ended June 30, 2001 was $11,537, an increase of $8,673 over the $2,864cash used in the same period in 2000. The major reason for the increased use of cash was payments foracquisitions, net of cash acquired, of $10,320, consisting of $10,029 paid atclosing, plus $291 in subsequent payments. For the six months ended June 30, 2000, $2,255 of cash was used foracquisitions, of which $223 related to a new acquisition and $2,032 consistedof additional consideration paid on 1996 and 1997 acquisitions.  Payments for equipment increased by $767, to$1,329 in the six months ended June 30, 2001 over the $562 spent in the sixmonths ended June 30, 2000.  Of the$1,329 spent in the current year, $597 was spent on infrastructure improvementssuch as computer upgrades and leasehold improvements, $293 was spent forrevenue-producing equipment (home medical rental equipment) and $439 was spenton new software development projects.

Net cash flow provided by financingactivities was $15,768 in the six months ended June 30, 2001 compared to $665provided in the first six months of 2000. The increase was primarily due to additional borrowings of $7,250 on theterm loan and an overall increase of $7,491 on our revolving credit facility tofund the cash purchase price and short-term operating cash flow needs of newacquisitions completed in the first six months of 2001.
**LIQUIDITY AND CAPITAL RESOURCES**

We have financed our operations andacquisitions from operating cash flows and borrowings.  Our principal demands for liquidity areworking capital, acquisition activities and debt service.

As of June 30, 2001, our loan facilityprovided for a secured revolving credit facility of up to $25,000 and anunsecured term loan facility of up to $15,000. Under the term loan facility, we were able to enter into unsecured termloans until June 30, 2001.  Repaymentunder the term loan facility will be made on a four-year amortization schedule,with the first payment due July 1, 2001. However, the entire balance is due February 2002.

Availability under the revolving creditfacility is related to percentages of our outstanding accounts receivable andinventory balances, less certain ineligible amounts, as defined in thefacility. Overall borrowings allowable under the revolving credit facility werelimited to the lesser of $25,000 or the total allowable collateral base.

The loan facility requires us to meetcertain financial covenants including a fixed charge coverage ratio, a debtratio, and a debt to operating cash flow ratio.  We are also subject to limitations on annual capitalexpenditures, our ability to make acquisitions, our ability to declare cashdividends and various other matters.

As of June 30, 2001, we had an aggregateof $17,101 outstanding under the revolving credit facility with an averageinterest rate for the first six months of 2001 of 7.5%.  Also, as of June 30, 2001, we had anaggregate of $10,250 outstanding under the term loan with an average interestrate for the first six months of 2001 of 8.7%.

As of June 30, 2001, we had no cash andcash equivalents, which equals the amount of cash and cash equivalents on handas of December 31, 2000.  Under ourrevolving credit facility, we can borrow or pay down on our existing debt on adaily basis.  We have instituted apolicy of using excess cash balances, if any, to retire outstanding debt underour loan facility.

Total debt outstanding was $27,522 as ofJune 30, 2001, which represents an increase of $14,738, or 115.3%, over theamount of debt outstanding as of December 31, 2000.  The increase was largely the result of borrowings made by us inthe first six months of 2001 to fund acquisitions and their associated workingcapital needs.  Also, the increase inaccounts receivable during the first quarter of 2001, which was the result ofhigher company revenue from internal and acquisition growth during that period,resulted in reduced cash flows from operations and higher borrowingrequirements.

We believe that cash flow fromoperations, amounts available under our revolving credit facility, and cashgenerated from the proceeds of the sale of our equity securities will besufficient to meet our operating cash for the immediate future, includinginterest and principal repayments due under our existing term loan.  In the event that additional capital isrequired or we are unsuccessful in accessing the market for our common equity,management cannot assure that such capital can be obtained from other sourceson terms acceptable to us, if at all.

Our business strategy includes theselective acquisition of additional local pharmacy facilities.  Accordingly, we may require additionalcapital in order to complete these acquisitions.  It is impossible to predict the amount of capital that may berequired for acquisitions, and there is no assurance that sufficient financingfor these activities will be available on terms acceptable to us.

**Goodwill and Other Intangible Assets**

As of June 30, 2001, goodwill and other intangibleassets, net, was $32,653, an increase of $5,629 over the $27,024 atDecember 31, 2000. The increase was primarily due to our acquisitions madeduring the first six months of 2001, plus additional consideration calculatedon one of our 2000 acquisitions. The goodwill and other intangible assetsgenerated from our acquisitions in the second quarter of 2001 represents theexcess of the purchase price over the fair market value of the tangible assetsacquired.

Total net goodwill and other intangible assets declinedas a percentage of total assets to 37.1% at June 30, 2001 from 40.4% as of December 31,2000.  This decline occurred primarilybecause accounts receivable and other tangible assets increased at a fasterpace than goodwill and other intangible assets.

