**SECURITIES AND 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, 2003**

 

**Commission file number 0-19878**

 

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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.) |
|                                                            |   |                               |
| **485 E. Half  Day Road, Suite 300  Buffalo Grove, Illinois**   |   | **60089**                          |
| (Address  of principal executive office)                        |   | (zip  code)                        |
|                                                            |   |                               |
| **(847)   465-2100**                                       |
| (Registrant’s  telephone number, including area code)      |

 

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

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2). 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, 2003** |   |
|------------------------------|--------|------------------------------------------------|--------|
|                         |   |                                           |   |
| Common Stock - .01 par value |   | 20,750,629                                     |   |

 

 

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**INDEX**

 

**OPTION CARE, INC. ANDSUBSIDIARIES**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                              |
|-------------|--------------------------------------------------------------------------------------------------------|
|        |                                                                                                   |
| Item 1.     | Financial Statements  (Unaudited)                                                                      |
|        |                                                                                                   |
|        | Condensed  consolidated balance sheets—March 31, 2003 and December 31, 2002                       |
|        |                                                                                                   |
|        | Condensed  consolidated statements of income—Three months ended March 31, 2003 and  2002     |
|        |                                                                                                   |
|        | Condensed  consolidated statements of cash flows—Three months ended March 31, 2003  and 2002 |
|        |                                                                                                   |
|        | Notes  to condensed consolidated financial statements—March 31, 2003                              |
|        |                                                                                                   |
| Item  2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations            |
|        |                                                                                                   |
| Item  3.    | Quantitative  and Qualitative Disclosures about Market Risk                                            |
|        |                                                                                                   |
| Item 4.     | Controls and  Procedures                                                                               |
|        |                                                                                                   |
| **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 SubsidiariesCondensed Consolidated BalanceSheets**(in thousands, except pershare amounts)

 
|                                                                                                                                                        |   | **March 31,  2003** |    | **December  31, 2002** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|------------|
|                                                                                                                                                        |   | **(Unaudited)**     |    | **(Note 1)**           | ** ** |
|                                                                                                                                                        |   |                |    |                   |       |
| Assets                                                                                                                                                      |   |                |    |                   |       |
| Current assets:                                                                                                                                             |   |                |    |                   |       |
| Cash and cash equivalents                                                                                                                                   |   | $                   | 1,074   |                   | $          | 488 |   |
| Accounts receivable, net                                                                                                                                    |   | 77,602              |    | 74,694                 |       |
| Inventory                                                                                                                                                   |   | 7,085               |    | 7,538                  |       |
| Deferred tax asset                                                                                                                                          |   | 3,539               |    | 3,701                  |       |
| Other current assets                                                                                                                                        |   | 2,645               |    | 2,744                  |       |
|                                                                                                                                                        |   |                |    |                   |       |
| Total current assets                                                                                                                                        |   | 91,945              |    | 89,165                 |       |
| Equipment and other fixed assets, net                                                                                                                       |   | 12,403              |    | 11,898                 |       |
| Goodwill, net                                                                                                                                               |   | 55,515              |    | 55,412                 |       |
| Other assets                                                                                                                                                |   | 2,250               |    | 2,375                  |       |
|                                                                                                                                                        |   |                |    |                   |       |
| Total assets                                                                                                                                                |   | $                   | 162,113 |                   | $          | 158,850 |   |
|                                                                                                                                                        |   |                |    |                   |       |
| Liabilities and stockholders’ equity                                                                                                                   |   |                |    |                   |       |
| Current liabilities:                                                                                                                                        |   |                |    |                   |       |
| Trade accounts payable                                                                                                                                      |   | $                   | 14,933  |                   | $          | 14,559 |   |
| Current portion of long-term debt                                                                                                                           |   | 246                 |    | 261                    |       |
| Other  current liabilities                                                                                                                                  |   | 10,694              |    | 12,635                 |       |
|                                                                                                                                                        |   |                |    |                   |       |
| Total current liabilities                                                                                                                                   |   | 25,873              |    | 27,455                 |       |
| Long-term debt, less current portion                                                                                                                        |   | 7,292               |    | 7,314                  |       |
| Deferred tax liability                                                                                                                                      |   | 4,754               |    | 4,178                  |       |
| Other liabilities                                                                                                                                           |   | 332                 |    | 368                    |       |
| Minority interest                                                                                                                                           |   | 926                 |    | 934                    |       |
|                                                                                                                                                        |   |                |    |                   |       |
| Total liabilities                                                                                                                                           |   | 39,177              |    | 40,249                 |       |
|                                                                                                                                                        |   |                |    |                   |       |
| Stockholders’ equity:                                                                                                                                  |   |                |    |                   |       |
| Common  stock, $.01 par value per share, 60,000 shares authorized, 20,741 and 20,588  shares issued and outstanding at March 31, 2003 and December 31, 2002 |   | 207                 |    | 206                    |       |
| Common stock to be issued, 73 and 167 shares,  respectively                                                                                                 |   | 1,492               |    | 1,371                  |       |
| Additional  paid-in capital                                                                                                                                 |   | 102,024             |    | 101,777                |       |
| Retained earnings                                                                                                                                           |   | 19,213              |    | 15,247                 |       |
|                                                                                                                                                        |   |                |    |                   |       |
| Total stockholders’ equity                                                                                                                             |   | 122,936             |    | 118,601                |       |
|                                                                                                                                                        |   |                |    |                   |       |
| Total liabilities and stockholders’ equity                                                                                                             |   | $                   | 162,113 |                   | $          | 158,850 |   |

 

*See notes tocondensed consolidated financial statements*

 

3

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**Option Care, Inc. and Subsidiaries****CondensedConsolidated Statements of Income**(Unaudited)(in thousands, except per share amounts)

