**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 ended**

 

**March 31, 2002**

 

**Commission file number 000-19878**

 

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**OPTION CARE, INC.**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                    |   | **36-3791193**                     |
|-----------------------------------------------------------------|--------|------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (IRS Employer Identification  No.) |
|                                                            |   |                               |
| **100 Corporate North, Suite 212**                              |   |                               |
| **Bannockburn, Illinois**                                       |   | **60015**                          |
| (Address of principal executive  office)                        |   | (zip code)                         |
|                                                            |   |                               |
| **(847) 615-1690**                                         |
| (Registrant’s telephone number,  including area code)      |

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o

 

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

 

| **Class**                      |   | **Issued and Outstanding  as of May 1, 2002** |
|--------------------------------|--------|-----------------------------------------------|
|                           |   |                                          |
| Common Stock - $0.01 par value |   | 20,484,359                                    |

 

 

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**INDEX**

 

**OPTIONCARE, INC. AND SUBSIDIARIES**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                |
|-------------|----------------------------------------------------------------------------------------------------------|
|        |                                                                                                     |
| Item 1.     | Financial Statements  (Unaudited)                                                                        |
|        |                                                                                                     |
|        | Condensed  consolidated balance sheets — March 31, 2002 and December 31, 2001                       |
|        |                                                                                                     |
|        | Condensed  consolidated statements of income — Three months ended March 31, 2002  and 2001     |
|        |                                                                                                     |
|        | Condensed  consolidated statements of cash flows — Three months ended March 31,  2002 and 2001 |
|        |                                                                                                     |
|        | Notes  to condensed consolidated financial statements — March 31, 2002                              |
|        |                                                                                                     |
| Item  2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations              |
|        |                                                                                                     |
| Item  3.    | Quantitative  and Qualitative Disclosures about Market Risk                                              |
|        |                                                                                                     |
|        |                                                                                                     |
| **PART II** | **OTHER INFORMATION**                                                                                    |
|        |                                                                                                     |
| Item 1.     | Legal Proceedings                                                                                        |
|        |                                                                                                     |
| Item  2.    | Changes  in Securities and Use of Proceeds                                                               |
|        |                                                                                                     |
| Item 3.     | Defaults Upon  Senior Securities                                                                         |
|        |                                                                                                     |
| Item  4.    | Submission  of Matters to a Vote of Security Holders                                                     |
|        |                                                                                                     |
| Item 5.     | Other Information                                                                                        |
|        |                                                                                                     |
| Item 6(a).  | Exhibits                                                                                                 |
|        |                                                                                                     |
| Item 6(b).  | Reports on  Form 8-K                                                                                |

 

2

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**PART I.  FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**Option Care, Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets**

(in thousands, except share and per share amounts)

 
|                                                                                                                                                                      |   | **March 31, 2002** |    | **December 31, 2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-----------------------|--------|
|                                                                                                                                                                      |   |               |    | **(Note 1)**          |   |
|                                                                                                                                                                      |   | **(Unaudited)**    |    |                  |   |
| Assets                                                                                                                                                                    |   |               |    |                  |   |
| Current  assets:                                                                                                                                                          |   |               |    |                  |   |
| Cash  and cash equivalents                                                                                                                                                |   | $                  | 3,250   |                  | $      | 8,511 |   |
| Accounts  receivable, net                                                                                                                                                 |   | 62,284             |    | 56,341                |   |
| Inventory                                                                                                                                                                 |   | 7,501              |    | 6,388                 |   |
| Deferred  tax asset                                                                                                                                                       |   | 3,038              |    | 3,038                 |   |
| Other  current assets                                                                                                                                                     |   | 3,818              |    | 3,421                 |   |
|                                                                                                                                                                      |   |               |    |                  |   |
| Total  current assets                                                                                                                                                     |   | 79,891             |    | 77,699                |   |
| Investments                                                                                                                                                               |   | 195                |    | —                |   |
| Equipment  and other fixed assets, net                                                                                                                                    |   | 7,597              |    | 7,330                 |   |
| Goodwill,  net                                                                                                                                                            |   | 39,418             |    | 38,384                |   |
| Intangible  assets, net                                                                                                                                                   |   | 1,816              |    | 1,555                 |   |
| Other  assets                                                                                                                                                             |   | 361                |    | 294                   |   |
|                                                                                                                                                                      |   |               |    |                  |   |
| Total  assets                                                                                                                                                             |   | $                  | 129,278 |                  | $      | 125,262 |   |
|                                                                                                                                                                      |   |               |    |                  |   |
| Liabilities  and stockholders’ equity                                                                                                                                |   |               |    |                  |   |
| Current  liabilities:                                                                                                                                                     |   |               |    |                  |   |
| Current  portion of long-term debt                                                                                                                                        |   | 254                |    | 265                   |   |
| Trade  accounts payable                                                                                                                                                   |   | 12,505             |    | 11,117                |   |
| Other  current liabilities                                                                                                                                                |   | 6,282              |    | 9,960                 |   |
|                                                                                                                                                                      |   |               |    |                  |   |
| Total  current liabilities                                                                                                                                                |   | 19,041             |    | 21,342                |   |
| Long-term  debt, less current portion                                                                                                                                     |   | 276                |    | 353                   |   |
| Other  liabilities                                                                                                                                                        |   | 2,571              |    | 2,333                 |   |
| Minority  interest                                                                                                                                                        |   | 485                |    | 468                   |   |
|                                                                                                                                                                      |   |               |    |                  |   |
| Total  liabilities                                                                                                                                                        |   | 22,373             |    | 24,496                |   |
|                                                                                                                                                                      |   |               |    |                  |   |
| Stockholders’  equity:                                                                                                                                               |   |               |    |                  |   |
| Common stock, $.01 par  value per share, 30,000,000 shares  Authorized, 20,455,320 and 20,046,480 shares issued and   outstanding at March 31, 2002 and December 31, 2001 |   | 205                |    | 200                   |   |
| Common  stock to be issued, 118,841 and 191,296 shares at March 31, 2002 and  December 31, 2001                                                                           |   | 992                |    | 1,270                 |   |
| Other  stockholders’ equity                                                                                                                                          |   | 105,708            |    | 99,296                |   |
|                                                                                                                                                                      |   |               |    |                  |   |
| Total  stockholders’ equity                                                                                                                                          |   | 106,905            |    | 100,766               |   |
|                                                                                                                                                                      |   |               |    |                  |   |
| Total  liabilities and stockholders’ equity                                                                                                                          |   | $                  | 129,278 |                  | $      | 125,262 |   |