**Regulatoryand Other Developments**

Many governmental payors reimburse us forsome pharmaceuticals based on the pharmaceutical’s average wholesale price. Inmany cases, we purchase pharmaceuticals at less than AWP. AWP for mostpharmaceuticals is compiled and published by private companies, including FirstDataBank, Inc. It has been reported that there are currently several lawsuitspending against manufacturers of certain pharmaceuticals. These governmentinvestigations and lawsuits involve allegations that manufacturers havemisrepresented to First DataBank the actual selling price of certainpharmaceuticals. First DataBank has announced that it will now base AWP onmarket prices certified by the manufacturer. As a result of this change, FirstDataBank has published a Market Price Survey that reduces the AWP significantlyfor a number of the products we currently supply to patients. We cannot predictthe eventual results of these investigations, nor the changes made in AWP byFirst DataBank. If AWP’s on the products we purchase were reduced, our grossprofit margins could be narrowed.

**SubsequentEvents**

On July 26, 2001, we filed a Form S-3Registration Statement with the Securities and Exchange Commission for theoffer and sale by us of 3,000 shares of our common stock.

**ITEM3.  Quantitative and QualitativeDisclosures About Market Risk**

             Weare subject to market risk from exposure to changes in interest rates based onour financing and cash management activities. We utilize a mix of debtmaturities along with both fixed-rate and variable-rate debt to manage ourexposure to changes in interest rates. Although there can be no assurances thatinterest rates will not change significantly, we do not expect changes ininterest rates to have a material effect on income or cash flows in 2001. As ofJune 30, 2001 and as of June 30, 2000, our fixed-rate debt was $171 and $175,and our corresponding variable-rate debt was $27,351 and  $12,609. Based on our variable-rate debt atJune 30, 2001, a one-percent change in interest rates would result in an annualchange in interest expense of approximately $274.

 

**PARTII.  OTHER INFORMATION**

**ITEM 1. Legal Proceedings**

             None.

**ITEM 2.  Changes in Securities and Use of Proceeds**

             None.

**ITEM 3. Defaults Upon Senior Securities**

             None.

**ITEM4.  Submission of Matters to a Vote ofSecurity Holders**

Our annual meeting of stockholders washeld on May l1, 2001.  The followingmatters 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 their respective successors are duly elected and  qualified.  Both of management's  nominees for election to our Board of Directors as listed in our proxy  statement were elected for three-year terms, with the results of the voting  as follows:
 
    **VOTES**   **VOTES FOR** **WITHHELD**    James M. Hussey 10,889,718 424,578 Jerome F. Sheldon 10,889,718 424,578 
             Continuingdirectors were John N. Kapoor, James G. Andress and Roger W. Stone.  Subsequent to the annual meeting, Mr. Stoneannounced his retirement from the Board of Directors.  On May 11, 2001, Rajat Rai, our Chief Executive Officer, wasappointed to the vacancy created by Mr. Stone’s resignation.  Mr. Rai’s term expires in 2003.

2.          Amendmentof  the Company's Amended and RestatedStock Incentive Plan to increase the number of shares available to be issuedfrom 2,500,000 shares to 3,500,000 shares. The Amendment was approved with the results of the voting as follows:

 
 For6,972,734  Against766,218  Abstain9,783 
 

**ITEM 5. Other Information**

             None.

**ITEM 6(a).  Exhibits**

             SeeExhibit Index.

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

             OptionCare did not file any reports on Form 8-K during the three months ended June30, 2001.

 

**SIGNATURE**

             Pursuantto the requirements of the Securities Exchange Act of 1934, the Company hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
  OPTION  CARE, INC. Date: August 14, 2001 By:Carla M. Pondel   *Chief Financial Officer*   *(Principal Accounting Officer and**Principal  Financial Officer)*   
 

**Exhibit Index**

 

 
**Exhibit** **Number**   3.1Certificate of  Incorporation of the Registrant, together with Certificate of Amendment  thereto filed February 18, 1992. Filed as Exhibit 3(a) to the  Company's Registration Statement (No. 33-45836) dated April 15,  1992 and incorporated by reference herein.3.2Certificate of Amendment  to Certificate of Incorporation of the Registrant filed March 25, 1992.  Filed as Exhibit 3(c) to the Company's Registration Statement  (No. 33-45836) dated April 15, 1992 and incorporated by reference  herein.3.3Restated By-laws of the  Registrant dated June 1, 1994. Filed as Exhibit 10.5 to the Company's  Annual Report on Form 10-K for the year ending December 31, 1994 and  incorporated by reference herein.3.4First Amendment to  Amended and Restated Loan and Security Agreement, Resignation of Existing  Lenders’ Agent, and Appointment of Successor Lenders’ Agent dated April 13,  2001.