** **

**UNITED STATES SECURITIES ANDEXCHANGE 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, 2005**

 

**Or**

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

 

**For the transition period from                  to                  **

 

**Commission file****number 0-19878**

 

**OPTION CARE, INC.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **36-3791193**                     |
|-----------------------------------------------------------------|------------|------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |       | (IRS  Employer Identification No.) |
|                                                            |       |                               |
| **485 Half Day Road, Suite 300  Buffalo Grove, Illinois**       | ** ** | **60089**                          |
| (Address  of principal executive office)                        |       | (zip  code)                        |
|                                                            |       |                               |
| **(847) 465-2100**                                         |
| (Registrant’s  telephone number, including area code)      |

 

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Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 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 sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

 

| **Class**                      | ** ** | **Issued and Outstanding  as of May 3, 2005** | ** ** |
|--------------------------------|------------|-----------------------------------------------|------------|
| Common Stock - $0.01 par value |       | 32,416,679                                    |       |

 

 

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**INDEX**

 

**OPTION CARE, INC. ANDSUBSIDIARIES**

 

**DESCRIPTION**

 
| **PART I**     | **FINANCIAL INFORMATION**                                                                              |       |
|----------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **     | ** **                                                                                             | ** ** |
| Item 1.        | Financial Statements  (Unaudited)                                                                      |       |
|           |                                                                                                   |       |
|           | Condensed  consolidated balance sheets—March 31, 2005 and December 31, 2004                       |       |
|           |                                                                                                   |       |
|           | Condensed  consolidated statements of income—Three months ended March 31, 2005 and  2004     |       |
|           |                                                                                                   |       |
|           | Condensed  consolidated statements of cash flows—Three months ended March 31, 2005  and 2004 |       |
|           |                                                                                                   |       |
|           | Notes  to condensed consolidated financial statements—March 31, 2005                              |       |
|           |                                                                                                   |       |
| 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.        | Unregistered Sales of Equity 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.        | Exhibits                                                                                               |       |
|           |                                                                                                   |       |
|           |                                                                                                   |       |
| **SIGNATURES** |                                                                                                   |

 

2

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**PART I.  FINANCIAL INFORMATION**

 

**Item 1.****  Financial Statements**

**Option Care,Inc. and Subsidiaries**

**CondensedConsolidated Balance Sheets**

(in thousands, except per share amounts)

 
| ** **                                                                                                                                                                | ** ** | **March 31, 2005  (Unaudited)** | ** ** | **December 31, 2004  (Note 1)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Assets                                                                                                                                                                    |       |                            |       |                            |       |
| Current assets:                                                                                                                                                           |       |                            |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                |       | $                               | 11,604     |                            | $          | 19,816 |   |
| Short-term  investments                                                                                                                                                   |       | 85,814                          |       | 75,370                          |       |
| Accounts  receivable, net                                                                                                                                                 |       | 74,081                          |       | 69,930                          |       |
| Inventory                                                                                                                                                                 |       | 9,973                           |       | 13,191                          |       |
| Deferred income  tax benefit                                                                                                                                              |       | 2,774                           |       | 3,098                           |       |
| Other current  assets                                                                                                                                                     |       | 5,634                           |       | 5,459                           |       |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Total current  assets                                                                                                                                                     |       | 189,880                         |       | 186,864                         |       |
| Equipment and  other fixed assets, net                                                                                                                                    |       | 13,901                          |       | 13,709                          |       |
| Goodwill, net                                                                                                                                                             |       | 71,999                          |       | 65,356                          |       |
| Other assets                                                                                                                                                              |       | 3,897                           |       | 3,918                           |       |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Total assets                                                                                                                                                              |       | $                               | 279,677    |                            | $          | 269,847 |   |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Liabilities and  stockholders’ equity                                                                                                                                |       |                            |       |                            |       |
| Current  liabilities:                                                                                                                                                     |       |                            |       |                            |       |
| Trade accounts  payable                                                                                                                                                   |       | $                               | 20,382     |                            | $          | 21,819 |   |
| Current portion  of long-term debt                                                                                                                                        |       | 12                              |       | 19                              |       |
| Other current  liabilities                                                                                                                                                |       | 6,867                           |       | 6,573                           |       |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Total current  liabilities                                                                                                                                                |       | 27,261                          |       | 28,411                          |       |
| Long-term debt,  less current portion                                                                                                                                     |       | 86,303                          |       | 86,306                          |       |
| Deferred income  tax liability                                                                                                                                            |       | 7,713                           |       | 7,468                           |       |
| Other  liabilities                                                                                                                                                        |       | 571                             |       | 551                             |       |
| Minority interest                                                                                                                                                         |       | 560                             |       | 548                             |       |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Total  liabilities                                                                                                                                                        |       | 122,408                         |       | 123,284                         |       |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Stockholders’  equity:                                                                                                                                               |       |                            |       |                            |       |
| Common stock,  $.01 par value per share, 60,000 shares authorized, 32,313 and 32,183 shares  issued and outstanding at March 31, 2005 and December 31, 2004, respectively |       | 323                             |       | 322                             |       |
| Common stock to  be issued, 202 and 171 shares at March 31, 2005 and December 31, 2004,  respectively                                                                     |       | 1,396                           |       | 1,085                           |       |
| Additional  paid-in capital                                                                                                                                               |       | 109,074                         |       | 108,062                         |       |
| Retained  earnings                                                                                                                                                        |       | 46,476                          |       | 41,612                          |       |
| Less treasury stock,  at cost, 474 shares at December 31, 2004                                                                                                            |       | —                          |       | (4,518                          | )          |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Total  stockholders’ equity                                                                                                                                          |       | 157,269                         |       | 146,563                         |       |
|                                                                                                                                                                      |       |                            |       |                            |       |
| Total  liabilities and stockholders’ equity                                                                                                                          |       | $                               | 279,677    |                            | $          | 269,847 |   |

 

*See notes tocondensed consolidated financial statements*

 

3

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**OptionCare, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Income**

(Unaudited)

