** **

**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**

**September 30, 2001**

**Commission file number 0-19878**

 

**OPTIONCARE, 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)

 

             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.

|                          |   |                       |
|-------------------------------|--------|----------------------------|
|                          |   | **Issued and Outstanding** |
| **Class**                     |   | **as of November 2, 2001** |
|                          |   |                       |
| Common  Stock - .01 par value |   | 16,011,424                 |
|                          |   |                       |

 

 

 

**INDEX**

**OPTION CARE, INC. ANDSUBSIDIARIES**

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

** **

**PARTI.  FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**Option Care, Inc. and SubsidiariesCondensed Consolidated BalanceSheets**(in thousands,except share and per share amounts)
|                                                                                                                                                                              |   | **September 30, 2001****(Unaudited)** |   | **December 31, 2000 (Note 1)** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------|--------|
|                                                                                                                                                                              |   |                                  |   |                           |   |
| Assets                                                                                                                                                                            |   |                                  |   |                           |   |
| Current assets:                                                                                                                                                                   |   |                                  |   |                           |   |
| Cash and cash equivalents                                                                                                                                                         |   | $                                     | – |                           | $      | – |   |
| Accounts receivable, net                                                                                                                                                          |   | 48,262                                |   | 28,845                         |   |
| Inventories, net                                                                                                                                                                  |   | 4,897                                 |   | 2,320                          |   |
| Deferred tax asset                                                                                                                                                                |   | 3,020                                 |   | 3,308                          |   |
| Other current assets                                                                                                                                                              |   | 931                                   |   | 900                            |   |
|                                                                                                                                                                              |   |                                  |   |                           |   |
| Total current assets                                                                                                                                                              |   | 57,110                                |   | 35,373                         |   |
| Equipment and other fixed  assets, net                                                                                                                                            |   | 5,869                                 |   | 4,182                          |   |
| Goodwill, net                                                                                                                                                                     |   | 32,353                                |   | 25,859                         |   |
| Other assets                                                                                                                                                                      |   | 1,745                                 |   | 1,411                          |   |
|                                                                                                                                                                              |   |                                  |   |                           |   |
| Total assets                                                                                                                                                                      |   | $                                     | 97,077 |                           | $      | 66,825 |   |
|                                                                                                                                                                                   |   |                                  |   |                           |   |
| Liabilities and  stockholders' equity                                                                                                                                             |   |                                  |   |                           |   |
| Current liabilities:                                                                                                                                                              |   |                                  |   |                           |   |
| Cash overdraft                                                                                                                                                                    |   | $                                     | 1,798  |                           | $      | 770 |   |
| Current portion of  long-term debt                                                                                                                                                |   | 28,944                                |   | 833                            |   |
| Trade accounts payable                                                                                                                                                            |   | 9,931                                 |   | 5,854                          |   |
| Other current liabilities                                                                                                                                                         |   | 6,510                                 |   | 6,922                          |   |
|                                                                                                                                                                              |   |                                  |   |                           |   |
| Total current liabilities                                                                                                                                                         |   | 47,183                                |   | 14,379                         |   |
| Long–term debt,  less current portion                                                                                                                                        |   | 116                                   |   | 11,951                         |   |
| Other liabilities                                                                                                                                                                 |   | 2,268                                 |   | 1,423                          |   |
| Minority interest                                                                                                                                                                 |   | 481                                   |   | 404                            |   |
|                                                                                                                                                                              |   |                                  |   |                           |   |
| Total liabilities                                                                                                                                                                 |   | 50,048                                |   | 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, 12,427,446 and  12,134,961 shares issued and outstanding at September 30, 2001 and December  31, 2000 |   | 124                                   |   | 121                            |   |
| Common stock to be  issued, 89,338 and 124,901 shares at September 30, 2001 and December 31, 2000                                                                                 |   | 550                                   |   | 352                            |   |
| Other stockholders'  equity                                                                                                                                                       |   | 46,355                                |   | 38,195                         |   |
|                                                                                                                                                                              |   |                                  |   |                           |   |
| Total stockholders'  equity                                                                                                                                                       |   | 47,029                                |   | 38,668                         |   |
|                                                                                                                                                                              |   |                                  |   |                           |   |
| Total liabilities and  stockholders' equity                                                                                                                                       |   | $                                     | 97,077 |                           | $      | 66,825 |   |

*See notes to condensed consolidated financial statements*

 

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

 
|                                            |   | **Three Months Ended**

**September 30,** |   | **Nine Months Ended**

**September 30,** |   |
|-------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
|                                            |   | **2001**                                       |   | **2000**                                      |   | **2001** |   | **2000** | ** ** |
|                                            |   |                                           |   |                                          |   |   |   |   |   |
| Revenue                                         |   | $                                              | 56,093 |                                          | $      | 35,265 |   | $ | 151,901 |   | $ | 101,183 |   |
| Cost of revenue                                 |   | 37,333                                         |   | 21,620                                        |   | 100,178 |   | 61,587 |   |
|                                            |   |                                           |   |                                          |   |   |   |   |   |
| Gross profit                                    |   | 18,760                                         |   | 13,645                                        |   | 51,723 |   | 39,596 |   |
| Selling, general and  administrative expenses   |   | 12,961                                         |   | 9,292                                         |   | 35,964 |   | 27,605 |   |
| Provision for doubtful  accounts                |   | 934                                            |   | 580                                           |   | 2,345 |   | 1,923 |   |
| Amortization of goodwill                        |   | 267                                            |   | 161                                           |   | 729 |   | 475 |   |
|                                            |   |                                           |   |                                          |   |   |   |   |   |
| Total operating expenses                        |   | 14,162                                         |   | 10,033                                        |   | 39,038 |   | 30,003 |   |
|                                            |   |                                           |   |                                          |   |   |   |   |   |
| Operating income                                |   | 4,598                                          |   | 3,612                                         |   | 12,685 |   | 9,593 |   |
| Interest expense                                |   | (458                                           | )      | (267                                          | )      | (1,212 | ) | (715 | ) |
| Other expense, net                              |   | (84                                            | )      | (86                                           | )      | (84 | ) | (278 | ) |
|                                            |   |                                           |   |                                          |   |   |   |   |   |
| Income before income  taxes                     |   | 4,056                                          |   | 3,259                                         |   | 11,389 |   | 8,600 |   |
| Income tax provision                            |   | 1,579                                          |   | 1,258                                         |   | 4,440 |   | 3,270 |   |
|                                            |   |                                           |   |                                          |   |   |   |   |   |
| Net income                                      |   | $                                              | 2,477  |                                          | $      | 2,001 |   | $ | 6,949 |   | $ | 5,330 |   |
|                                                 |   |                                           |   |                                          |   |   |   |   |   |
| Net income per common  share:                   |   |                                           |   |                                          |   |   |   |   |   |
| Basic                                           |   | $                                              | 0.20   |                                          | $      | 0.17 |   | $ | 0.56 |   | $ | 0.44 |   |
|                                            |   |                                           |   |                                          |   |   |   |   |   |
| Diluted                                         |   | $                                              | 0.19   |                                          | $      | 0.16 |   | $ | 0.54 |   | $ | 0.43 |   |
|                                                 |   |                                           |   |                                          |   |   |   |   |   |
| Shares used in computing  net income per share: |   |                                           |   |                                          |   |   |   |   |   |
| Basic                                           |   | 12,477                                         |   | 12,060                                        |   | 12,376 |   | 12,060 |   |
|                                            |   |                                           |   |                                          |   |   |   |   |   |
| Diluted                                         |   | 13,100                                         |   | 12,469                                        |   | 12,885 |   | 12,473 |   |