 

*See notes tocondensed consolidated financial statements*

 

3

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**Option Care, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Income**

(Unaudited)(in thousands, except per share amounts)

 
|                                            |   | **Three Months EndedMarch 31,** |         |
|-------------------------------------------------|--------|---------------------------------|--------------|
|                                            |   | **2002**                        |         | **2001** | ** ** |
|                                            |   |                            |         |   |   |
| Revenue                                         |   | $                               |  72,707 |   | $ |  45,905 |   |
| Cost  of revenue                                |   | 50,044                          |         | 30,289 |   |
|                                            |   |                            |         |   |   |
| Gross  profit                                   |   | 22,663                          |         | 15,616 |   |
| Selling,  general and administrative expenses   |   | 15,445                          |         | 11,020 |   |
| Provision  for doubtful accounts                |   | 1,500                           |         | 564 |   |
| Amortization  of goodwill                       |   | 0                               |         | 224 |   |
|                                            |   |                            |         |   |   |
| Total  operating expenses                       |   | 16,945                          |         | 11,808 |   |
|                                            |   |                            |         |   |   |
| Operating  income                               |   | 5,718                           |         | 3,808 |   |
| Interest  income (expense), net                 |   | 16                              |         | (341 | ) |
| Other  income (expense), net                    |   | (33                             | )            | 9 |   |
|                                            |   |                            |         |   |   |
| Income  before income taxes                     |   | 5,701                           |         | 3,476 |   |
| Income  tax provision                           |   | 2,239                           |         | 1,346 |   |
|                                            |   |                            |         |   |   |
| Net Income                                      |   | $                               |  3,462  |   | $ |  2,130 |   |
|                                            |   |                            |         |   |   |
| Net  income per common share:                   |   |                            |         |   |   |
| Basic  earnings per share                       |   | $                               |  0.17   |   | $ |  0.14 |   |
|                                            |   |                            |         |   |   |
| Diluted  earnings per share                     |   | $                               | 0.16         |   | $ |  0.13 |   |
|                                            |   |                            |         |   |   |
| Shares  used in computing net income per share: |   |                            |         |   |   |
| Basic                                           |   | 20,428                          |         | 15,295 |   |
| Diluted                                         |   | 21,004                          |         | 15,778 |   |

* *

*See notes to condensed consolidatedfinancial statements*

 

4

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**Option Care, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows**

(Unaudited)(in thousands)