(in thousands, except per share amounts)

 
| ** **                                      | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **2005**                         | ** ** | **2004** | ** ** |
|                                            |       |                             |       |   |   |
| Revenue:                                        |       |                             |       |   |   |
| Specialty  pharmacy services                    |       | $                                | 74,897     |   | $ | 64,932 |   |
| Infusion and  related healthcare services       |       | 42,848                           |       | 34,946 |   |
| Other                                           |       | 3,010                            |       | 3,271 |   |
| Total revenue                                   |       | 120,755                          |       | 103,149 |   |
| Cost of revenue:                                |       |                             |       |   |   |
| Cost of goods  sold                             |       | 75,692                           |       | 63,808 |   |
| Cost of services  provided                      |       | 11,800                           |       | 10,644 |   |
| Total cost of  revenue                          |       | 87,492                           |       | 74,452 |   |
|                                            |       |                             |       |   |   |
| Gross profit                                    |       | 33,263                           |       | 28,697 |   |
|                                            |       |                             |       |   |   |
| Selling, general  and administrative expenses   |       | 21,541                           |       | 19,249 |   |
| Provision for  doubtful accounts                |       | 2,326                            |       | 1,559 |   |
| Depreciation and  amortization                  |       | 904                              |       | 681 |   |
|                                            |       |                             |       |   |   |
| Total operating  expenses                       |       | 24,771                           |       | 21,489 |   |
|                                            |       |                             |       |   |   |
| Operating income                                |       | 8,492                            |       | 7,208 |   |
| Interest income  (expense)                      |       | (44                              | )          | 1 |   |
| Other expense,  net                             |       | (47                              | )          | (67 | ) |
|                                            |       |                             |       |   |   |
| Income before  income taxes                     |       | 8,401                            |       | 7,142 |   |
| Income tax  provision                           |       | 3,116                            |       | 2,857 |   |
|                                            |       |                             |       |   |   |
| Net income                                      |       | $                                | 5,285      |   | $ | 4,285 |   |
|                                            |       |                             |       |   |   |
| Net income per  common share:                   |       |                             |       |   |   |
| Basic                                           |       | $                                | 0.16       |   | $ | 0.14 |   |
|                                            |       |                             |       |   |   |
| Diluted                                         |       | $                                | 0.16       |   | $ | 0.13 |   |
|                                            |       |                             |       |   |   |
| Shares used in  computing net income per share: |       |                             |       |   |   |
| Basic                                           |       | 32,103                           |       | 31,637 |   |
| Diluted                                         |       | 33,265                           |       | 32,334 |   |
|                                            |       |                             |       |   |   |
| Cash dividends  per share                       |       | $                                | 0.0133     |   | $ | — |   |

 

*See notes to condensedconsolidated financial statements*

 

4

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**OptionCare, Inc. and Subsidiaries**

**Condensed ConsolidatedStatements of Cash Flows**

(Unaudited)

(in thousands)

 
| ** **                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                             |       |                                   |       |   |   |
| Net income                                                                         |       | $                                      | 5,285      |   | $ | 4,285 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                   |       |   |   |
| Depreciation and  amortization                                                     |       | 1,366                                  |       | 1,204 |   |
| Provision for  doubtful accounts                                                   |       | 2,326                                  |       | 1,559 |   |
| Deferred income  taxes                                                             |       | 521                                    |       | 806 |   |
| Income tax  benefit from exercise of stock options                                 |       | 1,288                                  |       | 456 |   |
| Changes in  assets and liabilities:                                                |       |                                   |       |   |   |
| Accounts and  notes receivable                                                     |       | (5,197                                 | )          | (4,709 | ) |
| Inventory                                                                          |       | 3,469                                  |       | 3,342 |   |
| Accounts payable                                                                   |       | (1,851                                 | )          | (1,417 | ) |
| Income taxes  receivable/payable                                                   |       | (81                                    | )          | 1,331 |   |
| Change in other  assets and liabilities                                            |       | 52                                     |       | (1,631 | ) |
|                                                                               |       |                                   |       |   |   |
| Net cash  provided by operating activities                                         |       | 7,178                                  |       | 5,226 |   |
|                                                                               |       |                                   |       |   |   |
| Cash flows from  investing activities:                                             |       |                                   |       |   |   |
| Purchases of  short-term investments                                               |       | (88,954                                | )          | — |   |
| Sales of  short-term investments                                                   |       | 78,510                                 |       | — |   |
| Purchases of  equipment and other, net                                             |       | (989                                   | )          | (975 | ) |
| Payments for  acquisitions, net of cash acquired                                   |       | (7,082                                 | )          | (1,090 | ) |
|                                                                               |       |                                   |       |   |   |
| Net cash used in  investing activities                                             |       | (18,515                                | )          | (2,065 | ) |
|                                                                               |       |                                   |       |   |   |
| Cash flows from  financing activities:                                             |       |                                   |       |   |   |
| Increase in  financing costs                                                       |       | (134                                   | )          | — |   |
| Payments on  capital leases and other debt                                         |       | (10                                    | )          | (364 | ) |
| Proceeds from  issuance of stock                                                   |       | 3,697                                  |       | 835 |   |
| Payments for  purchase of treasury stock                                           |       | —                                 |       | (944 | ) |
| Payments of  dividends to common shareholders                                      |       | (428                                   | )          | — |   |
|                                                                               |       |                                   |       |   |   |
| Net cash  provided by (used in) financing activities                               |       | 3,125                                  |       | (473 | ) |
|                                                                               |       |                                   |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                              |       | (8,212                                 | )          | 2,688 |   |
| Cash and cash  equivalents, beginning of period                                    |       | 19,816                                 |       | 3,961 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                      | 11,604     |   | $ | 6,649 |   |

 

*See notes tocondensed consolidated financial statements*

 

5

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**OptionCare, Inc. and Subsidiaries**

**Notes to Condensed ConsolidatedFinancial Statements**

**March 31, 2005**

(Unaudited)

 

**1.   Basis of Presentation**

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialinformation and with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the informationand footnotes required by accounting principles generally accepted in theUnited States for complete financial statements. In the opinion of management,all adjustments (consisting of normal recurring accruals) considered necessaryfor a fair presentation have been included. Operating results for the threemonths ended March 31, 2005 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2005.

 

The balance sheet at December 31, 2004 hasbeen derived from the audited financial statements at that date but does notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.

 

We completed a 3-for-2 split of our common stock on March 31, 2005 forshareholders of record as of March 17, 2005. All share and per share amounts in this Quarterly Report on Form 10-Q have been adjusted to reflect the pro forma effects of thisstock split.

 

For further information,refer to the consolidated financial statements and footnotes thereto includedin Option Care’s Annual Report on Form 10-K for the year endedDecember 31, 2004.