 
|                                           |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------|--------|------------------------------------|--------|
|                                           |   | **2003**                           |   | **2002** | ** ** |
|                                           |   |                               |   |   |   |
| Revenue:                                       |   |                               |   |   |   |
| Specialty pharmacy services                    |   | $                                  | 57,034 |   | $ | 40,549 |   |
| Infusion and related healthcare services       |   | 33,073                             |   | 29,521 |   |
| Other                                          |   | 2,455                              |   | 2,637 |   |
| Total revenue                                  |   | 92,562                             |   | 72,707 |   |
| Cost of revenue                                |   | 65,282                             |   | 50,044 |   |
|                                           |   |                               |   |   |   |
| Gross profit                                   |   | 27,280                             |   | 22,663 |   |
| Selling, general and administrative expenses   |   | 18,698                             |   | 15,445 |   |
| Provision for doubtful accounts                |   | 1,878                              |   | 1,500 |   |
|                                           |   |                               |   |   |   |
| Total operating expenses                       |   | 20,576                             |   | 16,945 |   |
|                                           |   |                               |   |   |   |
| Operating income                               |   | 6,704                              |   | 5,718 |   |
| Interest income (expense), net                 |   | (99                                | )      | 16 |   |
| Other expense, net                             |   | (9                                 | )      | (33 | ) |
|                                           |   |                               |   |   |   |
| Income before income taxes                     |   | 6,596                              |   | 5,701 |   |
| Income tax provision                           |   | 2,630                              |   | 2,239 |   |
|                                           |   |                               |   |   |   |
| Net  Income                                    |   | $                                  | 3,966  |   | $ | 3,462 |   |
|                                           |   |                               |   |   |   |
| Net income per common share:                   |   |                               |   |   |   |
| Basic earnings per share                       |   | $                                  | 0.19   |   | $ | 0.17 |   |
|                                           |   |                               |   |   |   |
| Diluted earnings per share                     |   | $                                  | 0.19   |   | $ | 0.16 |   |
|                                           |   |                               |   |   |   |
| Shares used in computing net income per share: |   |                               |   |   |   |
| Basic                                          |   | 20,807                             |   | 20,428 |   |
| Diluted                                        |   | 21,156                             |   | 21,004 |   |

 

*Seenotes to condensed consolidated financial statements*

 

4

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

 
|                                                                                         |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                         |   | **2003**                                |   | **2002** | ** ** |
|                                                                                         |   |                                    |   |   |   |
| Cash flows from operating activities:                                                        |   |                                    |   |   |   |
| Net income                                                                                   |   | $                                       | 3,966  |   | $ | 3,462 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |   |                                    |   |   |   |
| Depreciation and amortization                                                                |   | 1,069                                   |   | 915 |   |
| Provision for doubtful accounts                                                              |   | 1,878                                   |   | 1,500 |   |
| Income tax benefit from exercise of stock options                                            |   | 52                                      |   | 1,143 |   |
| Changes in assets and liabilities:                                                           |   |                                    |   |   |   |
| Accounts receivable                                                                          |   | (4,784                                  | )      | (7,443 | ) |
| Inventory                                                                                    |   | 581                                     |   | (777 | ) |
| Accounts payable                                                                             |   | 335                                     |   | (727 | ) |
| Income  taxes payable                                                                        |   | 1,089                                   |   | 450 |   |
| Change in other assets and liabilities                                                       |   | 484                                     |   | (155 | ) |
|                                                                                         |   |                                    |   |   |   |
| Net cash provided by (used in) operating activities                                          |   | 4,670                                   |   | (1,632 | ) |
|                                                                                         |   |                                    |   |   |   |
| Cash flows from investing activities:                                                        |   |                                    |   |   |   |
| Purchases of equipment and other, net                                                        |   | (1,390                                  | )      | (922 | ) |
| Additions to other assets, net                                                               |   | —                                  |   | (660 | ) |
| Payments  for acquisitions, net of cash acquired                                             |   | (3,058                                  | )      | (3,068 | ) |
| Proceeds from  disposals                                                                     |   | 84                                      |   | — |   |
|                                                                                         |   |                                    |   |   |   |
| Net cash used in investing activities                                                        |   | (4,364                                  | )      | (4,650 | ) |
|                                                                                         |   |                                    |   |   |   |
| Cash flows from financing activities:                                                        |   |                                    |   |   |   |
| Net borrowing on credit agreements                                                           |   | 43                                      |   | — |   |
| Payments on capital leases and other debt                                                    |   | (80                                     | )      | (88 | ) |
| Proceeds from issuance of stock                                                              |   | 317                                     |   | 1,109 |   |
|                                                                                         |   |                                    |   |   |   |
| Net cash provided by financing activities                                                    |   | 280                                     |   | 1,021 |   |
|                                                                                         |   |                                    |   |   |   |
| Net increase in cash and cash equivalents                                                    |   | 586                                     |   | (5,261 | ) |
| Cash and cash equivalents, beginning of period                                               |   | 488                                     |   | 8,511 |   |
|                                                                                         |   |                                    |   |   |   |
| Cash and cash equivalents, end of period                                                     |   | $                                       | 1,074  |   | $ | 3,250 |   |

 

*See notes tocondensed consolidated financial statements*

 

5

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**Option Care, Inc. and Subsidiaries****Notes to Condensed ConsolidatedFinancial Statements****March 31, 2003**(Unaudited)

 

**1. Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby accounting principles generally accepted in the United States for completefinancial statements. In the opinion of management, all adjustments (consistingof normal recurring accruals) considered necessary for a fair presentation havebeen included. Operating results for the three month periods ended March 31,2003 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2003.

 

The balance sheet at December 31, 2002 has been derived from theaudited financial statements at that date but does not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.

 

For further information,refer to the consolidated financial statements and footnotes thereto includedin Option Care’s Report on Form 10-K for the year ended December 31,2002.

 

**2. 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 serves as Adviser, J.P. Morgan ChaseBank, which serves as Administrator, Collateral Agent and Arranger, and LaSalleBank, National Association, which serves as Co-Agent.  The facility requires us to meet certain financialcovenants.  Option Care paid a facilityfee 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 to customary events of default,the facility provides that a change in control of our company would give riseto an event of default.

 

As of both March31, 2003 and December 31, 2002, our outstanding balance under this facility wasapproximately $7.1 million.  At March31, 2003, we had additional borrowing capacity of $34.4 million under thecredit facility based on the accounts receivable and inventory balances as ofthat date.   At December 31, 2002, wehad additional borrowing capacity of $32.3 million.

 

**3. Asset Disposals**

 

In the fourthquarter of 2002, Option Care decided to dispose of two company-ownedpharmacies, located in Bullhead City, Arizona and Grand Junction,Colorado.  Effective March 31, 2003,Option Care completed the sale and re-franchising of our Grand Junction,Colorado pharmacy operation. The sale pricewas equal to the net book value of the assets sold and was paid in cash atclosing. Upon consummating the asset purchase agreement, the buyers enteredinto a five-year franchise agreement with Option Care.  The franchise agreement allows the buyers touse the Option Care name and participate in our various contracts in exchangefor future royalty payments based on the subsequent cash collections of thebusiness.  Upon consummating the assetpurchase agreement, Option Care recorded a $240,000 reduction to operatingexpenses, representing the reversal of a portion of the expenses accrued in thefourth quarter of 2002 related to the plan to dispose of this office.  The expense reversal was primarily relatedto building lease termination costs. The buyer assumed the remaining obligations under our building lease inGrand Junction, Colorado, which we did not originally anticipate.

 

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On May 1, 2003, wecompleted the sale and re-franchising of our pharmacy in Bullhead City,Arizona.  A discussion of thistransaction is included in Note 8, Subsequent Events.

 

As of March 31, 2003,we had assets held for sale equaling approximately $100,000, classified asother current assets in the accompanying balance sheet.  The assets held for sale consist ofinventory and other long-term assets of our Bullhead City, Arizona pharmacy.