 
|                                                                           |   | **Three Months Ended  March 31,** |   |
|--------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                           |   | **2002**                               |   | **2001** | ** ** |
|                                                                           |   |                                   |   |   |   |
| Cash  flows from operating activities:                                         |   |                                   |   |   |   |
| Net  income                                                                    |   | $                                      | 3,462  |   | $ | 2,130 |   |
| Adjustments  to reconcile net income to net cash used by operating activities: |   |                                   |   |   |   |
| Depreciation  and amortization                                                 |   | 915                                    |   | 875 |   |
| Provision  for doubtful accounts                                               |   | 1,500                                  |   | 564 |   |
| Other                                                                          |   | 1,143                                  |   | 123 |   |
| Changes  in assets and liabilities:                                            |   |                                   |   |   |   |
| Accounts  receivable                                                           |   | (7,443                                 | )      | (6,219 | ) |
| Inventory                                                                      |   | (777                                   | )      | (560 | ) |
| Accounts  payable                                                              |   | (727                                   | )      | (1,442 | ) |
| Change  in other current assets and current liabilities                        |   | 295                                    |   | (760 | ) |
|                                                                           |   |                                   |   |   |   |
| Net  cash used by operating activities                                         |   | (1,632                                 | )      | (5,289 | ) |
|                                                                           |   |                                   |   |   |   |
| Cash  flows from investing activities:                                         |   |                                   |   |   |   |
| Purchases  of equipment and other, net                                         |   | (922                                   | )      | (512 | ) |
| Additions  to other assets, net                                                |   | (660                                   | )      | (13 | ) |
| Payments for  acquisitions, net of cash acquired                               |   | (3,068                                 | )      | (1,867 | ) |
|                                                                           |   |                                   |   |   |   |
| Net  cash used in investing activities                                         |   | (4,650                                 | )      | (2,392 | ) |
|                                                                           |   |                                   |   |   |   |
| Cash  flows from financing activities:                                         |   |                                   |   |   |   |
| Increase  in cash overdraft                                                    |   | —                                 |   | 1,519 |   |
| Net  borrowing on credit agreements                                            |   | —                                 |   | 5,835 |   |
| Payments  on capital leases and other debt                                     |   | (88                                    | )      | (6 | ) |
| Proceeds  from issuance of stock                                               |   | 1,109                                  |   | 333 |   |
|                                                                           |   |                                   |   |   |   |
| Net  cash provided by financing activities                                     |   | 1,021                                  |   | 7,681 |   |
|                                                                           |   |                                   |   |   |   |
| Net  decrease in cash and cash equivalents                                     |   | (5,261                                 | )      | — |   |
| Cash  and cash equivalents, beginning of period                                |   | 8,511                                  |   | — |   |
| Cash  and cash equivalents, end of period                                      |   | $                                      | 3,250  |   | $ | — |   |

* *

*See notes tocondensed consolidated financial statements*

 

5

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**Option Care, Inc. and Subsidiaries**

**Notesto Condensed Consolidated Financial Statements**

**March 31, 2002**

(Unaudited)

 

**1.    Basis of Presentation**

 

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

 

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

 

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

 

Effective January1, 2002, Option Care is operating in and reporting one segment.  Since there is no longer a clear distinctionbetween the operations of our local pharmacies and our regional specialtypharmacies, Option Care's chief decision-makers no longer use separatefinancial information by segment to make decisions. Our operations arereflected as one segment and all prior period information contained in thisForm 10-Q has been reclassified accordingly.

 

**2.   Reclassifications**

 

Certain amounts inthe condensed consolidated financial statements have been reclassified toconform to the current year presentation.

 

**3.   Long-Term Debt**

 

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

 

Availability underthe Credit and Security Agreement is related to various percentages of OptionCare’s outstanding accounts receivable and inventory balances, less certaincapped and ineligible amounts, as defined in the agreement.  Overall borrowings under the agreement willbe limited to the lesser of the remaining availability under the agreement andthe total allowable collateral borrowing base. The facility is secured by substantially all company assets.

 

In addition tocustomary events of default, the facility provides that a change in control ofour company would give rise to an event of default.

 

6

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As of March 31,2002, we had not yet borrowed against the new credit facility.

 

**4.   Earnings Per Share Data**

 

The following table sets forth the computation of basic and dilutedearnings per share for the periods indicated. Share and per share amounts reflect the pro forma effects of the 5-for-4stock split for stockholders of record as of April 10, 2002.

 

(in thousands, except per share amounts)

 
|                                                                            |   | **Three months ended  March 31,** |   |
|---------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                            |   | **2002**                          |   | **2001** |   |
|                                                                            |   |                              |   |   |   |
| **Basic:**                                                                      |   |                              |   |   |   |
| Net  income                                                                     |   | $                                 | 3,462  |   | $ | 2,130 |   |
|                                                                            |   |                              |   |   |   |
| Average  shares outstanding                                                     |   | 20,428                            |   | 15,295 |   |
|                                                                            |   |                              |   |   |   |
| Basic  earnings per share                                                       |   | $                                 | 0.17   |   | $ | 0.14 |   |
|                                                                            |   |                              |   |   |   |
| **Diluted:**                                                                    |   |                              |   |   |   |
| Net  income                                                                     |   | $                                 | 3,462  |   | $ | 2,130 |   |
|                                                                            |   |                              |   |   |   |
| Average  shares outstanding                                                     |   | 20,428                            |   | 15,295 |   |
| Net  effect of dilutive stock options – Based on the treasury stock method |   | 576                               |   | 483 |   |
|                                                                            |   |                              |   |   |   |
| Total  diluted shares                                                           |   | 21,004                            |   | 15,778 |   |
|                                                                            |   |                              |   |   |   |
| Diluted  earnings per share                                                     |   | $                                 | 0.16   |   | $ | 0.13 |   |

** **

**5.    Operating Segments**

 

Effective January 1, 2002, Option Care is operating in and reporting onesegment. Previously, Option Care had identified two distinct operatingsegments: the local pharmacy division and the regional specialty pharmacydivision. Since there is no longer a clear distinction between the operationsof our local pharmacies and our regional specialty pharmacies, OptionCare's chief decision-makers no longer use separate financial information bysegment to make decisions. Our operations are reflected as one segment and all prior period information contained in this Form10-Q has been reclassified accordingly.