 

**2.   Long-TermDebt**

 

On November 2, 2004, we completed an offering of $75 million of 2.25%convertible senior notes due 2024 in a private placement to qualifiedinstitutional buyers.  The initialpurchasers were granted the option to purchase up to an additional $11.3million principal amount of notes and exercised this option in full on November9, 2004.  We filed a RegistrationStatement on Form S-3 on January 24, 2005 to allow the notes to be re-sold tothe investing public.

 

The convertible notes are senior unsecured obligations of Option Careand will be convertible into cash and, if applicable, shares of our commonstock based on an initial conversion rate of 55.5278 shares per $1,000principal amount of notes, which represents an initial conversion price of$18.01 per share, subject to adjustment in certain circumstances.  Upon our completion of a 3-for-2 split of ourcommon stock on March 31, 2005, the conversion rate and conversion price wereadjusted to 83.2917 and $12.01 per share, respectively.  Holders may convert their notes into cashand, if applicable, shares of our common stock prior to the stated maturityonly under the following circumstances: (1) during any calendar quarterbeginning after December 31, 2004, if the closing sale price of our commonstock for each of 20 or more consecutive trading days in a period of 30consecutive trading days ending on the last trading day of the immediatelypreceding calendar quarter exceeds 120% of the conversion price in effect onthe last trading day of the immediately preceding calendar quarter; (2) duringthe five business day period after any five consecutive trading day period inwhich the average trading price per $1,000 principal amount of notes was equalto or less than 97% of the average conversion value of the notes during thenote measurement period; (3) upon the occurrence of specified corporatetransactions; or (4) if we have called the notes for redemption.  In general, upon conversion, the holder ofeach note will receive the conversion value of the note payable in cash, up tothe principal amount of the note, and common stock for the notes’ conversionvalue in excess of such principal amount (plus an additional cash payout inlieu of fractional shares).  If the notesare surrendered for conversion in connection with certain fundamental changesthat occur before November 1, 2009, holders will in certain circumstances alsoreceive a make-whole premium in addition to the cash and shares that holdersare otherwise entitled to receive upon conversion.  The convertible senior notes will mature onNovember 1, 2024 and will not be redeemable by us prior to November 1,2009.  Holders of the convertible notesmay require us to repurchase all or a portion of the convertible notes for cashon November 1, 2009, 2014 and 2019. Interest will be paid at 2.25% per annum, payable semi-annually inarrears on May 1 and November 1 of each year to the holders of record at theclose of business on the preceding April 15 and October 15, respectively.  The notes are senior unsecured obligationsand will rank equally with all of our existing and future senior unsecuredindebtedness.

 

6

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**3.   Earnings Per ShareData**

 

The following table sets forth the computation ofbasic and diluted earnings per share for the periods indicated.  All share and per share amounts reflect the3-for-2 stock split effective March 31, 2005 for shareholders of record onMarch 17, 2005. (in thousands, except per shareamounts):

 
| ** **                                                                      | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Basic:                                                                          |       |                             |       |   |   |
| Net income                                                                      |       | $                                | 5,285      |   | $ | 4,285 |   |
|                                                                            |       |                             |       |   |   |
| Average shares  outstanding                                                     |       | 32,103                           |       | 31,637 |   |
|                                                                            |       |                             |       |   |   |
| Basic earnings  per share                                                       |       | $                                | 0.16       |   | $ | 0.14 |   |
|                                                                            |       |                             |       |   |   |
| Diluted:                                                                        |       |                             |       |   |   |
| Net income                                                                      |       | $                                | 5,285      |   | $ | 4,285 |   |
|                                                                            |       |                             |       |   |   |
| Average shares  outstanding                                                     |       | 32,103                           |       | 31,637 |   |
| Net effect of  dilutive stock options – Based on the treasury stock method |       | 1,013                            |       | 697 |   |
| Net effect of  dilutive contingently convertible debt (1)                       |       | 149                              |       | 3⁄4 |   |
|                                                                            |       |                             |       |   |   |
| Total diluted  shares                                                           |       | 33,265                           |       | 32,334 |   |
|                                                                            |       |                             |       |   |   |
| Diluted earnings  per share                                                     |       | $                                | 0.16       |   | $ | 0.13 |   |

 

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(1) Weighted average sharesissuable upon conversion of all $86.3 million of our 2.25% convertible seniornotes due 2024.

 

**4.   Operating Segments**

 

We have one identifiable business segment, with three service lines:specialty pharmacy services; infusion and related healthcare services; andother.

 

**Specialty pharmacy services**involve the distribution of injectible and infused pharmaceuticals to treat awide range of chronic health conditions.  The pharmaceuticals can bedirectly distributed to the patient’s home or to their physician’s office forin-office administration.  These pharmaceuticals may require refrigerationduring shipping as well as special handling to prevent potencydegradation.  Patients receiving treatment usually require specialcounseling and education regarding their condition and treatment program.

** **

**Infusion and related healthcareservices** primarily involve the intravenous administration ofmedications at the patient’s home or other non-hospital sites such as one ofour infusion suites.  Infusion pharmacy services treat a wide range ofacute and chronic health conditions, including infections, dehydration, cancer,pain and nutritional deficiencies.  All of our company-owned pharmaciesprovide infusion pharmacy services.  Some of these pharmacies also providerelated healthcare services, such as home health nursing, home hospiceservices, respiratory therapy services and durable medical equipment.

 

**Other revenue**consists of royalties and other fees generated from our franchised pharmacynetwork and the software licensing and support revenue generated by oursubsidiary, Management by Information, Inc. (“MBI”).

 

**5.   Significant Customers and Concentration ofCredit Risk**

 

We generate the majority of our revenue frommanaged care contracts and other agreements with commercial third party payorsby our provision of health care services to their members.  Our principal managed care contract is withBlue Cross and Blue Shield of Florida, to whose members we provide infusionpharmacy services and specialty pharmacy services.  The contract is terminable by either party on90 days’ notice and, unless terminated, renews annually each September for anadditional one-year term.  We alsogenerate revenue from government healthcare programs such as Medicare and Medicaid.