 

**4.  Earnings Per Share Data**

 

The following table sets forth the computation of basic and dilutedearnings per share for the periods indicated. Share and per share amounts for the three months ended March 31, 2002reflect the pro forma effects of the 5-for-4 stock split completed on May 1,2002 for stockholders of record as of April 10, 2002.

 

(in thousands, except per share amounts)

 
|                                                                                 |   | **Three  months ended  March 31,** |   |
|--------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                 |   | **2003**                           |   | **2002** | ** ** |
|                                                                                 |   |                               |   |   |   |
| **Basic:**                                                                           |   |                               |   |   |   |
| Net income                                                                           |   | $                                  | 3,966  |   | $ | 3,462 |   |
|                                                                                 |   |                               |   |   |   |
| Average shares outstanding                                                           |   | 20,807                             |   | 20,428 |   |
|                                                                                 |   |                               |   |   |   |
| Basic earnings per share                                                             |   | $                                  | 0.19   |   | $ | 0.17 |   |
|                                                                                 |   |                               |   |   |   |
| **Diluted:**                                                                         |   |                               |   |   |   |
| Net income                                                                           |   | $                                  | 3,966  |   | $ | 3,462 |   |
|                                                                                 |   |                               |   |   |   |
| Average shares outstanding                                                           |   | 20,807                             |   | 20,428 |   |
| Net effect of dilutive stock options –  Based on the treasury stock method |   | 349                                |   | 576 |   |
|                                                                                 |   |                               |   |   |   |
| Total diluted shares                                                                 |   | 21,156                             |   | 21,004 |   |
|                                                                                 |   |                               |   |   |   |
| Diluted earnings per share                                                           |   | $                                  | 0.19   |   | $ | 0.16 |   |

 

**5. Significant Customer**

 

We generate the majority of our revenue from managed care contracts andother agreements with commercial third party payors.  Our principal managed care contract is with Blue Cross BlueShield of Florida which contracts with us for our provision of home infusionservices and specialty pharmacy services to their members.  Approximately 17% of our revenue for thethree months ended March 31, 2003 was related to this contract.  For the three months ended March 31, 2002,approximately 20% of our revenue was generated from this contract. As of March31, 2003 and December 31, 2002, respectively, approximately 11% and 9% of ouraccounts receivable was due from Blue Cross Blue Shield of Florida. Thecontract is terminable by either party on 90 days’ notice and, unlessterminated, renews annually each September for an additional one-year term.

 

Option Care also generates revenue from government programs such asMedicare and Medicaid.  Approximately18% and 17% of revenue for the quarters ended March 31, 2003 and March 31,2002, respectively, was from government programs.  As of March 31, 2003 and December 31, 2002, respectively,approximately 20% and 19% of our accounts receivable were due from governmentprograms.

 

7

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**6. Seasonal Revenue Trends**

 

One of the pharmaceuticals that we provide to patients is seasonal.  For the quarter ended March 31, 2003,approximately 13.0% of our total revenue and 21.0% of our specialty pharmacyservices revenue was from sales of Synagis®, a drug used for the prevention ofrespiratory synctial virus (RSV) in high-risk pediatric patients.  RSV infection is a seasonal condition, withthe season generally running from October through April.  Therefore, we anticipate a decline in salesof Synagis® during the second and third quarters of 2003, before sales reboundin the fourth quarter of 2003 due to the start of another RSV season.  Option Care’s revenue from the sale ofSynagis®, by quarter and year for 2001, 2002 and the first quarter of 2003 wasas follows (in thousands):

 
|                                  |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                  |   |     |   |     |   |     |   |
| Quarter ended  March 31               |   | $        | 11,998 |     | $      | 7,013    |   | $ | 3,891 |   |
| Quarter ended  June 30                |   | N/A      |   | 2,601    |   | 984      |   |
| Quarter  ended September 30           |   | N/A      |   | 362      |   | —   |   |
| Quarter ended  December 31            |   | N/A      |   | 8,205    |   | 4,219    |   |
|                                  |   |     |   |     |   |     |   |
| Total Synagis® revenue, per year |   | $        | 11,998 |     | $      | 18,181   |   | $ | 9,094 |   |

 

**7. Acquisitions**

 

During the quarter ended March 31, 2003, Option Care paid a total of$3.1 million related to acquisitions, of which approximately $2.8 million wasadditional consideration on prior years’ acquisitions and approximately$300,000 was for an acquisition completed in the current year.  Of the additional consideration paid forprior years’ acquisitions, the largest single payment was a scheduledinstallment of $2.6 million paid in January 2003 to Allina Health Systems aspartial consideration for our July 2002 purchase of their home infusionbusiness operating in the Minneapolis/St. Paul metropolitan area.  Our next and final installment on thisacquisition is due to be paid in July 2003 in the amount of $2.5 million.

 

**8. Subsequent Events**

 

Effective April 1, 2003, we exercised our option to acquire theremaining 40% minority interest of Infusion Specialties, Inc., a specialtypharmacy business in Houston, Texas.  Wehad acquired a 60% interest in this business effective April 1, 2002.  As of the date of this filing, the finalpurchase price for the remaining 40% interest has not been determined.  We anticipate that the final purchase pricewill be determined and paid in cash in the second quarter of 2003, and will equalapproximately $10.0 million.

 

On May 1, 2003, Option Care completed the sale and re-franchise of ourcompany-owned pharmacy in Bullhead City, Arizona to Convention Center Drug,Inc., which is the owner of our Las Vegas, Nevada franchise.  The sale price was equal to the net bookvalue of the assets sold, and was paid in cash at closing.  Upon consummating the asset purchaseagreement, the parties executed an amendment to the existing franchiseagreement between Option Care, Inc. and Convention Center Drug, Inc. to add theacquired territory.

 

**9. Stock-Based Compensation**

 

Statement of Financial Accounting Standards No. 123, *Accountingfor Stock-Based Compensation*, as amended by Statement of FinancialAccounting Standards No. 148, *Accounting for Stock-Based Compensation—Transitionand Disclosure*, encourages, but does not require, companies torecord compensation cost for stock-based compensation plans at fair value.  Option Care has chosen to account forstock-based compensation using the intrinsic value method prescribed inAccounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*,and related interpretations. Accordingly, compensation expense for stock options is measured as theexcess, if any, of the quoted market price of Option Care stock at the date ofgrant over the amount an employee must pay to acquire the stock.  Option Care grants options at fair marketvalue and therefore recognizes no compensation expense when options aregranted.  Likewise, Option Care’sEmployee Stock Purchase Plan was structured to qualify under Section 423 of theInternal Revenue Code.  Therefore, nocompensation expense is recognized from employees’ purchase of shares under ourEmployee Stock Purchase Plan.