** **

**6.    Significant Customer**

 

We generate revenue from managed care contracts and other agreementswith commercial third party payors.  Ourprincipal managed care contract is with Blue Cross and Blue Shield of Floridawhich contracts with us through our company-owned pharmacy located in Miami,Florida.  Approximately 20% and 22% ofour total revenue for the quarters ended March 31, 2002 and March 31, 2001,respectively, was related to this contract. As of March 31, 2002 and December 31, 2001, approximately 11% of ouraccounts receivable was due from Blue Cross and Blue Shield of Florida.  As of April 1, 2001, we agreed to pricereductions under this contract.  In September2001, we signed a new agreement that expands our relationship by increasing thepatient lives covered by the agreement. The contract is terminable by either party on 90 days’ notice and,unless terminated, renews annually each September for an additional one-yearterm.

 

Option Care also generates revenue from government programs such asMedicare and Medicaid.  Approximately17% and 16% of our total revenue for the quarters ended March 31, 2002 andMarch 31, 2001, respectively, was related to these government programs.  Approximately 19% and 17% of our totalaccounts receivable as of March 31, 2002 and December 31, 2001, respectively,was due from these government programs.

 

7

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**7.    Acquisitions**

 

On March 19, 2002, Option Care acquired certainassets related to the home infusion operations of American Homepatient, Inc. inthe Providence, Rhode Island metropolitan area.  This acquisition provides us with entrance into a new market andhelps Option Care achieve the goal of expanding our overall presence in theNortheast.

 

The acquisition was accounted for as a purchase,and accordingly, acquired assets were recorded at their estimated fair valuesat March 19, 2002. The purchase price was $1.3 million, paid in cash atclosing.  Of this purchase price,approximately $900,000 was allocated to goodwill and other intangible assets,$300,000 was allocated to inventories and the remaining $100,000 was allocatedto fixed and other assets.  Accountsreceivable were not acquired.

 

Our unaudited pro forma results of operations, presented as if theacquisitions we completed between January 1, 2001 and March 31, 2002 hadoccurred as of January 1, 2001, were as follows:

 

|                                                   |   | **Three Months Ended March 31,**              |       |
|--------------------------------------------------------|--------|-----------------------------------------------|------------|
|                                                   |   | **2002**                                      | ** ** | **2001** | ** ** |
|                                                   |   | **(in thousands, except per share  amounts)** | ** ** |
| Revenue                                                |   | $                                             | 73,611     |   | $ | 69,664 |   |
|                                                   |   |                                          |       |   |   |
| Net  income                                            |   | $                                             | 3,578      |   | $ | 3,042 |   |
|                                                   |   |                                          |       |   |   |
| Net income per diluted  share                          |   | $                                             | 0.17       |   | $ | 0.19 |   |
|                                                   |   |                                          |       |   |   |   |
| Shares used in  computing net income per diluted share |   |                                          | 21,004     |   |   | 15,778 |   |

 

8

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**8.    New Accounting Pronouncements**

 

Option Care adopted the non-amortizationprovisions of Statement of Financial Accounting Standards (SFAS) No. 142, *Goodwill andOther Intangible Assets*, effective January 1, 2002.  This resulted in a $300,000 increase to netincome in the first quarter of 2002 and is expected to increase full-year netincome by approximately  $1.1 million.  We have not yet determined the financialimpact that the impairment provisions of SFAS No. 142 may have on ourconsolidated financial statements.

 

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

 

|                                   |   | **Three Months Ended March 31,**              |       |
|----------------------------------------|--------|-----------------------------------------------|------------|
|                                   |   | **2002**                                      |       | **2001** | ** ** |
|                                   |   | **(in thousands, except per share  amounts)** | ** ** |
| Reported  net income                   |   | $                                             | 3,462      |   | $ | 2,130 |   |
| Goodwill  amortization, net of tax     |   | —                                        |       | 154 |   |
| Adjusted  net income                   |   | $                                             | 3,462      |   | $ | 2,284 |   |
|                                   |   |                                          |       |   |   |
| Basic  income per share:               |   |                                          |       |   |   |
| Reported  basic net income per share   |   | $                                             | 0.17       |   | $ | 0.14 |   |
| Goodwill  amortization, net of tax     |   | —                                        |       | 0.01 |   |
| Adjusted  basic net income per share   |   | $                                             | 0.17       |   | $ | 0.15 |   |
|                                   |   |                                          |       |   |   |
| Diluted  income per share:             |   |                                          |       |   |   |
| Reported  diluted net income per share |   | $                                             | 0.16       |   | $ | 0.13 |   |
| Goodwill  amortization, net of tax     |   | —                                        |       | 0.01 |   |
| Adjusted diluted net  income per share |   | $                                             | 0.16       |   | $ | 0.14 |   |

 

**9.    Subsequent Events**

 

For stockholders of record on April 10, 2002,Option Care completed a five-for-four split of our common stock.  As of May 2, 2002, our stock began tradingat post-split prices on the Nasdaq National Market.  All financial statements and schedules included in this QuarterlyReport on Form 10-Q reflect the effects of this stock split.

 

On April 16, 2002, Option Care acquired certainassets of the home infusion business operated by The Mount Sinai Hospital inNew York, New York.  The purchase pricewas $1.5 million, paid in cash at closing.