 

The following table sets forth informationregarding revenue and accounts receivable related to our most significantpayors as of the

 

7

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dates and for the periods presented:

 
| ** **                             | ** ** | **Revenue**                      | ** ** | **Accounts Receivable** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | **Three months ended March 31,** | ** ** | **March 31,**           | ** ** | **December 31,** | ** ** |
| ** **                             | ** ** | **2005**                         | ** ** | **2004**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                   |       |                             |       |                    |       |   |   |   |   |
| Blue Cross and  Blue Shield of Florida |       | 15                               | %          | 15                      | %          | 8 | % | 7 | % |
| Medicare &  Medicaid               |       | 17                               | %          | 20                      | %          | 17 | % | 18 | % |
| All other payors  (1)                  |       | 68                               | %          | 65                      | %          | 75 | % | 75 | % |
|                                   |       |                             |       |                    |       |   |   |   |   |
| Total                                  |       | 100                              | %          | 100                     | %          | 100 | % | 100 | % |
|                                   |       |                             |       |                    |       |   |   |   |   |

 

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(1) No other payor represents 10% or more ofrevenue or accounts receivable as of the dates and for the periods presented.

 

**6.   Seasonal Revenue Trends**

 

Synagis®, one of thespecialty pharmaceuticals that we provide to patients, is seasonal.  Synagis® is a drug used for the prevention ofrespiratory synctial virus (RSV) in high-risk pediatric patients. RSV infectionis a seasonal condition, with the season generally lasting from October throughApril.

 

OptionCare’s quarterly Synagis® revenue for the year 2004 and the first quarter of2005 was as follows (amounts in thousands):

 

| ** **                        | ** ** | **Synagi****s® revenue** | ** ** | **%****of Total  Revenue** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| Quarter ended  March 31, 2004     |       | $                             | 14,251     |                       | 13.8       | % |
| Quarter ended  June 30, 2004      |       | 3,955                         |       | 4.0                        | %          |
| Quarter ended  September 30, 2004 |       | 571                           |       | 0.6                        | %          |
| Quarter ended  December 31, 2004  |       | 9,455                         |       | 8.4                        | %          |
| Fiscal year 2004                  |       | $                             | 28,232     |                       | 6.8        | % |
|                              |       |                          |       |                       |       |
| Quarter ended  March 31, 2005     |       | $                             | 15,536     |                       | 12.9       | % |

** **

**7.   Acquisitions**

 

OnFebruary 3, 2005, we acquired the outstanding stock of the Option Care franchisein St. Cloud, Minnesota, expanding our presence of company-owned pharmacies inMinnesota.  We made this acquisition infurtherance of our strategy of acquiring profitable infusion pharmacies that weexpect will contribute to the growth of our business.  The initial purchase price was $7.6 million,net of franchise termination fees, paid in a combination of cash of $6.7million and unregistered shares of our common stock valued at $900,000.  Additional consideration may become payablein 2006 and 2007 based on the subsequent earnings of the acquired business andother related factors.  We recorded $6.5million in goodwill as a result of this acquisition and expect the full amountof this goodwill to be deductible for income tax purposes.  Upon terminating the St. Cloud franchiseagreement we recorded a settlement gain of $800,000, which was equal to thepresent value of the excess of the estimated future royalty payments receivableunder the St. Cloud franchise agreement over current market rates.  We consolidated the results of operations of thisnewly acquired business as of the date acquired.

 

During the quarter ended March 31, 2005, we also acquired the assets ofa small infusion pharmacy business in a market we currently serve.  The purchase price of approximately $100,000was equal to the value of the tangible assets acquired.

 

**8.   Stock-based Compensation**

 

Statementof Financial Accounting Standards No. 123, *Accounting for Stock-BasedCompensation*, as amended by Statement of Financial AccountingStandards No. 148, *Accounting for Stock-BasedCompensation—Transition and Disclosure*, encouraged, but did notrequire, companies to record compensation cost for stock-based compensationplans at fair value.  We have chosen toaccount for stock-based

 

8

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compensation using the intrinsic value method prescribed inAccounting Principles Board Opinion No. 25,*Accounting for StockIssued to Employees*, and related interpretations.  Accordingly, compensation expense for stockoptions is measured as the excess, if any, of the quoted market price of OptionCare stock at the date of grant over the amount an employee must pay to acquirethe stock.  We grant options at fairmarket value and therefore recognize no compensation expense when options aregranted.  Likewise, our Employee StockPurchase Plan was structured to qualify under Section 423 of the InternalRevenue Code.  Therefore, no compensationexpense is recognized from employees’ purchase of shares under our EmployeeStock Purchase Plan.

 

Thefollowing table sets forth our net income and net income per common share forthe three months ended March 31, 2005 and 2004, had compensation cost for ourstock-based compensation plan been determined based on FASB Statement No. 123.  All share and per share amounts in thefollowing table have been adjusted to reflect the pro forma effects of the3-for-2 split of our common stock that became effective March 31, 2005 forshareholders of record on March 17, 2005. (inthousands, except per share amounts):

 
| ** **                                                                                                                                                   | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                   | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Net income:                                                                                                                                                  |       |                             |       |   |   |
| As reported                                                                                                                                                  |       | $                                | 5,285      |   | $ | 4,285 |   |
| 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                                                                                                                                         |       | (216                             | )          | (332 | ) |
| Employee stock  purchase plan withholdings                                                                                                                   |       | (56                              | )          | (35 | ) |
|                                                                                                                                                         |       |                             |       |   |   |
| Pro forma                                                                                                                                                    |       | $                                | 5,013      |   | $ | 3,918 |   |
|                                                                                                                                                         |       |                             |       |   |   |
| Net income per  common share—basic:                                                                                                                     |       |                             |       |   |   |
| As reported                                                                                                                                                  |       | $                                | 0.16       |   | $ | 0.14 |   |
| Pro forma                                                                                                                                                    |       | $                                | 0.16       |   | $ | 0.12 |   |
|                                                                                                                                                         |       |                             |       |   |   |
| Net income per common share—diluted:                                                                                                                    |       |                             |       |   |   |
| As reported                                                                                                                                                  |       | $                                | 0.16       |   | $ | 0.13 |   |
| Pro forma                                                                                                                                                    |       | $                                | 0.15       |   | $ | 0.12 |   |

 

The fair valueof options granted under our stock option plan during the quarters ended March31, 2005 and 2004 was estimated on the date of grant using the Black-Scholesoption pricing model with the following assumptions (as pro forma adjusted forour 3-for2 stock split on March 31, 2005):

 
| ** **                                                | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------|------------|
| ** **                                                | ** ** | **2005**      | ** ** | **2004** | ** ** |
|                                                      |       |          |       |   |   |
| Annual dividend  yield per share                          |       | $             | 0.08       |   | $ | — |   |
| Expected  volatility                                      |       | 40            | %          | 40 | % |
| Weighted average  risk-free interest rate                 |       | 3.54          | %          | 2.25 | % |
| Expected grant  life (years)                              |       | 4.0           |       | 4.0 |   |
| Weighted average  per share fair value of options granted |       | $             | 4.15       |   | $ | 2.65 |   |