 

8

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Had compensation cost for Option Care’s stock-based compensation planbeen determined based on FASB Statement No. 123, Option Care’s net income andincome per common share for the quarters ended March 31, 2003 and 2002 on apro-forma basis would have been (in thousands, except per share amounts):

 
|                                                                                                                                                         |   | **Three  months ended March 31,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                                                         |   | **2003**                          |   | **2002** | ** ** |
| Net income:                                                                                                                                                  |   |                              |   |   |   |
| As reported                                                                                                                                                  |   | $                                 | 3,966  |   | $ | 3,462 |   |
| Add: Stock-based  employee compensation expense included in reported net income, net of related  tax effects                                                 |   | —                            |   | 99 |   |
| Deduct: Total  stock-based employee compensation expense determined under the fair value  based method for the following awards, net of related tax effects: |   |                              |   |   |   |
| Stock option  grants                                                                                                                                         |   | (573                              | )      | (510 | ) |
| Employee stock  purchase plan withholdings                                                                                                                   |   | (53                               | )      | (73 | ) |
|                                                                                                                                                         |   |                              |   |   |   |
| Pro forma                                                                                                                                                    |   | $                                 | 3,340  |   | $ | 2,978 |   |
|                                                                                                                                                         |   |                              |   |   |   |
| Net income per  common share—basic:                                                                                                                     |   |                              |   |   |   |
| As reported                                                                                                                                                  |   | $                                 | 0.19   |   | $ | 0.17 |   |
| Pro forma                                                                                                                                                    |   | $                                 | 0.16   |   | $ | 0.15 |   |
|                                                                                                                                                         |   |                              |   |   |   |
| Net income per common share—diluted:                                                                                                                    |   |                              |   |   |   |
| As reported                                                                                                                                                  |   | $                                 | 0.19   |   | $ | 0.16 |   |
| Pro forma                                                                                                                                                    |   | $                                 | 0.16   |   | $ | 0.14 |   |

 

9

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

 

**FORWARDLOOKING STATEMENTS**

 

The following discussionshould be read in conjunction with our Annual Report on Form 10-K for theyear ended December 31, 2002. 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**

 

Option Care providespharmacy services to patients on behalf of managed care organizations and otherthird party payors.  We contract withpayors to provide specialty pharmacy services, home infusion therapy and otherrelated healthcare services to patients at home or at other alternate-sitesettings, such as physicians’ offices. As of March 31, 2003, our services are provided locally through ournationwide network of owned and franchised pharmacy locations.

 

We have three servicelines: specialty pharmacy services, infusion and related healthcare services,and other.  Specialty pharmacy servicesconsist of delivering specialty pharmaceuticals either to patients directly orto their physician’s offices.  Infusionand related services primarily consists of providing infusion pharmaceuticalsand related nursing services to patients in non-hospital settings, typicallythe patient’s home.  For some of ourcompany-owned locations, infusion and related healthcare services also includesthe provision of home health nursing services, and/or respiratory therapyservices and durable medical equipment sales and rentals. Other revenueconsists primarily of royalties from our franchise network and software licensingand support.  Summarized informationabout revenues and gross profit for each service line is provided in thefollowing table (amounts in thousands):

 
|                                     |   | **Three  months ended March 31,** |   |
|------------------------------------------|--------|-----------------------------------|--------|
|                                     |   | **2003**                          |   | **2002** |   |
|                                     |   | **Amount**                        |   | **of total %** |   | **Amount** | ** ** | **% of total** | ** ** |
| Revenue:                                 |   |                              |   |   |   |   |   |   |   |
| Specialty  pharmacy services             |   | $                                 | 57,034 |   | 61.6 | % | $ | 40,549 |   | 55.8 | % |
| Infusion and related healthcare services |   | 33,073                            |   | 35.7 | % | 29,521 |   | 40.6 | % |
| Other                                    |   | 2,455                             |   | 2.7 | % | 2,637 |   | 3.6 | % |
|                                     |   |                              |   |   |   |   |   |   |   |
| Total revenue                            |   | $                                 | 92,562 |   | 100.0 | % | $ | 72,707 |   | 100.0 | % |

 
|                                     |   | **Three months ended March 31,** |   |
|------------------------------------------|--------|----------------------------------|--------|
|                                     |   | **2003**                         |   | **2002** |   |
|                                     |   | **Amount**                       |   | **%****margin** |   | **Amount** |   | **%****margin** |   |
| Gross profit:                            |   |                             |   |   |   |   |   |   |   |
| Specialty  pharmacy services             |   | $                                | 11,034 |   | 19.3 | % | $ | 6,958 |   | 17.2 | % |
| Infusion and related healthcare services |   | 13,879                           |   | 42.0 | % | 13,090 |   | 44.3 | % |
| Other                                    |   | 2,367                            |   | 96.4 | % | 2,615 |   | 99.2 | % |
|                                     |   |                             |   |   |   |   |   |   |   |
| Total gross  profit                      |   | $                                | 27,280 |   | 29.5 | % | $ | 22,663 |   | 31.2 | % |

 

10

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Most of our revenue is generated 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 for our provision of home infusion services andspecialty pharmacy services to their members. For the quarters ended March 31, 2003 and 2002, respectively, 17% and20% of total revenue was related to this contract.  As of March 31, 2003 and December 31, 2002, respectively,approximately 11% and 9% of our accounts receivable was due from Blue CrossBlue Shield of Florida. The contract is terminable by either party on 90 days’notice and, unless terminated, renews annually each September for an additionalone-year term.

 

A portion of our revenueis reimbursed through government healthcare programs such as Medicare andMedicaid.  For the quarters ended March31, 2003 and 2002, respectively, approximately 18% and 17% of our revenue camefrom governmental programs. Approximately 20% and 19% of our total accounts receivable as of March31, 2003 and December 31, 2002, respectively, was due from these governmentalprograms.

 

Many governmental payors reimburse us for some pharmaceuticals based onthat pharmaceutical’s average wholesale price (AWP).  AWP for most pharmaceuticals is compiled and published by privatecompanies, including First DataBank, Inc. There has been an increase in thenumber of lawsuits and government investigations against pharmaceuticalmanufacturers regarding prescription drug pricing and AWP, alleging thatmanufactuers have misrepresented to First DataBank the actual selling price ofcertain pharmaceuticals.  First DataBankhas announced that it will now base AWP on market prices rather than on pricessubmitted by the manufacturer.  As aresult of this change, First DataBank has published a Market Price Survey thatreduces the AWP significantly for a number of the products we currently supplyto patients.  If the average wholesaleprices on the products we provide are reduced, our gross profit margins coulddecline.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Management’sdiscussion and analysis of our financial condition and results of operationsare based upon our consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates. The preparation of these statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses and their related disclosures. On an ongoing basis, Option Careevaluates its estimates and judgments based on historical experience andvarious other factors that are believed to be reasonable. Actual results mayvary from these estimates under different assumptions or conditions. Weannually review our financial reporting and disclosure practices and accountingpolicies to ensure that our financial reporting and disclosures provideaccurate and transparent information relative to our financial condition andresults of operations, as well as our current business environment. Option Caremanagement believes that of our significant accounting policies, the followingpolicies involve a higher degree of judgment and/or complexity.