 

On May 6, 2002, Option Care acquired 60% of theoutstanding common stock of Infusion Specialties, Inc., a provider ofhemophilia and other specialty pharmacy drugs and services located in Houston,Texas.  The purchase price for thisacquisition was approximately $1.9 million, paid in cash at closing.

 

9

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

 

**FORWARD LOOKING STATEMENTS**

 

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

** **

**OVERVIEW**

 

We provide infusion andspecialty pharmacy services to patients on behalf of managed care organizationsand other third party payors.  Wecontract with payors to provide infusion therapy, specialty pharmaceuticals andother related healthcare services to patients at home or at otheralternate-site settings, such as physicians’ offices.  As of March 31, 2002, our infusion pharmacy and related servicesare provided locally through our nationwide network of 129 owned and franchisedpharmacy locations, operating under the name Option Care®.  Three of these pharmacies also function asregional distribution hubs for specialty pharmaceuticals, and operate under thename OptionMedTM.

 

Effective January 1,2002, Option Care is operating in and reporting one segment with three servicelines:  infusion pharmacy and relatedservices; specialty pharmacy services; and other.  The following table presents quarterly revenue generated from ourthree service lines for the year 2001 (in thousands):

 
|                                    |   | **2001** |   |
|-----------------------------------------|--------|----------|--------|
|                                    |   | **Q1**   |   | **Q2** |   | **Q3** |   | **Q4** |   |
| Revenue:                                |   |     |   |   |   |   |   |   |   |
| Infusion pharmacy and  related services |   | $        | 21,679 |   | $ | 26,061 |   | $ | 29,483 |   | $ | 30,587 |   |
| Specialty pharmacy  services            |   | 21,307   |   | 21,091 |   | 23,786 |   | 31,982 |   |
| Other                                   |   | 2,919    |   | 2,751 |   | 2,824 |   | 2,663 |   |
| Total revenue                           |   | $        | 45,905 |   | $ | 49,903 |   | $ | 56,093 |   | $ | 65,232 |   |

 

The following tablepresents quarterly gross profit margins for 2001 for each of our three servicelines:

 
|                                    |   | **2001** |   |
|-----------------------------------------|--------|----------|--------|
|                                    |   | **Q1**   |   | **Q2** |   | **Q3** |   | **Q4** |   |
| Gross profit margin:                    |   |     |   |   |   |   |   |   |   |
| Infusion pharmacy and  related services |   | 41.1     | %      | 43.6 | % | 40.6 | % | 41.0 | % |
| Specialty pharmacy  services            |   | 18.0     |   | 15.6 |   | 17.1 |   | 17.7 |   |
| Other                                   |   | 97.7     |   | 97.4 |   | 97.2 |   | 96.8 |   |
| Overall gross profit  margin            |   | 34.0     | %      | 34.8 | % | 33.4 | % | 31.8 | % |

 

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**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

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

** **

**Revenue recognition**

 

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

 

**Accountsreceivables**

 

Option Care records all of our accounts receivablesnet of allowance for bad debts.  Theseallowances are estimated based on several factors, such as our past accountsreceivable collection history, evaluation of the age of the accounts receivableat the end of each period, and detailed analysis of the expected collectibilityof amounts receivable from each significant payor based on a number of factors.In certain circumstances, our accounts receivable may also be subject toretroactive adjustments by payors. Although we believe that our estimation ofthe net value of our accounts receivable is reasonable, actual collections maydiffer from our estimates of collectibility, affecting our future financialcondition and results of operations.

** **

**Goodwill and other intangible assets**

 

We record goodwill fromour acquisitions equal to the excess of the total cost of the acquisitions overthe net book value of all identified tangible and intangible assets acquired.Beginning in 2002, in accordance with Statements of Financial AccountingStandards No. 141, *Business Combinations*and No. 142, *Goodwill and Other IntangibleAssets (SFAS No. 141 and SFAS No. 142)*, goodwill is not to beamortized but is to be evaluated periodically for impairment. Option Care willperform annual impairment tests of our goodwill and intangible assets, based onthe guidelines in those statements. As of December 31, 2001, no impairment ofour goodwill and intangible assets was identified. If market conditions and/orthe performance of our acquired businesses change in future periods, we may berequired to record impairment charges.

 

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**RESULTSOF OPERATIONS**

 

**Three Months Ended March 31, 2002 and2001**

 

The following table showsrevenue for each of our three service lines: infusion pharmacy and relatedservices; specialty pharmacy services; and other revenue:

 
|                                   |   | **Three months ended  March 31,** |   |
|----------------------------------------|--------|-----------------------------------|--------|
|                                   |   | **2002**                          |   | **2001** |   |
|                                   |   | **Amounts**                       |   | **% of** |   | **Amounts** |   | **% of** | ** ** |
|                                   |   | **(in thousands)**                |   | **total** |   | **(in thousands)** |   | **total** |   |
|                                   |   |                              |   |   |   |   |   |   |   |
| Revenue:                               |   |                              |   |   |   |   |   |   |   |
| Infusion pharmacy and related services |   | $                                 | 29,521 |   | 40.6 | % | $ | 21,679 |   | 47.2 | % |
| Specialty  pharmacy services           |   | 40,549                            |   | 55.8 |   | 21,307 |   | 46.4 |   |
| Other                                  |   | 2,637                             |   | 3.6 |   | 2,919 |   | 6.4 |   |
| Total  revenue                         |   | $                                 | 72,707 |   | 100.0 | % | $ | 45,905 |   | 100.0 | % |
|                                        |        |                                   |        |  |  |  |  |  |  |  |  |  |  |

 

Revenue for the quarterended March 31, 2002 increased to $72.7 million, which is $26.8 million, or58.4%, higher than the $45.9 million generated during the first quarter of2001.