 

9

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**9.   Recently Issued Accounting Pronouncement**

 

On December 16,2004, the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards (SFAS) No. 123(R), *Share-Based Payment*,which will change the way we account for employee stock options in futureperiods.  SFAS No. 123(R), which is arevision to SFAS No. 123, *Accounting for Stock-BasedCompensation*, supersedes APB Opinion No. 25, *Accountingfor Stock Issued to Employees,* and amends SFAS No. 95, *Statement of Cash Flows*. Generally, the approach in SFAS No. 123(R) is similar to the approachdescribed in SFAS No. 123, but with certain enhancements to improve theaccuracy of fair value estimates. However, SFAS 123(R) requires all share-based payments to employees,including grants of employee stock options, to be recognized in the incomestatement based on their fair values. Pro forma disclosure is no longer an alternative.

 

SFAS No. 123(R)permits public companies to adopt its requirements using one of two methods:

•      A “modified prospective” method in whichcompensation cost is recognized beginning with the effective date (a) based onthe requirements of Statement 123(R) for all share-based payments granted afterthe effective date and (b) based on the requirements of SFAS No. 123 for allawards granted to employees prior to the effective date of Statement 123(R)that remain unvested on the effective date.

•      A “modified retrospective” method whichincludes the requirements of the modified prospective method described above,but also permits entities to restate based on the amounts previously recognizedunder SFAS No. 123 for purposes of pro forma disclosures either (a) all priorperiods presented or (b) prior interim periods of the year of adoption.

 

Initially, theSEC announced that SFAS No. 123(R) must be adopted in the first interim orannual period beginning after June 15, 2005. Subsequently, on April 14, 2005, the SEC announced that calendaryear-end companies will be allowed to delay implementation of the new standarduntil their first interim period beginning after December 15, 2005.

 

We will adoptSFAS No. 123(R) in our fiscal quarter ending March 31, 2006 and intend to applythe “modified retrospective” method. Adoption of SFAS No. 123(R) may materiallyaffect our results of operations for periods following adoption, but will haveno effect on our financial condition.

 

**10.  Quarterly Dividends**

 

Our Board of Directors initiated a quarterlydividend policy at their meeting on May 11, 2004.  Accordingly, in each fiscal quarter beginningwith the quarter ended June 30, 2004, our board declared a dividend of $0.0133per share.  The $0.0133 per sharedividend in the quarter ended March 31, 2005 was paid March 22, 2005 toshareholders of record as of March 8, 2005.

 

**11.  SubsequentEvents**

 

On April 11, 2005, we acquired the assets of theOption Care franchise located in the Indianapolis, Indiana metropolitan area.  This acquisition is consistent with ourstrategy of acquiring select franchises and independent pharmacies that areexpected to help us expand our national coverage and increase our revenue andnet income.  We will consolidate theoperations of this business as of the purchase date.

 

**12.  ComprehensiveIncome**

 

Netincome was our only component of comprehensive income for the quarters endedMarch 31, 2005 and 2004.

 

10

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**Item 2****.**             **Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

**FORWARD LOOKING STATEMENTS**

 

The following discussion should be read in conjunction with our AnnualReport on Form 10-K for the year ended December 31, 2004. The PrivateSecurities Litigation Reform Act of 1995 provides a “safe harbor” forforward-looking statements. Certain information included in this QuarterlyReport on Form 10-Q and other materials filed or to be filed by us withthe Securities and Exchange Commission (as well as information included in oralstatements or other written statements made or to be made by us) containstatements that are or will be forward-looking, such as statements relating toacquisitions and other business development activities, future capitalexpenditures and the effects of future regulation and competition. Suchforward-looking information involves important risks and uncertainties thatcould significantly affect anticipated results in the future and, accordingly,such results may differ from those expressed in any forward-looking statementsmade by us, or on our behalf. These risks and uncertainties include, but arenot limited to, uncertainties affecting our businesses and our franchiseesrelating to acquisitions and divestitures (including continuing obligationswith respect to completed transactions), sales and renewals of franchises,government and regulatory policies (including federal, state and local effortsto reform the delivery of and payment for healthcare services), generaleconomic conditions (including economic conditions affecting the healthcareindustry in particular), the pricing and availability of equipment andservices, technological developments and changes in the competitive environmentin which we operate.  For a morecomprehensive description of risks applicable to our business, see Risk Factorsin our Annual Report on Form 10-K for the year ended December 31, 2004.

 

**OVERVIEW**

 

We provide specialty pharmacy services and infusion pharmacy and otherrelated healthcare services to patients at home or at other alternate sitessuch as infusion suites and physician’s offices.  We contract with managed care organizationsand other third party payors who reimburse us for the services we provide totheir subscriber members.  Our servicesare provided through our national network of company-owned and franchise-ownedpharmacies and our two central, high-volume drug distribution facilities.

 

We have three service lines: specialty pharmacy services, infusion andrelated healthcare services, and other. Specialty pharmacy services involve thedistribution of injectible and infused pharmaceuticals to treat a wide range ofchronic health conditions.  Thepharmaceuticals can be directly distributed to the patient’s home or to theirphysician’s office for in-office administration.  Depending on therapy type, we may alsoadminister specialty pharmaceuticals to patients at our ambulatory infusioncenters. These pharmaceuticals may require refrigeration during shipping aswell as special handling to prevent potency degradation.  Patients receiving treatment usually requirespecial counseling and education regarding their condition and treatmentprogram.  Infusion and related servicesprimarily involves the intravenous administration of medications at the patient’shome or other non-hospital site such as one of our infusion suites.  Infusion pharmacy services treat a wide rangeof acute and chronic health conditions, including infections, dehydration,cancer, pain and nutritional deficiencies. All of our company-owned pharmacies provide infusion therapies.  Some of these pharmacies also provide relatedhealthcare services, such as home health nursing, home hospice services,respiratory therapy services and durable medical equipment.  Other revenue consists of royalties and otherfees generated from our franchised pharmacy network and the software licensingand support revenue generated by our subsidiary, MBI.