*See notes to condensed consolidated financial statements*

 

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

 
|                                                                                      |   | **Nine Months Ended**

** September 30,** |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|
|                                                                                      |   | **2001**                                            |   | **2000** | ** ** |
|                                                                                      |   |                                                |   |   |   |
| Cash flows from operating  activities:                                                    |   |                                                |   |   |   |
| Net income                                                                                |   | $                                                   | 6,949  |   | $ | 5,330 |   |
| Adjustments to reconcile  net income to net cash provided (used) by operating activities: |   |                                                |   |   |   |
| Depreciation and  amortization                                                            |   | 2,774                                               |   | 2,217 |   |
| Provision for doubtful  accounts                                                          |   | 2,345                                               |   | 1,923 |   |
| Other                                                                                     |   | 579                                                 |   | 255 |   |
| Changes in assets and  liabilities:                                                       |   |                                                |   |   |   |
| Accounts receivable                                                                       |   | (20,299                                             | )      | (4,254 | ) |
| Inventory                                                                                 |   | (956                                                | )      | 1,890 |   |
| Accounts payable                                                                          |   | 1,995                                               |   | (1,301 | ) |
| Change in other current  assets and current liabilities                                   |   | 954                                                 |   | (1,454 | ) |
|                                                                                      |   |                                                |   |   |   |
| Net cash provided (used)  by operating activities                                         |   | (5,659                                              | )      | 4,606 |   |
|                                                                                      |   |                                                |   |   |   |
| Cash flows from investing  activities:                                                    |   |                                                |   |   |   |
| Purchases of equipment  and other, net                                                    |   | (2,218                                              | )      | (507 | ) |
| Additions to other  assets, net                                                           |   | 204                                                 |   | (756 | ) |
| Payments for  acquisitions, net of cash acquired                                          |   | (10,433                                             | )      | (6,777 | ) |
|                                                                                      |   |                                                |   |   |   |
| Net cash used in  investing activities                                                    |   | (12,447                                             | )      | (8,040 | ) |
|                                                                                      |   |                                                |   |   |   |
| Cash flows from financing  activities:                                                    |   |                                                |   |   |   |
| Increase (decrease) in  cash overdraft                                                    |   | 1,028                                               |   | (3,067 | ) |
| Net borrowing on credit  agreements                                                       |   | 16,298                                              |   | 6,266 |   |
| Payments on capital  leases and other debt                                                |   | (52                                                 | )      | (131 | ) |
| Proceeds from issuance of  stock                                                          |   | 832                                                 |   | 366 |   |
|                                                                                      |   |                                                |   |   |   |
| Net cash provided by  financing activities                                                |   | 18,106                                              |   | 3,434 |   |
|                                                                                      |   |                                                |   |   |   |
| 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 to Condensed ConsolidatedFinancial Statements****September 30, 2001**(Unaudited)

**1.  Basis ofPresentation**

             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 andnine month periods ended September 30, 2001 are not necessarily indicative ofthe results that 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/A for the year ended December 31, 2000.

**2.  Long-Term Debt**

             On February 5, 1999, weentered into a $25 million Loan and Security Agreement with Banc ofAmerica Commercial Finance Corporation. This agreement provided for borrowingup to $25 million on revolving loans. On June 30, 2000, the agreementwas amended and restated to increase the total facility to $40 million,consisting of $25 million available on revolving loans, plus $15 million availableunder term loans. The purpose of the amendment was to provide us with theavailable capital to acquire selected franchises and other healthcare companiesupon approval by the lenders and by our board of directors. Under the revised agreement,we were able to enter into term loans from June 30, 2000 throughJune 30, 2001. Repayment under the term loan was to be made on a four-yearamortization schedule, with the first quarterly payment due and paid onJuly 1, 2001.  The existing Loanand Security Agreement is scheduled to expire in February 2002.

             Availabilityunder the revolving loan portion of the facility is related to percentages ofoutstanding accounts receivable and inventory balances, less certain ineligibleamounts, as defined in the facility. Overall borrowings allowable under therevolving credit facility are limited to the lesser of $25 million or the totalallowable collateral base.

             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%.

             On April 13, 2001, GE Capital CommercialFinance, Inc. became the agent on our $40 million credit facility, replacingBanc of America Commercial Finance Corporation in this role.  There were no material changes to thefacility agreement resulting from this transaction.

             As of September 30, 2001, we had$19.3 million outstanding under the revolving credit facility and $9.6 millionoutstanding under the term loan. For the third quarter of 2001, the averageinterest rates paid on outstanding borrowings were 6.1% on the revolving loansand 7.2% on the term loans.