 

*Revenuerecognition and contractual adjustments*

 

Ourrevenue is primarily derived from the sale of pharmaceuticals and the provisionof related nursing services to patients at alternate-site settings. Most ofthis revenue is billed under managed care or other contracts, with a smalleramount billed under government programs, such as Medicare and Medicaid. Billedand unbilled revenue is recorded net of contractual adjustments based on ourinterpretation of the terms of each managed care contract or governmentcontract or pricing schedule. The accuracy of our recorded net revenue issubject to the accuracy of payor information on file for each patient, and isalso subject to our correct interpretation of each underlying contract withrespect to reimbursement rates for the drugs and services we provided. Ifchanges are subsequently required to either payor information or ourinterpretation of the reimbursement rates of our contracts, we adjust revenuein the period that such changes are identified. Such adjustments may have apositive or negative impact on the revenues and results of operations reportedfor those subsequent periods. Historically, such adjustments have not beensignificant to our statements of income.

 

*Accountsreceivable and allowances for doubtful accounts*

 

Werecord our accounts receivable net of contractual adjustments (as described inthe preceding paragraph) and net of allowances for doubtful accounts. Theprocedure for estimating the allowance for doubtful accounts requiressignificant judgment and assumptions. The allowance for doubtful accounts is estimated based on several factors,including our past accounts receivable collection history, consideration of theage of the accounts receivable at the end of each period, and detailed analysisof the expected collectibility of the amounts receivable from each significantpayor based on a number of factors. The allowance for doubtful accounts alsoconsiders the fact that in certain circumstances, our accounts receivable mayalso be subject to retroactive adjustments by payors. Although we believe thatour estimation of the net value of our accounts receivable is reasonable, actualcollections may differ from our estimates of collectibility, affecting ourfuture financial condition and results of operations.

 

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*Goodwill andother intangible assets*

 

Werecord goodwill from our acquisitions equal to the excess of the total cost ofthe acquisitions over the fair value of all identified tangible and intangibleassets acquired. In accordance with Statements of Financial AccountingStandards (SFAS) No. 141, *Business Combinations* and SFASNo. 142, *Goodwill and Intangible Assets*, effective January 1, 2002 weno longer amortize goodwill but rather test our goodwill annually forimpairment.  Our method of impairmenttesting consists of comparing the market value of our company to its book value.The market value is equal to the current value of our common stock times thetotal number of shares outstanding.  Wetest goodwill for impairment annually each October 1st, or wheneverwe identify events or conditions that could potentially result in impairment ofour goodwill.

 

Other intangible assets primarily consist ofnon-compete agreements, payor contracts and patient records.  These intangible assets are amortizedstraight-line over periods ranging from two to five years.  Their amortization period equals theirestimated useful lives, or in the case of non-compete agreements, it equalstheir contractual term.

 

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**RESULTSOF OPERATIONS**

 

The following table shows certain statement of income items expressedas a percentage of revenue for the quarters ended March 31, 2003 and 2002.

 
|                                 |   | **Three  months ended  March 31,** |   |
|--------------------------------------|--------|------------------------------------|--------|
|                                 |   | **2003**                           |   | **2002** | ** ** |
|                                 |   |                               |   |   |   |
| Revenue                              |   | 100.0                              | %      | 100.0 | % |
| Cost of revenue:                     |   | 70.5                               | %      | 68.8 | % |
|                                 |   |                               |   |   |   |
| Gross profit                         |   | 29.5                               | %      | 31.2 | % |
|                                 |   |                               |   |   |   |
| Operating  expenses:                 |   |                               |   |   |   |
| Selling, general  and administrative |   | 20.3                               | %      | 21.2 | % |
| Provision for  doubtful accounts     |   | 2.0                                | %      | 2.1 | % |
|                                 |   |                               |   |   |   |
| Total operating  expenses            |   | 22.3                               | %      | 23.3 | % |
|                                 |   |                               |   |   |   |
| Operating income                     |   | 7.2                                | %      | 7.9 | % |
|                                 |   |                               |   |   |   |
| Other expenses:                      |   |                               |   |   |   |
| Interest expense                     |   | (0.1                               | )%     | — | % |
| Other expense,  net                  |   | —                             | %      | (0.1 | )% |
|                                 |   |                               |   |   |   |
| Total other  expense, net            |   | (0.1                               | )%     | (0.1 | )% |
|                                 |   |                               |   |   |   |
| Income before  income taxes          |   | 7.1                                | %      | 7.8 | % |
| Provision for  income taxes          |   | 2.8                                | %      | 3.0 | % |
|                                 |   |                               |   |   |   |
| Net income                           |   | 4.3                                | %      | 4.8 | % |

 

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**ThreeMonths Ended March 31, 2003 and 2002**

 

Revenue for the quarter ended March 31, 2003 was $92.6 million, whichrepresents an increase of $19.9 million, or 27.3%, over the revenue of $72.7million from the corresponding quarter in 2002.  This revenue increase can be attributed to two main factors:acquisitions completed during 2002 and increases in patient census.

 

Specialty pharmacy services revenue increased by $16.5 million, or40.7%, in the quarter ended March 31, 2003 compared to the correspondingquarter in 2002.  Of the $16.5 millionrevenue increase, $9.2 million was from acquisitions completed during 2002,particularly the acquisition of a specialty pharmacy business in Houston, Texascompleted as of April 1, 2002.  The remaining$7.3 million was from sales increases throughout our existing specialtypharmacy operations.   Of the overall$16.5 million increase in specialty pharmacy services revenue, $5.0 million ofthe increase was from sales of Synagis®, a drug used for the prevention ofrespiratory syctial virus (RSV) in high-risk pediatric patients.  Sales of Synagis® reached $12.0 million forthe quarter ended March 31, 2003, compared to $7.0 million for thecorresponding prior year quarter.  RSVis seasonal, with the season generally running from October through April.  Therefore, Synagis® revenue is expected todecline significantly in the second quarter and become nonexistent in the thirdquarter, before rebounding in the fourth quarter due to the start of anotherRSV season.

 

Infusion and related healthcare services revenue increased by $3.6million, or 12.0%, for the quarter ended March 31, 2003 compared to thecorresponding quarter in 2002.  Thegrowth was primarily from acquisitions that we completed from March throughJuly of 2002.

 

Other revenue declined by $200,000 to $2.5 million for the quarterended March 31, 2003.  Franchise royaltyrevenue remained stable at approximately $2.0 million for each period.  Software license and support revenuedeclined slightly, as did revenue from other miscellaneous sources.