 

Summarized information about revenues and gross profit for each of our servicelines is provided in the following table (amounts in thousands):

 
| ** **                               | ** ** | **Three months  ended March 31, 2005** | ** ** | **Three months  ended March 31, 2004** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **Revenue**                            | ** ** | **%****of  total**                     | ** ** | **Gross  Profit** | ** ** | **Gross  profit %** | ** ** | **Revenue** | ** ** | **%****of  total** | ** ** | **Gross  Profit** | ** ** | **Gross  profit %** | ** ** |
|                                     |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  pharmacy services             |       | $                                      | 74,897     |                                   | 62.0       | % | $ | 11,553 |   | 15.4 | % | $ | 64,932 |   | 62.9 | % | $ | 10,526 |   | 16.2 | % |
| Infusion and related healthcare services |       | 42,848                                 |       | 35.5                                   | %          | $ | 18,797 |   | 43.9 | % | 34,946 |   | 33.9 | % | 15,029 |   | 43.0 | % |
| Other                                    |       | 3,010                                  |       | 2.5                                    | %          | 2,913 |   | 96.8 | % | 3,271 |   | 3.2 | % | 3,142 |   | 96.1 | % |
| Total revenue                            |       | $                                      | 120,755    |                                   | 100.0      | % | $ | 33,263 |   | 27.5 | % | $ | 103,149 |   | 100.0 | % | $ | 28,697 |   | 27.8 | % |

 

The majority of our revenue is generated from managed care contractsand other agreements with commercial third party payors.  Our principal managed care contract is withBlue Cross Blue Shield of Florida for the provision of specialty pharmacyservices and infusion pharmacy services to their members. For the three monthsended March 31, 2005 and 2004, approximately 15% of our

 

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revenue was generated from thiscontract.  As of March 31, 2005 andDecember 31, 2004, respectively, 8% and 7% of our accounts receivable was duefrom Blue Cross Blue Shield of Florida. The contract is terminable by eitherparty on 90 days’ notice and, unless terminated, renews annually each Septemberfor an additional one-year term.

 

We also generate revenue from government healthcare programs such asMedicare and Medicaid.  For the threemonths ended March 31, 2005 and 2004, approximately 17% and 20% of our revenue,respectively, was generated from government healthcare programs.  As of March 31, 2005 and December 31, 2004,respectively, 17% and 18% of our total accounts receivable was due from these governmenthealthcare programs.

 

Many of the pharmaceuticals we provide are reimbursed at somepercentage of the Average Wholesale Price (AWP) for those pharmaceuticals.  AWP for most pharmaceuticals is compiled andpublished by private companies, including First DataBank, Inc.  In recent years, we have seen reductions toAWP for certain of the pharmaceuticals that we provide to patients as a resultof government investigations and other legal and regulatory actions.  Any modifications to the AWP system orreductions in AWP for the products we provide to patients could narrow ourgross profit margins.

 

The Medicare Prescription Drug,Improvement and Modernization Act of 2003 changed the way in which coveredoutpatient drugs are reimbursed by the Medicare program.  In January 2004, payment for most drugscovered by Medicare decreased to 85% of the AWP for those drugs, determined asof April 1, 2003.  Beginning in 2005,reimbursement for most Medicare Part B drugs not paid on a cost or prospectivepayment basis was to be set at either 106% of the average sales price (ASP) orthrough a competitive acquisition program to be phased in beginning in2006.  The competitive acquisitionprogram will be established by the Centers for Medicare and Medicaid Services (CMS)and will enable physicians in designated competitive acquisition areas topurchase drugs through contractors that have successfully bid for thatright.  Each physician will electannually whether to obtain drugs through the competitive acquisitionprogram.  CMS will re-bid the contractsat least every three years.  Asignificant portion of the infusion drugs provided by us are administered inconnection with covered durable medical equipment (DME).  The payment rate for drugs administered inthis manner generally will continue to be 95% of the AWP in effect as ofOctober 1, 2003.

 

While the majority of our revenue is reimbursedby managed care organizations and other non-government payors, these changes tothe way Medicare pays for outpatient drugs and biologicals may reduce ourrevenue and gross margins on services provided to Medicare patients.  Further, adoption of ASP as the standardmeasure for determining reimbursement by state Medicaid programs for the drugswe provide may reduce our revenue and gross margins.

 

12

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**RESULTS OF OPERATIONS**

 

The following table shows the resultsof our operations for the three months ended March 31, 2005 and 2004, expressedin amounts and percentages of revenue (amounts in thousands):

 
| ** **                                    | ** ** | **Three Months EndedMarch 31, 2005** | ** ** | **Three months EndedMarch 31, 2004** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                                    | ** ** | **Amount**                           | ** ** | **% of  Revenue**                    | ** ** | **Amount** | ** ** | **% of  Revenue** | ** ** |
| Revenue:                                      |       |                                 |       |                                 |       |   |   |   |   |
| Specialty  pharmacy services                  |       | $                                    | 74,897     |                                 | 62.0       | % | $ | 64,932 |   | 62.9 | % |
| Infusion and  related healthcare services     |       | 42,848                               |       | 35.5                                 | %          | 34,946 |   | 33.9 | % |
| Other                                         |       | 3,010                                |       | 2.5                                  | %          | 3,271 |   | 3.2 | % |
| Total revenue                                 |       | 120,755                              |       | 100.0                                | %          | 103,149 |   | 100.0 | % |
|                                          |       |                                 |       |                                 |       |   |   |   |   |
| Cost of revenue:                              |       |                                 |       |                                 |       |   |   |   |   |
| Cost of goods  sold                           |       | 75,692                               |       | 62.7                                 | %          | 63,808 |   | 61.9 | % |
| Cost of services  provided                    |       | 11,800                               |       | 9.8                                  | %          | 10,644 |   | 10.3 | % |
| Total cost of  revenue                        |       | 87,492                               |       | 72.5                                 | %          | 74,452 |   | 72.2 | % |
|                                          |       |                                 |       |                                 |       |   |   |   |   |
| Gross profit                                  |       | 33,263                               |       | 27.5                                 | %          | 28,697 |   | 27.8 | % |
|                                          |       |                                 |       |                                 |       |   |   |   |   |
| Selling, general  and administrative expenses |       | 21,541                               |       | 17.8                                 | %          | 19,249 |   | 18.7 | % |
| Provision for  doubtful accounts              |       | 2,326                                |       | 1.9                                  | %          | 1,559 |   | 1.5 | % |
| Depreciation and  amortization                |       | 904                                  |       | 0.8                                  | %          | 681 |   | 0.6 | % |
|                                          |       |                                 |       |                                 |       |   |   |   |   |
| Total operating  expenses                     |       | 24,771                               |       | 20.5                                 | %          | 21,489 |   | 20.8 | % |
|                                          |       |                                 |       |                                 |       |   |   |   |   |
| Operating income                              |       | 8,492                                |       | 7.0                                  | %          | 7,208 |   | 7.0 | % |
| Interest income  (expense), net               |       | (44                                  | )          | —                               | %          | 1 |   | — | % |
| Other expense,  net                           |       | (47                                  | )          | —                               | %          | (67 | ) | (0.1 | )% |
|                                          |       |                                 |       |                                 |       |   |   |   |   |
| Income before  income taxes                   |       | 8,401                                |       | 7.0                                  | %          | 7,142 |   | 6.9 | % |
| Income tax  provision                         |       | 3,116                                |       | 2.6                                  | %          | 2,857 |   | 2.7 | % |
|                                          |       |                                 |       |                                 |       |   |   |   |   |
| Net income                                    |       | $                                    | 5,285      |                                 | 4.4        | % | $ | 4,285 |   | 4.2 | % |