             On October 12, 2001,Option Care completed the sale of 3,500,000 shares of our common stock throughan underwritten public offering. The shares were delivered on the closing date,October 17, 2001. In connection with the offering, the underwriters exercisedtheir over-allotment option and another 525,000 shares of common stock weresold, of which 450,000 shares were sold by the selling shareholder and 75,000shares were sold by us. The sale generated net proceeds to us of approximately $49.7million. We used approximately $28.9 million of the proceeds to pay off theoutstanding balances on our credit facility, while the remainder was added toworking capital.  We incurred an earlyprepayment fee of $135,000 related to paying off the outstanding balance on ourterm loan.

**3.  Earnings Per Share Data**

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

(in thousands, except per share amounts)
|                                                                            |   | **Three months  ended September 30,** |   | **Nine months  ended September 30,** |   |
|---------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                            |   | **2001**                              |   | **2000**                             |   | **2001** |   | **2000** |   |
|                                                                            |   |                                  |   |                                 |   |   |   |   |   |
|                                                                            |   |                                  |   |                                 |   |   |   |   |   |
| Basic:                                                                          |   |                                  |   |                                 |   |   |   |   |   |
| Net income                                                                      |   | $                                     | 2,477  |                                 | $      | 2,001 |   | $ | 6,949 |   | $ | 5,330 |   |
|                                                                            |   |                                  |   |                                 |   |   |   |   |   |
| Average shares  outstanding                                                     |   | 12,477                                |   | 12,060                               |   | 12,376 |   | 12,060 |   |
|                                                                            |   |                                  |   |                                 |   |   |   |   |   |
| Basic earnings per share                                                        |   | $                                     | 0.20   |                                 | $      | 0.17 |   | $ | 0.56 |   | $ | 0.44 |   |
|                                                                            |   |                                  |   |                                 |   |   |   |   |   |
|                                                                            |   |                                  |   |                                 |   |   |   |   |   |
| Diluted:                                                                        |   |                                  |   |                                 |   |   |   |   |   |
| Net income                                                                      |   | $                                     | 2,477  |                                 | $      | 2,001 |   | $ | 6,949 |   | $ | 5,330 |   |
|                                                                            |   |                                  |   |                                 |   |   |   |   |   |
| Average shares  outstanding                                                     |   | 12,477                                |   | 12,060                               |   | 12,376 |   | 12,060 |   |
| Net effect of dilutive  stock options – Based on the treasury stock method |   | 623                                   |   | 409                                  |   | 509 |   | 413 |   |
|                                                                            |   |                                  |   |                                 |   |   |   |   |   |
| Total diluted shares                                                            |   | 13,100                                |   | 12,469                               |   | 12,885 |   | 12,473 |   |
|                                                                            |   |                                  |   |                                 |   |   |   |   |   |
| Diluted earnings per  share                                                     |   | $                                     | 0.19   |                                 | $      | 0.16 |   | $ | 0.54 |   | $ | 0.43 |   |

**4.  Operating Segments**

             Asof September 30, 2001, we have two identifiable operating segments: the localpharmacy division and the regional specialty pharmacy division.  Our local pharmacy division was formerlycalled “infusion and services” and our regional specialty pharmacy division wasformerly called “specialty pharmacy.” The local pharmacy division operatesthrough our nationwide network of 128 owned and franchised locations.  Local pharmacy revenue consists of:

             • infusion therapy and specialty pharmaceuticalsprovided through company-owned locations,             • royalties from franchisedpharmacy locations,             • sales and support ofManagement by Information, Inc. software, and             • other sources

             The regional specialty pharmacy division derives revenueprimarily from dispensing specialty injectable pharmaceutical products topatients’ homes or physicians’ offices from three regional distributioncenters.  Inter-division sales in 2000were recorded at cost and there was no profit or loss on inter-division salesor transfers.  In 2001, nointer-division sales have been recorded. Sales from the regional specialtypharmacy division to the local pharmacy division are being accounted for ascost of goods transfers.

 
|   |   | **Three months ended September 30,****(in thousands)** |   |  
 

 

**2001**

 

**2000**

 

 
 

 

**Local  Pharmacy**

 

**Regional Specialty Pharmacy**

 

**Total**

 

**Local****  Pharmacy**

 

**Regional Specialty Pharmacy**

 

**Total**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net  sales to external customers

 

$

42,075

 

$

14,018

 

$

56,093

 

$

25,086

 

$

10,179

 

$

35,265

 

Inter-segment  net sales

 

–

 

–

 

–

 

–

 

2,151

 

2,151

 

Gross  profit

 

17,264

 

1,496

 

18,760

 

12,238

 

1,407

 

13,645

 

Operating  income

 

$

3,666

 

$

932

 

$

4,598

 

$

2,856

 

$

756

 

$

3,612

 

 

 

 

**Nine months ended September 30,****(in thousands)**

 

 

 

**2001**

 

**2000**

 

 

 

**Local  Pharmacy**

 

**Regional Specialty  Pharmacy**

 

**Total**

 

**Local**  **Pharmacy**

 

**Regional Specialty  Pharmacy**

 

**Total**

** **

 

 

 

** **

 

** **

 

** **

 

** **

 

** **

 

** **

Net sales to external  customers

 

$

113,190

 

$

38,711

 

$

151,901

 

$

72,963

 

$

28,220

 

$

101,183

 

Inter-segment net sales

 

–

 

–

 

–

 

–

 

5,548

 

5,548

 

Gross profit

 

47,389

 

4,334

 

51,723

 

35,639

 

3,957

 

39,596

 

Operating income

 

10,338

 

2,347

 

12,685

 

7,714

 

1,879

 

9,593

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

89,117

 

$

7,960

 

$

97,077

 

$

59,505

 

$

4,198

 

$

63,703

 

 

**5.Significant Customer**

             For thenine months ended September 30, 2001, approximately 78% of our revenue and 82%of our total pharmacy revenue (revenue excluding royalties, sales and supportof MBI software and other revenue) came from managed care contracts and otheragreements with commercial third party payors. Our principal managed care contract is with Blue Cross Blue Shield ofFlorida which contracts with us through our regional specialty pharmacy locatedin Miami, Florida.  Approximately 72% ofthe regional specialty pharmacy revenue and 22% of the total pharmacy revenuefor the nine months ended September 30, 2001 was related to this contract.  For the third quarter of 2001, 73% of ourregional specialty pharmacy revenue and 22% of our total pharmacy revenue wasrelated to this contract. In the calendar year 2000, approximately 74% of ourregional specialty pharmacy revenue and approximately 27% or our total pharmacyrevenue was related to this contract. The contract is terminable by either partyon 90 days’ notice and, unless terminated, renews annually each September foran additional one-year term.