 

Our overall gross profit margin declined to 29.5% for the quarter endedMarch 31, 2003 compared to 31.2% for the quarter ended March 31, 2002 due tocontinuing increases in specialty pharmacy services revenue.  Our gross profit margin on specialtypharmacy services increased from 17.2% for the quarter ended March 31, 2002 to19.3% for the quarter ended March 31, 2003. An increase in revenue from therapies with higher gross profit margins,such as hemophilia treatment, was the primary cause of this increase.  Our gross profit margin on infusion andrelated services declined from 44.3% for the quarter ended March 31, 2002 to42.0% for the quarter ended March 31, 2003. Therapy mix was the primary cause of this decline.  The gross profit margin on other revenueswas near 100% in each period, as the majority of this revenue is from franchiseroyalties which have no direct costs related to them.

 

Operating expenses increased by $3.6 million, or 21.4%, to $20.6 millionfor the quarter ended March 31, 2003. This increase is primarily attributable to acquisitions, which haveincreased the scale of our business. Operating expenses increased at a slower pace than revenue due to ourincreases in specialty pharmacy services revenue, which has lower operatingcosts that our other service lines, and due to the efficiencies realized fromspreading our fixed overhead costs over a larger revenue base. Selling, generaland administrative expenses increased $3.2 million for the quarter ended March31, 2003 compared to the corresponding prior year period, primarily due to theadded incremental expenses of our newly acquired offices.  As anticipated, we also saw increases insalaries and depreciation expense as we concluded the development stage of anew pharmacy management software product developed by our subsidiary,Management by Information, Inc.  Webegan depreciating the software development costs in the quarter ended March31, 2003 and incurred additional salaries related to implementation of the newsoftware in our company-owned pharmacies.

 

The provision for doubtful accounts was approximately $1.9 million forthe quarter ended March 31, 2003, representing an increase of $400,000, or25.2% over the quarter ended March 31, 2002. This increase is due to the 27.3% revenue increase over thisperiod.  As a percentage of revenue, theprovision for doubtful accounts was fairly consistent, declining from 2.1% forthe quarter ended March 31, 2002 to 2.0% for the quarter ended March 31, 2003.

 

Operating income was $6.7 million for the quarter ended March 31, 2003,representing an increase of approximately $1.0 million, or 17.2%, over thecorresponding quarter of the prior year. This 17.2% increase in operating income was primarily attributable toour increase in revenue that resulted from business acquisitions and increasesin patient census.  Our operating incomegrew at a lower rate than our revenue because our greatest revenue growth wasin the provision of specialty pharmacy services, which generates a lower grossprofit margin and lower operating margin than our other service lines.

 

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Interest expense was approximately $100,000 for the quarter ended March31, 2003 compared to interest income of $16,000 for the quarter ended March 31,2002.  In the first quarter of 2002, wehad a positive cash balance and minimal debt due to the cash we raised inOctober 2001 from an underwritten public stock offering.  In the second and third quarters of 2002, wecompleted five acquisitions, which we financed with available cash and throughborrowing on our revolving credit facility. The interest expense of $100,000 for the quarter ended March 31, 2003was primarily related to borrowings under our credit facility to fundacquisition activities in 2002.

 

Our income tax provision was $2.6 million for the quarter ended March31, 2003, an increase of $400,000, or 17.5%, over the corresponding prior yearquarter. This increase is directly attributable to our 15.7% increase in pretaxincome over this period.  The effectiveincome tax rate for the quarter ended March 31, 2003 was 39.9%, whichrepresents a slight increase from the 39.3% rate for the quarter ended March31, 2002. Some of the acquisitions we completed in the second and thirdcalendar quarters of 2002 were in states with relatively higher tax rates,increasing our overall income tax percentage.

 

Net income grew to $4.0 million, or $0.19 per diluted share, for thequarter ended March 31, 2003.  Thisrepresents an increase of $500,000, or 14.6%, over the corresponding period ofthe prior year.  For the quarter endedMarch 31, 2002, net income was $3.5 million, or $0.16 per diluted share.  The increase in net income was primarily dueto acquisitions, and also due to patient census increases, which addedincremental revenue and net income.

 

Option Care completed a 5-for-4 stock split effective May 1, 2002 forholders of record on April 10, 2002. All shares and per share amounts in this Quarterly Report on Form 10-Qhave been adjusted to reflect the pro forma effects of the split.

 

Diluted shares increased slightly, from approximately 21.0 million forthe quarter ended March 31, 2002 to 21.2 million for the quarter ended March31, 2003.  This increase is primarilydue to the issuance of shares to participants in Option Care’s Employee StockPurchase Plan and the issuance of shares upon employees’ exercise of stockoptions.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

For the quarter ended March 31, 2003, we have financed our operationsthrough operating cash flows and borrowings on our revolving creditfacility.  In previous periods, we havealso financed our operations through public stock offerings.

 

Operationsprovided $4.7 million in net cash flow for the quarter ended March 31, 2003,compared to $1.6 million cash used by operations in the corresponding quarterin 2002.  In the current year quarter,both continuing operations and offices acquired in 2002 produced positive operatingcash flows.  The $4.7 million providedin the current year quarter was primarily related to the $4.0 million netincome for the period, combined with minimal growth in accountsreceivable.  For the prior year quarterended March 31, 2002, operating cash flow was negative by $1.6 million due toincreases in accounts receivable during that quarter due to the effects ofacquisitions.

 

Weused $4.4 million in cash in investing activities in the quarter ended March31, 2003, compared to $4.7 million used during the quarter ended March 31, 2002.  For each period, acquisition-relatedpayments accounted for approximately $3.1 million in cash used in investingactivities.  During the quarter endedMarch 31, 2003, we paid a $2.6 million installment on our 2002 acquisition inthe Minneapolis/St. Paul area, and also paid $500,000 in consideration forother acquisitions.  During the prioryear quarter, the $3.1 million paid consisted of $1.3 million for a newacquisition completed in that quarter, plus $1.8 million in additionalconsideration on prior years’ acquisitions. In addition to payments for acquisitions, during the quarter ended March31, 2003 we used $1.4 million in cash to purchase equipment.  Of this $1.4 million, approximately $400,000was spent for office equipment and leasehold improvements for pharmacies thathave recently relocated.  Approximatelyanother $400,000 was spent to upgrade computer equipment in our corporateoffices and our pharmacy locations, and the remaining $600,000 was spent on rentalmedical equipment and other assets.  Inthe quarter ended March 31, 2002, $900,000 in cash was used to purchaseequipment, and $700,000 was used to acquire other assets.  Of this $700,000 used to acquire other assets,the largest single expenditure was $400,000 paid to J.P. Morgan CommercialFinance as a fee related to obtaining our $60 million credit facility withthem.