 

**Three Months Ended March 31, 2005 and 2004**

 

In the quarter ended March 31, 2005, our revenue was$120.8 million, representing an increase of $17.6 million, or 17.1%, over thecorresponding quarter in 2004.  Revenuesincreased in both specialty pharmacy services and infusion and relatedhealthcare services due to a combination of internal growth and acquisitions.  In dollars, our gross profit increased by15.9% to $33.3 million in the current year quarter.  Our overall gross profit margin declinedslightly due to shift in mix of business, specifically our increased sales ofXolair® in the current year, and due to increasedproduct costs for IVIG.  Net income perdiluted share was $0.16 for the quarter ended March 31, 2005 compared to $0.13in the prior year quarter.

 

We continued to generate positive cash flow fromoperations, producing $7.2 million in operating cash flow during the quarterended March 31, 2005.  We ended thequarter with cash and short-term investments totaling $97.4 million compared to$95.2 million as of December 31, 2004.  Ourpositive operating cash flow and cash generated from the issuance of common stockfrom stock option exercises and employee stock purchase plan withholdings morethan offset the cash we used for acquisitions and capital expenditures duringthe quarter.

 

We completed two acquisitions during the quarter endedMarch 31, 2005.  In order to expand the presenceof company-owned pharmacies in Minnesota, we acquired the outstanding stock of theOption Care franchise in St. Cloud.  Wealso acquired a small infusion business in a market area that we currentlyserve.  We intend to continue to expandthrough acquisitions, as well as explore growth opportunities through jointventures and new pharmacy start-ups in selected markets.  We will also continue to pursue opportunitiesto expand our business through increased market penetration and by partneringwith biotech manufacturers on the

 

13

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releaseof new specialty drugs.

 

**Revenue:**

We report our operating results in one segment, consisting of threeservice lines: specialty pharmacy services; infusion and related healthcareservices; and other.  For the quarterended March 31, 2005, our revenue was $120.8 million, which represents anincrease of $17.6 million, or 17.1%, over the corresponding prior yearquarter.  This increase is due to salesgrowth for multiple products and therapies, including Xolair®, and from theeffects of acquisitions.

 

**Specialty pharmacy services revenue:**

During the quarter ended March 31,2005, specialty pharmacy services revenue was $74.9 million, an increase of $10.0million, or 15.3%, over the prior year quarter.   The largest growth factor was increasedsales of Xolair®, a drug approved in 2003 for the treatment of moderate tosevere allergic asthma.  We experiencedsignificant revenue growth from Xolair® sales throughout 2004 as the drugbecame established in the market.  Inaddition to sales of Xolair®, our specialty revenue grew throughout our networkof company-owned pharmacies and central, high-volume distribution centers acrossa wide variety of therapies.  For thequarter ended March 31, 2005, our largest revenue-producing specialty drug wasSynagis®, which produced $15.5 million in sales.  Synagis® is a seasonal drug for theprevention of respiratory synctial virus (RSV) in premature and other high-riskinfants.  RSV season runs through thecold months, generally from October through April.  Accordingly, our Synagis® revenue willdecline in our quarter ending June 30, 2005 as the current Synagis® seasonreaches its conclusion.

 

**Infusion and related healthcare services revenue:**

For the quarter ended March 31, 2005, infusion and related healthcareservices revenue was $42.8 million, an increase of $7.9 million, or 22.6%, overthe corresponding prior year quarter. Infusion pharmacy services increased $6.9 million, or 23.3%, while otherrelated healthcare services, such as respiratory therapy services, durablemedical equipment sales and home health nursing services, increased by $1.0million, or 18.7%.  Infusion pharmacyservices revenue increased in most of our company-owned pharmacies and across awide variety of therapies, with the largest gains in antibiotic therapies.  Continuing sales efforts contributed to theincreases, as well as the effect of acquisitions completed in 2004 and thefirst quarter of 2005.

 

**Other revenue:**

Other revenue consists of two primaryelements: (1) revenue generated from our franchise network, consisting ofroyalties, franchise fees and vendor rebates earned through our franchises’purchases under our contracts, and; (2) software licensing and support servicesprovided by our wholly-owned subsidiary, MBI. Other revenue was $3.0 million inthe quarter ended March 31, 2005 compared to $3.3 million in the correspondingprior year quarter.  In the quarter endedMarch 31, 2005, we recorded an $800,000 settlement gain related to thetermination of our franchise agreement with our St. Cloud, Minnesota franchiseupon completing our acquisition of that business. In the prior year quarterended March 31, 2004, $400,000 of our franchise-related revenue was from theamortization of a non-compete agreement we signed with the buyers of a formerfranchise.  Our royalty revenue declinedby $400,000 in the quarter ended March 31, 2005 compared to the correspondingprior year quarter as a result of franchise terminations and acquisitions.  Franchise-related revenue may fluctuatesignificantly in future quarters as we continue our strategy of acquiring selectedfranchises.