**6.Acquisitions**

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

 

 

** Nine Months Ended September 30,(in thousands, except per share amounts)**

 

 

 

**2001**

 

**2000**

** **

 

 

 

** **

 

** **

Revenue

 

$

177,094

 

$

161,474

 

 

 

 

 

 

 

Net income

 

7,100

 

6,456

 

 

 

 

 

 

 

Net income per diluted  share

 

$

0.55

 

$

0.52

 

** **

**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)*.  Under the new rules, effective January 1,2002, goodwill and intangible assets deemed to have indefinite lives, relatedto acquisitions prior to June 30, 2001, will no longer be amortized but will besubject to annual impairment tests in accordance with the Statements.  In addition, goodwill and intangible assetsdeemed to have indefinite lives, related to acquisitions subsequent to June 30,2001, will not be amortized but will be subject to annual impairment tests inaccordance with the Statements.  Otherintangible assets will 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 nine months ended September 30, 2001 would haveincreased $496,000 ($0.04 per diluted 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 Event**

             OnOctober 10, 2001, a lawsuit captioned I.V. Associates, Inc. v. Option Care,Inc., Civil Action No. 01-4726, was filed in the U.S. District Court forthe District of New Jersey and was served on Option Care, Inc. on October 24,2001. I.V. Associates, Inc., an Option Care franchisee, alleges breach ofcontract, violation of the New Jersey Franchise Practices Act, tortiousinterference with prospective contractual relationships and breach of thecovenant of good faith and fair dealing. Specifically, I.V. Associates allegesthat we are operating a business that competes with I.V. Associates’ businessin violation of the franchise agreement between the parties. I.V. Associates isseeking compensatory damages in excess of the minimum jurisdictional limits forthe U. S. District Court as well as unspecified equitable relief. We believethat the plaintiff’s allegations are without merit and intend to fileresponsive pleadings denying all substantive allegations of wrongdoing andclaims for relief.

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

**FORWARDLOOKING STATEMENTS**

Thefollowing discussion should be read in conjunction with our Annual Report onForm 10-K/A for the year ended December 31, 2000. The PrivateSecurities Litigation Reform Act of 1995 provides a "safe harbor" forforward-looking statements. Certain information included in this QuarterlyReport on Form 10-Q and other materials filed or to be filed by us withthe Securities and Exchange Commission (as well as information included in oralstatements or other written statements made or to be made by us) containstatements that are or will be forward-looking. Forward-lookingstatements give our current expectations of forecasts of future events. Allstatements other than statements of current or historical fact contained inthis Quarterly Report, including statements regarding our future financialposition, business strategy, budgets, projected costs and plans and objectivesof management for future operations, are forward-looking statements. The words"anticipate," "believe," "continue,""estimate," "expect," "intend," "may,""plan," "will," and similar expressions, as they relate tous, are intended to identify forward-looking statements. In particular, theseinclude, among other things, statements relating to:
- government     and regulatory policies including federal, state and local efforts to     reform the delivery of and payment for healthcare services;
- sales and renewals     of our franchises;
- changes in the     competitive environment in which we operate;
- our ability to grow     through acquisitions and development;
- the pricing and     availability of services;
- uncertainties     affecting our businesses and our franchisees and relating to acquisitions     including continuing obligations with respect to completed acquisitions;     and
- our ability to     enhance operating efficiencies.

Anyor all of the forward-looking statements made by us may turn out to be wrong.We base these forward-looking statements largely on our current expectationsand projections about future events and financial trends that we believe mayaffect our financial condition, results of operations, business strategy andfinancial needs. Our forward-looking statements can be affected by inaccurateassumptions or by known or unknown risks, uncertainties and assumptions,including the risks, uncertainties and assumptions described in "Riskfactors" in our Annual Report on Form 10-K/A.  In light of these risks, uncertainties and assumptions,forward-looking events and circumstances discussed by us may not occur andactual results could differ materially from those anticipated or implied in theforward-looking statements. When you consider our forward-looking statements,you should keep in mind these risk factors and other cautionary statements inthis Quarterly Report on Form 10-Q and in our Annual Report.

Ourforward-looking statements speak only as of the date they are made.

**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 September 30, 2001, our pharmacy andrelated services are provided locally through our nationwide network of 128owned and franchised pharmacy locations and through our 3 regional specialtypharmacies which operate under the name OptionMedTM.  Our franchised pharmacy locations include 15 locations whichprovide ancillary infusion services and are not licensed pharmacies.  For the nine months ended September 30,2001, approximately 50.8% of our revenue was generated from home infusiontherapy and related services (excluding specialty injectable pharmaceuticals,some of which may also be infused), 43.6% from the sale of specialty injectablepharmaceuticals, 4.3% in royalties from our franchised pharmacy locations, and1.3% from other sources.