 

Revenue from infusionpharmacy and related services increased by $7.8 million, from $21.7 million inthe first quarter of 2001 to $29.5 million in the first quarter of 2002,accounting for 29.3% of the total revenue increase.  This increase was primarily from sales by new offices acquired overthe last five quarters.

 

Of the $26.8 millionincrease in revenue, $19.2 million, or 71.8%, related to increases in the saleof specialty pharmaceuticals. The majority of our company-owned pharmaciesgenerated increased specialty pharmaceutical revenue, particularly our Floridapharmacies.  In September 2001, wesigned a new contract with Blue Cross and Blue Shield of Florida that expandedour relationship statewide as their exclusive provider of specialty pharmaceuticals.  Another factor responsible for our growth inspecialty pharmacy services revenue was increased marketing of specialty drugssuch as Synagis, a seasonal drug for the treatment of Respiratory SynctialVirus (RSV).  Synagis revenue increasedapproximately 80% in the first quarter of 2002 compared to the correspondingquarter in the prior year.  Specialtypharmacy services revenue from businesses acquired over the past five quartersaccounted for approximately 28% of the total increase in specialty pharmacyservices revenue.

 

 

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Thefollowing table shows gross profit for each of our three service lines:infusion pharmacy and related services; specialty pharmacy services; and otherrevenue:

 
|                                    |   | **Three months ended March 31** |   |
|-----------------------------------------|--------|---------------------------------|--------|
|                                    |   | **2002**                        |   | **2001** |   |
|                                    |   | **Amounts**

**(in thousands)** |   | **% of**

**revenue** |   | **Amounts**

**(in thousands)** |   | **% of**

**revenue** |   |
| Gross  profit:                          |   |                            |   |   |   |   |   |   |   |
| Infusion  pharmacy and related services |   | $                               | 13,090 |   | 44.3 | % | $ | 8,918 |   | 41.1 | % |
| Specialty  pharmacy services            |   | 6,958                           |   | 17.2 |   | 3,845 |   | 18.0 |   |
| Other                                   |   | 2,615                           |   | 99.2 |   | 2,853 |   | 97.7 |   |
| Total  gross profit                     |   | $                               | 22,663 |   | 31.2 | % | $ | 15,616 |   | 34.0 | % |

 

 

 

Cost of revenue increasedby $19.8 million over the corresponding quarter of the prior year. Thisincrease is attributable to the $26.8 million increase in revenue over the sameperiod.  The gross profit margin for thefirst quarter of 2002 was 31.2%, which represents a decline of 2.8% from the34.0% gross profit margin in the corresponding quarter last year.  The primary reason for this decrease inmargin was the increase in sales of specialty pharmaceuticals, which are highercost, lower margin drugs than traditional infusion drugs. The gross profitmargin on specialty pharmaceuticals dropped by 0.8%, from 18.0% in the firstquarter of 2001 to 17.2% in the first quarter of 2002. The primary cause ofthis decline was a 3.1% drop in the specialty pharmacy services profit marginof our Florida pharmacies.  EffectiveApril 1, 2001, we agreed to reduced pricing under our primary managed carecontract with Blue Cross and Blue Shield of Florida, which reduced the grossprofit margins of our Florida pharmacies. Though our margins were negativelyaffected by the pricing change, increases in sales volume under this agreementmore than offset the reduction in margin. The gross profit margin on infusionpharmacy and related services improved by 3.2%, from approximately 41.1% in thefirst quarter of 2001 to 44.3% in the first quarter of 2002.  An increase in respiratory therapy anddurable medical equipment (RT/DME) revenue accounted for 1.0% of theincrease.  Changes in product mix withinthe infusion business accounted for the remainder of the margin improvement.

 

Selling, general and administrative expenses were $15.4 million for the quarter ended March 31, 2002.  This represents an increase of $4.4 million, or 40.2%, over the quarter ended March 31, 2001.  This increase is primarily attributable to the acquisitions we made over the past five quarters, which have added additional fixed costs to our business.  Despite the dollar increase quarter over prior year quarter, selling, general and administrative expenses declined as a percentage of revenue from 24.0% for the first quarter of 2001 to 21.2% for the first quarter of 2002. The decline in percentage was primarily related to our increase in sales of specialty pharmaceuticals by our local pharmacies. Selling, general and administrative expenses related to such sales are minimal.