 

Financing activities provided approximately $300,000 in cash flowduring the quarter ended March 31, 2003 compared to $1.0 million providedduring the quarter ended March 31, 2002. The current year cash flow was primarily from the issuance of stock uponexercise of stock options and employee withholdings for purchase of stock underthe current year’s employee stock purchase plan.   During the quarter ended March 31, 2002, $1.1 million in cashwas provided from these sources, primarily due to large stock option exercisesby

 

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terminated and retiring optionees.

 

As of March 29, 2002, Option Care signed a senior secured creditfacility with JP Morgan Commercial Finance Corp. Availability under therevolving credit facility is related to percentages of our outstanding accountsreceivable and inventory balances, less certain capped and ineligible amounts,as defined in the facility agreement. Overall borrowings allowable under therevolving credit facility are limited to the lesser of $60 million or the totalallowable collateral borrowing base. The agreement requires us to comply withvarious financial covenants. The JP Morgan credit facility expires on March 29,2005.

 

As of both March 31, 2003 and December 31, 2002, our outstanding debtbalance under this facility was approximately $7.1 million. We had additionalborrowing availability of $34.4 million and $32.3 million as of March 31, 2003and December 31, 2002, respectively, based on our accounts receivable andinventory balances on those dates.

 

As of March 31, 2003, we had cash and cash equivalents of $1.1 million,compared to $500,000 as of December 31, 2002. During times when we have an outstanding debt balance under our creditfacility with JP Morgan, we use excess available cash to pay down this debt,and therefore typically carry a low cash balance.  Our credit facility agreement with JP Morgan allows us to borrowor pay down as needed on a daily basis, subject to our total borrowingavailability.

 

We believe that cash flow from operations and amounts available underour revolving credit facility will be sufficient to meet our operating cashflow needs for the immediate future, including any interest due on our creditfacility or other debt.  In the eventthat additional capital is required, management cannot assure that such capitalcan be obtained from other sources on terms acceptable to us, if at all.

 

Our business strategy includes the selective acquisition of additionalinfusion and specialty 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.

 

**Goodwilland Other Intangible Assets**

 

Asof March 31, 2003, net goodwill and other intangible assets equaled $57.1 million,consisting of $55.5 million of goodwill and $1.6 million of other intangibleassets such as non-compete agreements, patient records, and managed carecontracts.  Goodwill increased $100,000over the balance at December 31, 2002 primarily due to a small acquisitioncompleted during the quarter ended March 31, 2003.  This acquisition also added approximately $100,000 to otherintangible assets.  Net other intangibleassets declined $100,000 from December 31, 2002 to March 31, 2003 due to the$100,000 added from the acquisition, less $200,000 in amortization of existingassets.

 

Asrequired by Statement of Financial Accounting Standards No. 142, Goodwill andOther Intangible Assets, Option Care does not amortize goodwill, butperiodically tests goodwill for impairment. During the quarter ended March 31, 2003, no impairment of goodwill wasidentified.

 

**Regulatory and Other Developments**

 

Many governmental payors reimburse us for some pharmaceuticals based onthe pharmaceutical’s average wholesale price (AWP). In many cases, we purchasepharmaceuticals at less than AWP. The AWP for most pharmaceuticals is compiledand published by private companies, including First DataBank, Inc. There hasbeen an increase in the number of lawsuits and government investigationsagainst pharmaceutical manufacturers regarding prescription drug pricing andAWP, alleging that manufacturers have misrepresented to First DataBank theactual selling price of certain pharmaceuticals.  First DataBank has announced that it will now base AWP on marketprices rather than on prices submitted by the manufacturer.  As a result of this change, First DataBankhas published a Market Price Survey that reduces the AWP significantly for anumber of the products we currently supply to patients.  If the AWPs on the products we purchase arereduced, our gross profits could decline.

 

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**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 noassurances that interest rates will not change significantly, we do not expectchanges in interest rates to have a material effect on income or cash flows in2003. As of March 31, 2003, our fixed-rate debt was $400,000 and ourcorresponding variable-rate debt was $7.1 million.  At December 31, 2002, our fixed-rate debt was $500,000 and ourvariable-rate debt was $7.1 million. Based on our variable-rate debt as of March 31, 2003, a one-percentincrease in interest rates would increase our annual interest expense by $71,000.

 

**ITEM4.  Controls and Procedures**

 

**(a)  Evaluation ofdisclosure controls and procedures.**

 

We maintain disclosurecontrols and procedures which have been designed to ensure that informationrelated to Option Care is recorded, processed, summarized and reported byOption Care on a timely basis.  Within90 days of the filing date of this Quarterly Report on Form 10-Q, our ChiefExecutive Officer, Rajat Rai, and Chief Financial Officer, Paul Mastrapa,carried out an evaluation of the effectiveness of the design and operation ofour disclosure controls and procedures. Based upon this evaluation, Mr. Rai and Mr. Mastrapa concluded that ourdisclosure controls and procedures are effective in causing material informationto be recorded, processed, summarized and reported by management on a timelybasis and ensuring that the quality and timeliness of our public disclosurescomply with our disclosure obligations under the Securities Exchange Act of1934.

 

**(b)  Changes ininternal controls.**

 

There were no significantchanges in our internal controls or in other factors that could significantlyaffect our internal controls after the date of the most recent evaluation byour Chief Executive Officer and Chief Financial Officer.

 

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**PART II.  OTHER INFORMATION**

 

**ITEM 1.  LegalProceedings**

 

From time to time, we are named as a party to legal claims andproceedings in the ordinary course of business.  Additionally, from time to time, governmental and regulatoryagencies may initiate investigations or proceedings against us in the ordinarycourse of business, or which have a general application to the businesses weoperate.

 

As previously disclosed in our Annual Report on Form 10-K for the yearended December 31, 2002, Option Care has been named as a defendant in twoseparate lawsuits, each alleging that Option Care negligently prepared, soldand dispensed a prescription resulting in fatal injury.  Option Care has denied the allegations andcontinues to vigorously defend against the allegations contained in eachlawsuit.  There are no materialdevelopments in either lawsuit since the filing of our Annual Report on Form10-K on March 31, 2003.  We believe thatto the extent a monetary award is rendered against Option Care related toeither lawsuit, that monetary award will fall within the limits of our generaland professional liability insurance policy coverage for that claim.

 

Aside from these lawsuits, Option Care is not aware of any claims,investigations or proceedings against us or any of our franchisees that webelieve are likely to have a material financial impact on us.

 

**ITEM2.  Changes in Securities and Use ofProceeds**

 

None.

 

**ITEM 3. Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**ITEM 5.  OtherInformation**

 

On May 12, 2003, Option Care announced the appointment of Richard M.(Rick) Smith to the position of president and chief operating officer.  Mr. Smith will be reporting directly toRajat Rai, who continues as Option Care's chief executive officer.