We operate our business in two segments –our local pharmacy division and our regional specialty pharmacy division.  Our local pharmacy division was formerlycalled “infusion and services” and our regional specialty pharmacy division wasformerly called “specialty pharmacy.” Summarized information about revenue for the three months endedSeptember 30, 2001 and 2000 and the nine months ended September 30, 2001 and2000 in each division is provided in the following table:

 

 

**Three  months   ended September 30,**

 

**Nine  months   ended September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

** **

 

 

 

** **

 

** **

 

** **

 

** **

Local pharmacy:

 

 

 

 

 

 

 

 

 

Infusion and specialty  pharmacy

 

70.0

%

62.4

%

68.9

%

63.3

%

Royalties

 

4.0

 

6.5

 

4.3

 

6.6

 

Sale and support of  MBI software

 

0.6

 

1.8

 

0.8

 

1.8

 

Other revenue

 

0.4

 

0.4

 

0.5

 

0.4

 

 

 

 

 

 

 

 

 

 

 

Total local pharmacy

 

75.0

 

71.1

 

74.5

 

72.1

 

Regional specialty  pharmacy

 

25.0

 

28.9

 

25.5

 

27.9

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

100.0

%

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 22% of the total pharmacy revenue (revenue excludingroyalties, sale and support of MBI software and other revenue) for the ninemonths ended September 30, 2001 was related to this contract.  The contract is terminable by either partyon 90 days’ notice and, unless terminated, renews annually each September foran additional one-year term.  In April2001, we agreed to a reduced pricing schedule under this contract.  In September 2001, we entered into a newcontract with respect to specialty pharmaceuticals which continued the revisedpricing and expanded the number of Blue Cross and Blue Shield of Florida, Inc.patients to which we may provide pharmaceuticals. We expect to implementexpanded services under the new contract in stages over the next 18 to24 months. Although we expect the reduced pricing to lower our gross margin, weexpect to gradually increase our profitability as we expand our specialty injectablepharmaceutical sales by serving a larger patient population.

For the three months ended September 30,2001, approximately 13% of our total pharmacy revenue came from governmentalprograms such as Medicare and Medicaid. For the nine months ended September 30, 2001, approximately 15% of ourtotal pharmacy revenue came from government programs.

Many governmental payors reimburse us forsome pharmaceuticals based on that pharmaceutical’s average wholesale price. Inmany cases, we purchase pharmaceuticals at less than average wholesaleprice.  Average wholesale price 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 government investigations and lawsuitsinvolve allegations that manufacturers have misrepresented to First DataBankthe actual selling price of certain pharmaceuticals. First DataBank hasannounced that it will now base average wholesale price on market pricescertified by the manufacturer. First DataBank has published a Market PriceSurvey that reduces the average wholesale price significantly for a number ofthe products we currently supply to patients. If the average wholesale priceson the products we purchase are reduced, our gross profit margins coulddecline.

 

**RESULTS OF OPERATIONS**

The following table shows certainstatement of income items expressed as a percentage of revenue for the threemonths ended September 30, 2001 and 2000 and the nine months ended September30, 2001 and 2000.

 

 

**Three  months ended  September 30,**

 

**Nine  months ended  September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

 

 

 

 

 

 

** **

 

** **

Revenue

 

100.0

%

100.0

%

100.0

%

100.0

%

 

 

 

 

 

 

 

 

 

 

Cost  of revenue:

 

 

 

 

 

 

 

 

 

Local  pharmacy

 

44.3

%

36.4

%

43.3

%

36.9

%

Regional  specialty pharmacy

 

22.3

%

24.9

%

22.6

%

24.0

%

 

 

 

 

 

 

 

 

 

 

Total  cost of revenue

 

66.6

%

61.3

%

65.9

%

60.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross  profit

 

33.4

%

38.7

%

34.1

%

39.1

%

 

 

 

 

 

 

 

 

 

 

Operating  expenses:

 

 

 

 

 

 

 

 

 

Selling,  general and administrative

 

23.1

%

26.3

%

23.7

%

27.3

%

Provision  for doubtful accounts

 

1.7

%

1.7

%

1.5

%

1.9

%

Amortization  of goodwill

 

0.4

%

0.5

%

0.5

%

0.5

%

 

 

 

 

 

 

 

 

 

 

Total  operating expenses

 

25.2

%

28.5

%

25.7

%

29.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating  income

 

8.2

%

10.2

%

8.4

%

9.4

%

 

 

 

 

 

 

 

 

 

 

Other  expenses:

 

 

 

 

 

 

 

 

 

Interest  expense

 

(0.8)

%

(0.8)

%

(0.8)

%

(0.7

)%

Other  expense, net

 

(0.2)

%

(0.2)

%

(0.1)

%

(0.2

)%

 

 

 

 

 

 

 

 

 

 

Total  other expense, net

 

(1.0)

%

(1.0)

%

(0.9)

%

(0.9

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income  before income taxes

 

7.2

%

9.2

%

7.5

%

8.5

%

Provision  for income taxes

 

2.8

%

3.5

%

2.9

%

3.2

%

 

 

 

 

 

 

 

 

 

 

Net  income

 

4.4

%

5.7

%

4.6

%

5.3

%

 
****
**Three Months Ended September 30, 2001 and 2000**

Revenue for the third quarter of 2001 was$56.1 million, which is an increase of $20.8 million, or 59.1%, over therevenue of $35.3 million reported for the third quarter of 2000.

Infusion therapy and specialty pharmacyrevenue from our local pharmacy division in the third quarter of 2001 was $39.2million, representing an increase of $17.2 million, or 78.2%, over the revenueof $22.0 million reported in the same period in 2000.  This increase is primarily attributable to acquisitions made overthe last five quarters which accounted for a $13.5 million, or 61.5%, revenueincrease over the same period in 2000. The remaining increase of $3.7 million,or 16.7%, is attributable to same-store sales growth generated by company-ownedlocal pharmacies.

Regional specialty pharmacy revenue forthe third quarter of 2001 increased by $3.8 million, or 37.7%, over the revenueof $10.2 million reported for the third quarter of 2000.  This increase is primarily due to newmanaged care contracts and increased orders on existing managed care contracts.

Royalty fee revenue of $2.3 million inthe third quarter of 2001 was nearly equal to royalty fee revenue in the sameperiod of the prior year, declining by $28,000, or 1.2% over the period.  An increase in cash collections in ourexisting franchises, which resulted in increased royalties, nearly offset thedecline in royalties due to the termination of certain of our franchiseeagreements and our acquisition of selected franchises.

Revenues from sales and support ofsoftware products developed by our wholly owned subsidiary, Management byInformation, Inc. (MBI), declined in the third quarter of 2001 by $314,000, or48.8%, compared to the third quarter of 2000. The decline was primarily due to a reduction in new sales of the currentMBI products, largely the result of our shift in focus toward developing newand improved software products.  Demandfor existing products has declined due to anticipation of the release of MBI’snew software, which is scheduled for release in 2002.