 

The provision for doubtful accounts increased by approximately $900,000, or 166.0%, to $1.5 million in the first quarter of 2002 over the corresponding quarter of the prior year.  As a percentage of revenue, the provision for doubtful accounts increased from 1.2% in the first quarter of 2001 to 2.1% in the first quarter of 2002.  This increase was primarily due to the acquisitions completed over the past five quarters.  We recognize a higher bad debt provision for our acquired offices during their integration period.

 

In compliance with thenew accounting standards presented in SFAS No.142, *Goodwill and Other Intangible Assets*,Option Care did not amortize goodwill in the first quarter of 2002.  Goodwill amortization expense for the firstquarter of 2001 was $224,000.  Had weadopted the non-amortization provisions of SFAS No. 142 as of the beginning of2001, our net income for that period would have been higher by $154,000.

 

Interest income for thefirst quarter of 2002 was $16,000. By contrast, we had interest expense in thefirst quarter of 2001 of $341,000.  Thisinterest expense in 2001 was primarily related to borrowings on our creditfacility to fund acquisitions completed in 2000 and in the first quarter of2001.  Upon completing an underwrittenpublic offering of stock in October 2001, which generated $50 million in cash,we were able to pay off this debt and had a positive cash balance.  The $16,000 of interest income in the firstquarter of 2002 was generated from our remaining cash reserves from the stockoffering.

 

Income tax expenseincreased by $900,000, or 66.3%, in the first quarter of 2002 compared to thecorresponding quarter in the prior year. This increase is directly attributableto our 64.0% increase in pretax income over this period.  The effective income tax rate for the firstquarter of 2002 was 39.3%, which represents a slight increase from the 38.7%effective income tax rate in the first quarter of 2001. This increase is due tofluctuations in tax-deductible items and in our blended state income tax rate.

 

Net income grew to $3.5million, or $0.16 per diluted share, for the first quarter of 2002.  This represents a 62.5% increase over firstquarter of 2001 net income of $2.1 million, or $0.13 cents per dilutedshare.  This increase in net income wasprimarily due to the incremental revenue and net income generated by officesacquired over the past five quarters and to same store sales increases in ourcompany-owned pharmacies.  Anotherfactor was the adoption of the non-amortization provisions of SFAS No.142, *BusinessCombinations*, as of January 1, 2002.

 

Option Care completed a5-for-4 stock split for holders of record on April 10, 2002.  All shares outstanding and per share amountsin this Quarterly Report on Form 10-Q have been adjusted to reflect the proforma effects of the split.

 

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Total diluted shares forthe first quarter of 2002 was 21.0 million compared to 15.8 million for thecorresponding quarter in 2001.  This 5.2million, or 33.1%, increase in diluted shares was primarily due to the issuanceof 4,468,750 new shares of stock through an underwritten public offering ofstock we completed in October 2001. The remaining increase of approximately700,000 shares was mostly related to the issuance of shares from employees’exercises of stock options, an increase in the number of unexercised “in themoney” stock options, and the issuance of shares to participants in OptionCare’s Employee Stock Purchase Plan.****

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

For the quarter endedMarch 31, 2002, we financed our operations and our one acquisition throughoperating cash flows and use of cash reserves. In previous periods, we also financed our operations and acquisitionsthrough credit facility borrowings and an underwritten public offering ofcommon stock.

 

Netcash flow used by operations for the three months ended March 31, 2002 was $1.6million, compared to $5.3 million used by operations during the same period in2001.  Of the overall $1.6 million cashused in the three months ended March 31, 2002, acquisitions completed over thepast five quarters used $3.6 million, while existing operations and officesacquired before January 1, 2001 provided $2.0 million in positive cashflow.  The major cause of our overalluse of operating cash flow for the three months ended March 31, 2002 was anincrease in net accounts receivable of $5.9 million. Of this increase, $4.8million was attributable to new acquisitions and $1.1 million to officesacquired before January 1, 2001.  Forthe two acquisitions we completed late in the fourth quarter of 2001, we didnot acquire accounts receivable. Therefore, as these offices generated revenuein the first quarter of 2002, their accounts receivable grew, resulting innegative operational cash flow for the quarter.

 

Net cash flow used in investing activities during the quarter ended March 31, 2002 was $4.7 million, an increase of $2.3 million over the $2.4 million cash used during the same period in 2001.  The major reason for the increased use of cash was payments for acquisitions, net of cash acquired, of $3.1 million, consisting of $1.3 million paid at closing for the one new acquisition completed in the first quarter of 2002, plus $1.8 million in additional consideration related to 2000 and 2001 acquisitions. Payments for equipment equaled $900,000 in the first quarter of 2002, representing an increase of $400,000 over the cash used in the first quarter of 2001.  Of the $900,000 spent in the current year’s quarter, approximately $500,000 was spent on infrastructure improvements such as computer upgrades and leasehold improvements, $200,000 was spent for revenue-producing equipment (home medical rental equipment) and $200,000 was spent on new software development projects.  In the quarter ended March 31, 2002, $700,000 was spent on other assets.  Of this total, $400,000 was related to loan origination costs on our new Credit and Security Agreement with J.P. Morgan Commercial Finance Corp.