 

**ITEM 6(a).  Exhibits**

 

See Exhibit Index.

 

**ITEM 6(b).  Reports on Form 8-K**

 

Option Care didnot file any reports on Form 8-K during the quarter ended March 31, 2003.

 

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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 14, 2003 | By:                    | Paul  Mastrapa                                                    |   |
|                |                   | *Chief Financial Officer*                                         |   |
|                |                   | *(Principal Accounting Officer and  Principal Financial Officer)* |   |

 

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**CERTIFICATION**

 

I, Rajat Rai, certifythat:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Option Care, Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by the report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officer(s) and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly reports is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officer(s) and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officer(s) and I have indicated in this quarterly reportwhether or not there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date: May 14, 2003 | By:    | /s/ Rajat Rai           |   |
|--------------------|--------|-------------------------|--------|
|               |   | Rajat Rai               |
|               |   | Chief Executive Officer |

 

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**CERTIFICATION**

 

I, Paul Mastrapa, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Option Care, Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by the report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officer(s) and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly reports is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of a datewithin 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on  ourevaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officer(s) and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalent function):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors any materialweaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officer(s) and I have indicated in this quarterly reportwhether or not there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date: May 14, 2003 | By:    | /s/ Paul Mastrapa                                  |   |
|--------------------|--------|----------------------------------------------------|--------|
|               |   | Paul Mastrapa                                      |
|               |   | Senior Vice President and Chief  Financial Officer |

 

21

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**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 Option Care’s Registration Statement (No. 33-45836) dated  April 15, 1992 and incorporated by reference herein.                               |
|                |   |                                                                                                                                                                                                                                                                                                  |
| 3.2                 |   | Certificate of Amendment to Certificate of  Incorporation of the Registrant filed March 25, 1992. Filed as Exhibit 3(c)  to Option Care’s Registration Statement (No. 33-45836) dated April 15, 1992  and incorporated by reference herein.                                                      |
|                |   |                                                                                                                                                                                                                                                                                                  |
| 3.3                 |   | Certificate of Amendment to Certificate of  Incorporation of the Registrant filed with the Delaware Secretary of State on  June 18, 2002. Filed as Exhibit 3.3 to Option Care’s Quarterly Report on Form  10-Q for the fiscal quarter ended June 30, 2002 and incorporated by reference  herein. |
|                |   |                                                                                                                                                                                                                                                                                                  |
| 3.4                 |   | Restated By-laws of the Registrant dated June 1,  1994. Filed as Exhibit 10.5 to Option Care’s Annual Report on Form 10-K for  the year ending December 31, 1994 and incorporated by reference herein.                                                                                           |
|                |   |                                                                                                                                                                                                                                                                                                  |
| 10.1                |   | Intentionally omitted.                                                                                                                                                                                                                                                                                |
|                |   |                                                                                                                                                                                                                                                                                                  |
| 10.2                |   | Intentionally omitted.                                                                                                                                                                                                                                                                                |
|                |   |                                                                                                                                                                                                                                                                                                  |
| 10.3                |   | Intentionally omitted.                                                                                                                                                                                                                                                                                |
|                |   |                                                                                                                                                                                                                                                                                                  |
| 10.4                |   | Intentionally omitted.                                                                                                                                                                                                                                                                                |
|                |   |                                                                                                                                                                                                                                                                                                  |
| 10.5                |   | Option Care, Inc. 401(k) Profit Sharing Plan. Filed  as Exhibit 10(b) to Option Care’s Registration Statement (No. 33-45836) dated  April 15, 1992 and incorporated by reference herein.                                                                                                         |
|                |   |                                                                                                                                                                                                                                                                                                  |
| 10.6                |   | Amendment to the 1992 401(k) Profit Sharing Plan of  the Registrant dated January 1, 1996. Filed as Exhibit 10.3(a) to Option  Care’s Annual Report on Form 10-K for the year ending December 31, 1997 and  incorporated by reference herein.                                                    |
|                |   |                                                                                                                                                                                                                                                                                                  |
| 10.7                |   | Intentionally omitted.                                                                                                                                                                                                                                                                                |
|                |   |                                                                                                                                                                                                                                                                                                  |
| 10.8                |   | Form of Franchise Agreement. Filed as Exhibit 10.5  to Option Care’s Annual Report on Form 10-K for the year ending December 31,  1996 and incorporated by reference herein.                                                                                                                     |
|                |   |                                                                                                                                                                                                                                                                                                  |
| 10.9                |   | Intentionally omitted.                                                                                                                                                                                                                                                                                |

 

22

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

 

23

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| **Exhibit  Number** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.26               |   | Participation Agreement between Health Options, Inc.  and Option Care, Inc. effective as of June 1, 1997. 2001. Filed as Exhibit  10.26 to Option Care’s Amendment No. 1 to its Annual Report on Form 10-K  filed September 10, 2001 and incorporated by reference herein.                                                                                                                                                                                                                                                            |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.27               |   | Prescription Drug Agreement among Blue Cross and  Blue Shield of Florida, Inc., Health Options, Inc. and Option Care, Inc.  dated March 8, 2000. Filed as Exhibit 10.27 to Option Care’s Amendment No. 1  to its Annual Report on Form 10-K filed September 10, 2001 and incorporated  by reference herein.                                                                                                                                                                                                                           |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.28               |   | Amendment to Participation Agreement between Health  Options, Inc. and Option Care, Inc. dated as of April 1, 2001.**                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.29               |   | Deferred Compensation Plan for certain Executives,  effective as of January 1, 2001.**                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.30               |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.31               |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.32               |   | Injectible Drugs Agreement, effective as of  September 5, 2001 between Health Options, Inc. and Option Med, Inc. Filed on  October 10, 2001 as Exhibit 10.1 to Form 8-K/A and incorporated herein by  reference.                                                                                                                                                                                                                                                                                                                           |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.33               |   | Credit and Security Agreement, dated March 29, 2002,  by and among Option Care, Inc. and the domestic subsidiaries of Option Care  party thereto, as Borrowers, the Lending Institutions party thereto, as  Lenders, J.P. Morgan Business Credit Corp., as Advisor, and JPMorgan Chase  Bank, as Administrative and Collateral Agent and Arranger, and LaSalle Bank  National Association, as Co-Agent. Filed as Exhibit 10.21 to Option Care’s  Current Report on Form 8-K filed May 15, 2002 and incorporated by reference  herein. |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 99.1                |   | Certification of President and Chief Executive  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                         |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 99.2                |   | Certification of Senior Vice President and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                             |

 

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*                                         Managementcontracts and compensatory plans and arrangements.

 

**                                  Portionsof this Exhibit are subject to a Confidential Treatment Request pursuant toRule 24b-2 under the Securities Exchange Act of 1934, as amended, filed withthe SEC on September 10, 2001 and amended October 10, 2001.

 

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