The gross profit margin for the thirdquarter of 2001 was 33.4%, which represents a decrease of 5.3% from the 38.7%gross profit margin in the third 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 thethird quarter of 2001 from our local pharmacy division (excluding royalties)was 37.7%, a decline of 5.9% from the 43.6% margin realized in the thirdquarter of 2000.  The decline, which wasanticipated, was primarily due to an increase in the sale of higher cost, lowermargin specialty pharmaceuticals by our company-owned local pharmacies,particularly those pharmacies acquired this year.

The regional specialty pharmacydivision’s gross profit margin for the third quarter of 2001 declined to 10.7%from 13.8% in the third quarter of 2000. This was primarily due to price reductions that became effective inApril 2001 under our contract with Blue Cross Blue Shield of Florida, and to alesser extent, due to a shift of the specialty pharmacy business from atraditional medical benefit to a pharmacy benefit.

Total operating expenses of $14.2 millionfor the third quarter of 2001 were $4.1 million, or 41.2%, higher than for thethird quarter of 2000.  This increase isprimarily attributable to the acquisitions we made over the past fivequarters.  Much of the remainingincrease in operating expenses is due to a greater focus on sales and marketingand on technology improvements, resulting in increases in staffing to thoseareas.  A market-driven increase in thecost of providing health insurance to our employees has also contributed to thegrowth in these expenses.

 

Despite the overall dollar increase inoperating expenses in the third quarter of 2001 over the corresponding periodin 2000, operating expenses have declined as a percentage of revenue, from28.5% in the third quarter of 2000 to 25.2% in the third quarter of 2001.  This is primarily due to the increase insales 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 accountsincreased by $354,000, or 61.0%, to $934,000 in the third quarter of 2001compared to $580,000 in the third quarter of 2000. This increase is directlyrelated to the 59.1% increase in revenue over this same period.  As a percentage of revenue, the provisionfor doubtful accounts remained consistent at 1.7% in the third quarter of 2001.

Goodwill amortization increased by 65.8%for the third quarter of 2001, compared to the same period in 2000, primarilydue to our acquisitions completed over the past twelve months.  However, due to the increase in revenue overthe same period, goodwill amortization remained consistent as a percentage ofrevenue.

Interest expense increased by $191,000,or 71.5%, to $458,000 for the third quarter 2001 from $267,000 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.

Income tax expense increased by $321,000,or 25.5%, in the third quarter of 2001 compared to the third quarter of 2000.This increase was related to our 24.5% increase in pretax income over thisperiod.  The effective income tax ratefor the third quarter of 2001 was 38.9%, which represents a slight increasefrom the 38.6% effective income tax rate for the third quarter of 2000.  This increase is a result of the growth inour pre-tax income in 2001 versus 2000, which caused an increase in ourstatutory federal income tax rate.

Net income improved 23.8% to $2.5million, or $0.19 cents per diluted share for the third quarter of 2001,compared to $2.0 million, or $0.16 cents per diluted share for the thirdquarter of 2000.  This was due toincreased revenue and a reduction in total operating expenses as a percentageof revenue, which decreased from 28.6% in the third quarter of 2000 to 25.2% inthe third quarter of 2001.  Thisincrease in revenue and decrease in total operating expenses as a percentage ofrevenue more than offset the declines in operating margins and net income as apercentage of revenues.

Total diluted shares for the thirdquarter of 2001 increased to 13.1 million from 12.5 million for the thirdquarter 2000.  This 5.1% increase wasprimarily due to two factors: an increase in the number of nonqualified stockoptions that are “in the money,” and the issuance of new shares under the 2000Employee Stock Purchase Plan.
****
**Nine Months Ended September 30, 2001 and 2000**

Revenue for the nine months endedSeptember 30, 2001 was $151.9 million, which is an increase of $50.7 million,or 50.1%, over the revenue of $101.2 million reported for the nine months endedSeptember 30, 2000.

Infusion therapy and specialty pharmacyrevenue from our local pharmacy division in the nine months ended September 30,2001 increased by $40.6 million, or 63.4%, over the revenue of $64.0 millionreported for the same period in 2000. This increase is primarily attributed to revenue generated byacquisitions, which accounted for $27.5 million, or a 42.9% revenue increase,over the same period in 2000.  Theremaining $13.1 million, or 20.5% revenue increase is attributable tosame-store sales growth generated by company-owned local pharmacies.

Regional specialty pharmacy revenue forthe nine months ended September 30, 2001 increased by $10.5 million, or 37.2%,over the same period in 2000.  Thisincrease is primarily due to new managed care contracts and increased orders onexisting managed care contracts.

Royalty fee revenue in the nine monthsended September 30, 2001 declined by $183,000, or 2.7%, over the same period in2000.  Termination of franchiseagreements and our acquisition of four Option Care franchises since July 1,2000 were the primary reasons for the decline.

Revenue from sales and support of our MBIsoftware for the nine months ended September 30, 2001 declined by $669,000, or35.6%, compared to the same period in 2000. The decline was primarily due to areduction in new sales of the current MBI products, largely the result of ourshift in focus toward developing new and improved software products. Demand forexisting products has declined due to anticipation of the release of MBI’s newsoftware, which is scheduled for release in 2002.

Gross profit margin for the nine monthsended September 30, 2001 was 34.1%, representing a decline of 5.0% from thegross profit margin of 39.1% for the nine months ended September 30, 2000.  This decline, which was anticipated, wasprimarily due to an overall increase in sales of specialty pharmaceuticals,which typically have lower margins, and partially as a result of pricereductions which took effect at the beginning of the second quarter of 2001 underour contract with Blue Cross Blue Shield of Florida.

The gross profit margin realized in thefirst nine months of 2001 from our local pharmacy division (excludingroyalties) was 38.3%, representing a decline of 5.4% from the 43.7% marginrealized in the first nine months of 2000. This decline, which was anticipated, was primarily due to an increase inthe sale of higher cost, lower margin specialty pharmaceuticals by ourcompany-owned local pharmacies, particularly those pharmacies acquired thisyear.