 

Net cash flow provided byfinancing activities equaled $1.0 million for the first quarter of 2002,compared to $7.7 million provided by financing activities in the correspondingperiod in the prior year.  The $1.0million provided in the current year was primarily generated from employees’exercises of stock options.  In theprior year, the majority of the $7.7 million provided was from borrowings onour credit facility to fund acquisitions and their working cash flow needs.

 

As of March 29, 2002,Option Care signed a new senior secured credit facility with J.P. MorganCommercial Finance Corp. Availability under the revolving credit facility isrelated to percentages of our outstanding accounts receivable and inventorybalances, less certain ineligible amounts, as defined in the facility. Overallborrowings allowable under the revolving credit facility are limited to thelesser of $60 million or the total allowable collateral base. The agreementrequires us to comply with various financial covenants.  As of March 31, 2002, we had not yetborrowed against this facility.  TheJ.P. Morgan credit facility expires on March 29, 2005.

 

As of March 31, 2002, wehad cash and cash equivalents of $3.3 million, compared to $8.5 million as ofDecember 31, 2001. The decline was primarily due to payments for acquisitions,and operational cash flow funding related to those acquisitions. Should we needto borrow to fund future acquisitions or operating cash flow needs, we will beable to borrow or pay down on our existing debt facility with J.P. Morgan on adaily basis.  We have instituted apolicy of using excess cash balances, if any, to retire outstanding debt underour loan facility.

 

We believe that cash flowfrom operations and amounts available under our revolving credit facility willbe sufficient to meet our operating cash for the immediate future, including anyinterest due on our credit facility or other debts.  In the event that additional capital is required, managementcannot assure that such capital can be obtained from other sources on termsacceptable to us, if at all.

 

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

 

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**Goodwill and Other Intangible Assets**

 

Asof March 31, 2002, net goodwill and other intangible assets equaled $41.2million, consisting of $39.4 million of goodwill and $1.8 million of otherintangible assets such as non-compete agreements, patient records, and managedcare contracts.  This total represents anincrease of $1.3 million over the $39.9 million of net goodwill and otherintangible assets at December 31, 2001. The increase of $1.0 million ingoodwill and $300,000 of other intangible assets was primarily due to theacquisition we made during the first quarter of 2002, plus additionalconsideration on various 2000 and 2001 acquisitions.

 

Totalnet goodwill and other intangible assets represent 31.9% of total assets as ofMarch 31, 2002.  This percentageremained unchanged from December 31, 2001. Acquisition activity and same storesales growth caused an increase in total assets, such as accounts receivable,equal in proportion to the increase in net goodwill and other intangibleassets.

** **

**Regulatory andOther Developments**

 

Many governmental payors reimburse us for some pharmaceuticals based on the pharmaceutical’s average wholesale price (AWP). In many cases, we purchase pharmaceuticals at less than AWP. AWP for most pharmaceuticals is compiled and published by private companies, including First DataBank, Inc. It has been reported that there are currently several lawsuits pending against manufacturers of certain pharmaceuticals. These government investigations and lawsuits involve allegations that manufacturers have misrepresented to First DataBank the actual selling price of certain pharmaceuticals. First DataBank has announced that it will now base AWP on market prices certified by the manufacturer. As a result of this change, First DataBank has published a Market Price Survey that reduces the AWP significantly for a number of the products we currently supply to patients. We cannot predict the eventual results of these investigations, nor the changes made in AWP by First DataBank. If AWP’s on the products we purchase were reduced, or if the AWP system was replaced with a different reimbursement system, our profitability could be adversely affected.

** **

**ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk**

 

We are subject to marketrisk from exposure to changes in interest rates based on our financing and cashmanagement activities. We utilize a mix of debt maturities along with bothfixed-rate and variable-rate debt to manage our exposure to changes in interestrates. Although there can be no assurances that interest rates will not changesignificantly, we do not expect changes in interest rates to have a materialeffect on income or cash flows in 2002. As of March 31, 2002, our fixed-ratedebt was $500,000 and our corresponding variable-rate debt was zero. Since wehad no variable-rate debt, our market rate risk as of March 31, 2002 was zero.

 

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**PARTII.    OTHER INFORMATION**

 

**ITEM 1.    LegalProceedings**

 

Option Care is not a party to anymaterial legal proceedings.  Option Caremay become a party to various claims and legal actions arising in the ordinarycourse of business.

 

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

 

None.

** **

**ITEM 3.    Defaults Upon Senior Securities**

 

None.

** **

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

 

None.

 

**ITEM 5.    OtherInformation**

 

None.

 

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**ITEM 6(a).   Exhibits**

 

None.

** **

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

 

Option Care didnot file any reports on Form 8-K during the three months ended March 31, 2002.

 

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**SIGNATURE**

 

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

 

 
|                | OPTION CARE, INC. |                                                               |
|---------------------|------------------------|--------------------------------------------------------------------|
| Date:  May 15, 2002 | By:                    | /s/  Paul Mastrapa                                                 |   |
|                |                   | Paul Mastrapa                                                      |   |
|                |                   | *Chief  Financial Officer*                                         |   |
|                |                   | *(Principal  Accounting Officer and  Principal Financial Officer)* |   |

 

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