The regional specialty pharmacy grossprofit margin for the nine months ended September 30, 2001 declined to 11.2%from 14.0% in the nine months ended September 30, 2000. This was primarily dueto price reductions that became effective in April 2001 under our contract withBlue Cross Blue Shield of Florida, and to a lesser extent, due to a shift ofthe specialty pharmacy business from a traditional medical benefit to apharmacy benefit.

Total operating expenses of $39.0 millionfor the nine months ended September 30, 2001 were $9.0 million, or 30.1%,higher than for the nine months ended September 30, 2000.  This increase is primarily attributable toacquisitions made over the last twelve months. Much of the remaining increase in operating expenses is due to a greaterfocus on sales and marketing and on technology improvements, resulting inincreases in staffing to those areas. A market-driven increase in the cost ofproviding health insurance to our employees has also contributed to the growthin these expenses.

Despite the overall dollar increase inoperating expenses in the nine months ended September 30, 2001 over the ninemonths ended September 30, 2000, operating expenses have declined as apercentage of revenue from 29.7% in the prior year to 25.7% in the currentyear.  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 accountsincreased by $422,000, or 21.9%, for the nine months ended September 30, 2001compared to the corresponding period in the prior year.  For the nine months ended September 30, 2001,the provision for doubtful accounts was equal to 1.5% of revenue, compared to1.9% for the nine months ended September 30, 2000.  This reduction was due to an increase in the sale of specialtypharmaceuticals, which incur lower bad debt expense than infusion servicesprimarily because the vast majority of specialty pharmaceutical claims arebilled electronically, which eliminates billing errors and the rejection ofclaims.

Goodwill amortization increased by 53.5%for the nine months ended September 30, 2001 compared to the same period in2000, 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 forboth periods.

Interest expense increased by $497,000,or 69.5%, to $1.2 million for the nine months ended September 30, 2001 from$715,000 for the corresponding period in the prior year.  This was primarily due to the additionalborrowing incurred to fund our acquisitions made over the past twelve months.

Income tax expense increased by $1.2million, or 35.8%, for the nine months ended September 30, 2001 compared to thecorresponding period in the prior year. This increase was primarily due to the 32.4% increase in pretax incomeover the same period. The effective income tax rate for the nine months endedSeptember 30, 2001 increased to 39.0% from 38.0% for the nine months endedSeptember 30, 2000. This increase is a result of the growth in our pre-taxincome in 2001 versus 2000, which caused our statutory federal income tax rateto increase from 34% to 35%.

Net income improved 30.4% to $6.9million, or $0.54 cents per diluted share for the nine months ended September30, 2001, compared to $5.3 million, or $0.43 cents per diluted share for thenine months ended September 30, 2000. This was due to increased revenue, and a reduction in total operatingexpense as a percentage of revenue, which decreased from 29.7% for the ninemonths ended September 30, 2000 to 25.7% for the nine months ended September30, 2001. This increase in revenue and decrease in total operating expenses asa percentage of revenue more than offset the declines in operating margins andnet income as a percentage of revenues.

Total diluted shares for the nine monthsended September 30, 2001 increased to 12.9 million from 12.5 million for thenine months ended September 30, 2000. This 3.3% increase was primarily due to two factors: an increase in thenumber of nonqualified stock options that are “in the money,” and the issuanceof new shares under the 2000 Employee Stock Purchase Plan.

**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.

Net cash flow used by operations for the nine monthsended September 30, 2001 was $5.7 million, compared to $4.6 million provided byoperations during the same period in 2000. Of the overall $5.7 million cash used in the nine months just ended,acquisitions completed over the past twelve months used $8.8 million, whileexisting operations and offices acquired before January 1, 2000 provided $3.1million in positive cash flow.  Themajor cause of our overall use of operating cash flow for the nine months endedSeptember 30, 2001 was a $20.3 million increase in accounts receivable. Of thisincrease in accounts receivable, $12.4 million was attributable to newacquisitions and $7.9 million to offices acquired before January 1, 2000.  For most of our recent acquisitions,accounts receivable was not acquired. Therefore, as our new offices generated revenue, their accountsreceivable grew, resulting in negative operational cash flows.  The $7.9 million increase in accountsreceivable of offices acquired before January 1, 2000 can be primarilyattributed to their increase in revenue for the nine months ended September 30,2001 versus the same period in 2000.

Net cash flow used in investing activities in the ninemonths ended September 30, 2001 was $12.4 million, an increase of $4.4 millionover the $8.0 million cash used during the same period in 2000.  The major reason for the increased use ofcash was payments for acquisitions, net of cash acquired, of $10.4 million,consisting of $10.0 million paid at closing, plus $403,000 in subsequentpayments on current year and prior year acquisitions.  For the nine months ended September 30, 2000, $6.8 million ofcash was used for acquisitions, of which $3.9 million was paid for newacquisition and $2.9 million consisted of additional consideration paid on 1996and 1997 acquisitions.  Payments forequipment and other increased by $1.7 million, to $2.2 million for the ninemonths ended September 30, 2001, compared to $507,000 spent in the nine monthsended September 30, 2000.  Of the $2.2million spent in the current year, $804,000 was spent on infrastructureimprovements such as computer upgrades and leasehold improvements, $455,000 wasspent for revenue-producing equipment (home medical rental equipment) and$959,000 was spent on new software development projects.

Net cash flow of $18.1 million wasprovided by financing activities in the nine months ended September 30, 2001,compared to $3.4 million provided in the nine months ended September 30,2000.  The increase was primarily due toadditional borrowings of $6.6 million on our term loan and an overall increaseof $9.7 million on our revolving credit facility to fund the cash purchaseprice and short-term operating cash flow needs of new acquisitions completed inthe first six months of 2001.

As of September 30, 2001, our loanfacility consisted of a secured revolving credit facility of up to $25 millionand an unsecured term loan facility of up to $15 million.  Under the term loan facility, we were ableto enter into unsecured term loans until June 30, 2001. Repayment under theterm loan was to be made on a four-year amortization schedule, with the firstquarterly payment due and paid on July 1, 2001.  The existing loan facility is scheduled to expire in February2002.

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 arelimited to the lesser of $25 million 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 September 30, 2001, we had anaggregate of $19.3 million outstanding under the revolving creditfacility.  The average interest ratespaid were 6.1% for the third quarter of 2001 and 7.0% for the nine months endedSeptember 30, 2001.  Also, as ofSeptember 30, 2001, we had an aggregate of $9.6 million outstanding under theterm loan with an average interest rate of 7.2% for the third quarter of 2001and 7.8% for the nine months ended September 30, 2001.

As of September 30, 2001, we had no cashand cash equivalents, which equals the amount of cash and cash equivalents onhand as 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 as of September30, 2001was $29.1 million, which represents an increase of $16.3 million, or127.3%, over the $12.8 million of debt outstanding as of December 31,2000.  The increase was largely theresult of borrowings made by us in 2001 to fund acquisitions and theirassociated working capital needs.  Also,the increase in accounts receivable during 2001, which was the result of highercompany revenue from internal and acquisition growth during the year, resultedin reduced cash flows from operations and higher borrowing requirements.

On October 12, 2001, Option Carecompleted the sale of 3,500,000 shares of our common stock through anunderwritten public offering. The shares were delivered on the closing date,October 17, 2001. In connection with the offering, the underwriters exercisedtheir over-allotment option and another 525,000 shares of common stock weresold, of which 450,000 shares were sold by the selling shareholder and 75,000shares were sold by us. The sale generated net proceeds to us of approximately$49.7 million. We used approximately $28.9 million of the proceeds to pay offthe outstanding balances on our credit facility, while the remainder was addedto working capital.  We incurred anearly prepayment fee of $135,000 related to paying off the outstanding balanceon our term loan.

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 needs at least through December 31, 2002.In the event that additional capital is required, management cannot assure thatsuch capital can be obtained from other sources on terms acceptable to us, ifat all.Our business strategy includes the selective acquisition of additional localpharmacy facilities.  Accordingly, wemay require additional capital in order to complete these acquisitions.  It is impossible to predict the amount ofcapital that may be required for acquisitions, and there is no assurance thatsufficient financing for these activities will be available on terms acceptableto us, if at all.

**Goodwill and Other Intangible Assets**

As of September 30, 2001, goodwill and other intangibleassets, net, was $33.8 million, an increase of $6.8 million over the $27.0million at December 31, 2000. The increase was primarily due to ouracquisitions made during the first six months of 2001, plus additionalconsideration calculated on our 2000 acquisitions.

Total net goodwill and other intangible assets declinedas a percentage of total assets to 34.8% at September 30, 2001 from 40.4% as ofDecember 31, 2000.  This declineoccurred primarily because accounts receivable and other tangible assetsincreased at a faster pace than goodwill and other intangible assets.

**ITEM 3. Quantitative and Qualitative Disclosures 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 ofSeptember 30, 2001 and as of September 30, 2000, our fixed-rate debt was$153,000 and $171,000, and our corresponding variable-rate debt was $28.9million and  $14.6 million. Based on ourvariable-rate debt at September 30, 2001, a one-percent change in interestrates would result in an annual change in interest expense of approximately$289,000.
****
**PARTII.  OTHER INFORMATION**

**ITEM 1. Legal Proceedings**

             OnOctober 10, 2001, a lawsuit captioned I.V. Associates, Inc. v. Option Care, Inc.,Civil Action No. 01-4726, was filed in the U.S. District Court for the Districtof New Jersey and was served on Option Care, Inc. on October 24, 2001. I.V.Associates, Inc., an Option Care franchisee, alleges breach of contract,violation of the New Jersey Franchise Practices Act, tortious interference withprospective contractual relationships and breach of the covenant of good faithand fair dealing. Specifically, I.V. Associates alleges that we are operating abusiness that competes with I.V. Associates’ business in violation of thefranchise agreement between the parties. I.V. Associates is seekingcompensatory damages in excess of the minimum jurisdictional limits for theU.S. District Court as well as unspecified equitable relief. We believe thatthe plaintiff’s allegations are without merit and intend to file responsivepleadings denying all substantive allegations of wrongdoing and claims forrelief.

**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**

             None.

**ITEM 5. Other Information**

             None.

**ITEM 6(a).  Exhibits**

             SeeExhibit Index.

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

             OnAugust 31, 2001, we filed an 8-K disclosing that our Chairman, Dr. John Kapoor,has been named in a shareholders class action lawsuit against Akorn, Inc.  Dr. Kapoor serves as Chairman and InterimChief Executive Officer of Akorn, Inc.

  On September 10, 2001, we filed an 8-K toannounce our signing of an expanded contract with Blue Cross/Blue Shield ofFlorida for the distribution of injectable and other pharmaceuticalproducts.  This 8-K was subsequentlyamended by filing an 8-K/A on October 10, 2001 to include certain portions ofthe Blue Cross/Blue Shield of Florida contract which had been omitted under aConfidential Treatment Request filed on September 10, 2001.

  On September 27, 2001, we filed an 8-K toannounce our signing of a new contract with Health New England, Inc.
****
**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: November 14, 2001

By:

Carla M. Pondel

 

 

*Chief Financial Officer**(Principal Accounting Officer and**Principal  Financial Officer)*

** **
****
**ExhibitIndex**

 

**Exhibit Number**

 

 

 

 

 

3.1

 

Certificate of  Incorporation of the Registrant, together with Certificate of Amendment  thereto filed February 18, 1992. Filed as Exhibit 3(a) to the  Company's Registration Statement (No. 33-45836) dated April 15,  1992 and incorporated by reference herein.

 

 

 

3.2

 

Certificate of Amendment  to Certificate of Incorporation of the Registrant filed March 25, 1992.  Filed as Exhibit 3(c) to the Company's Registration Statement  (No. 33-45836) dated April 15, 1992 and incorporated by reference  herein.

 

 

 

3.3

 

Restated By-laws of the  Registrant dated June 1, 1994. Filed as Exhibit 10.5 to the Company's  Annual Report on Form 10-K for the year ending December 31, 1994 and incorporated  by reference herein.

 

 

 

10.1

 

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.

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