 

**Cost of revenue:**

Cost of revenue consists of the costof goods sold and the cost of service provided. For the quarter ended March 31, 2005, our cost of revenue was $87.5million, which represents an increase of $13.0 million, or 17.5%, over thecorresponding quarter of the prior year.  The primary cause of this increase was our17.1% increase in revenue over the same period.

 

Cost of goods sold for the quarter ended March 31, 2005 was $75.7million, or 62.7% of revenue, while in the prior year quarter, cost of goodssold was $63.8 million, or 61.9% of revenue. The primary causes of the 80-basis point increase in cost of goods soldas a percentage of revenue were shifts in mix of business within our infusionand related healthcare services and specialty pharmacy service lines towardhigher-cost products, such as Xolair, and cost increases for IVIG due to supplyshortages.

 

Cost of service consists of salariesand related costs for employees directly involved in patient care, includingpharmacists, nurses, therapists and delivery drivers.  Cost of service also includes the cost ofshipping or delivering products and services to the patient.  Our cost of service for the quarter endedMarch 31, 2005 was $11.8 million, or 9.8% of revenue, compared to $10.6million, or 10.3% of revenue in the prior year. This decline in cost of service as a percentage of revenue was due toour cost-containment efforts and revenue growth.

 

14

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**Gross profit margin.**  The following table sets forth the grossprofit margin for each of our three service lines: specialty pharmacy services;infusion and related healthcare services; and other:

 
| ** **                                | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Gross profit  margin:                     |       |                             |       |   |   |
| Specialty  pharmacy services              |       | 15.4                             | %          | 16.2 | % |
| Infusion and  related healthcare services |       | 43.9                             | %          | 43.0 | % |
| Other                                     |       | 96.8                             | %          | 96.1 | % |
| Overall gross  profit margin              |       | 27.5                             | %          | 27.8 | % |

 

Our gross profit margin for thequarter ended March 31, 2005 was 27.5% compared to 27.8% for the quarter endedMarch 31, 2004. Our specialty pharmacy services gross profit margin declined by80 basis points, from 16.2% for the quarter ended March 31, 2004 to 15.4% forthe quarter ended March 31, 2005.  Ofthis 80 basis point decline, 30 basis points relates to a shift in mixresulting from increased sales of Xolair®, which has a lower gross profitmargin than our composite gross profit margin. The remaining 50 basis point decline primarily related to lower grossmargin for IVIG therapy due to increased product cost.  Overall, our infusion and related healthcareservices gross profit margin remained steady, showing an increase from 43.0% inthe quarter ended March 31, 2004 to 43.9% in the quarter ended March 31, 2005.  Other revenue, which consists offranchise-related revenues and software sales and support, has minimal directcosts and therefore produces a gross profit margin near 100%.

 

**Selling, general and administrative expenses:**

For the quarter ended March 31, 2005, selling, general andadministrative expenses were $21.5 million, an increase of $2.3 million, or 11.9%over the prior year period.   This increase is primarily related to ourrevenue growth during the period.  The largestincreases were in wages and related costs, which increased by $1.9 million and consultingand other professional services, which increased by $500,000.  The increase in wages and related costs wasdue to our increases in staff to manage our continued growth, along with the effectsof business acquisitions completed in 2004 and the first quarter of 2005.  The increase in consulting and professionalservices was largely due to additional audit costs related to testing our compliancewith Section 404 of the Sarbanes-Oxley Act of 2002.

 

**Provision for doubtful accounts:**

Our provision for doubtful accountsfor the quarter ended March 31, 2005 was $2.3 million, or 1.9% of revenue,compared to $1.6 million, or 1.5% of revenue, in the prior year period.  The slight increase in our provision fordoubtful accounts in both dollar amount and percentage of revenue was primarilydue to our higher growth rate in infusion and related healthcare servicesrevenue compared to specialty pharmacy services revenue.  Infusion and related healthcare servicesrevenue grew 22.6% over the period, while specialty pharmacy services revenuegrew by 15.3%.  We provide at a higherrate for infusion and related healthcare services, as these services generallyinvolve higher patient co-payments and co-insurance amounts.

 

**Depreciation and amortization:**

For the quarter ended March 31, 2005,depreciation and amortization expense was $900,000, an increase of $200,000, or32.7%, over the corresponding prior year period.  This increase is primarily related toamortization of deferred financing costs generated from our November 2004offering of $86.3 million of 2.25% convertible senior notes, as well as amortizationof intangible assets we acquired through business acquisitions in 2004 and thefirst quarter of 2005. The depreciation expense contained within this line itemrelates to non-revenue producing assets only, such as furniture and fixturesand leasehold improvements.  Depreciationfor revenue-producing equipment such as rental medical equipment and deliveryvehicles is included in cost of revenue.

 

**Operating income:**

Our operating income was $8.5 millionin the quarter ended March 31, 2005 representing an increase of $1.3 million,or 17.8%, over the prior year period.  Thisincrease in operating income resulted from our increase in revenue in thecurrent year through both internal growth and business acquisitions.  Our operating income equaled 7.0% of revenuefor both the quarter ended March 31, 2005 and the quarter ended March 31, 2004.

 

**Interest Income/(Expense):**

For the quarter ended March 31, 2005,our interest expense, net of interest income, was $44,000.  In the prior year, interest expense was minimal.  In November 2004, we completed an $86.3million offering of 2.25% convertible senior notes due 2024.  Our interest expense on these notes for thequarter ended March 31, 2005 was approximately $485,000.  The funds raised from this offering were investedin commercial paper, variable-rate bonds and preferred stocks and other relatedinstruments.  During the quarter endedMarch 31, 2005, the interest earned on these investments offset the interestexpense on the bonds.  In the prior yearquarter ended March

 

15

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31, 2004, we had a net positive cashbalance and limited borrowing under our credit facility.

 

**Income taxes:**

Our income tax provision for thequarter ended March 31, 2005 was $3.1 million compared to $2.9 million in theprior year period.  As a percentage ofpre-tax income, our provision for income taxes was 37.1% compared to 40.0% forthe prior year quarter ended March 31, 2004. The decline in income taxes as a percentage of pre-tax income is primarilydue to two factors:  re-evaluation of oureffective state income tax rate based on our reduced state tax exposurereserve; and an increase in tax-exempt interest income from our short-terminvestments.

 

**Net income:**

Our net income was $5.3 million forthe quarter ended March 31, 2005 compared to $4.3 million in the prior yearquarter.  Our growth in revenue generatedboth internally and through acquisitions was the primary cause of our increasein net income over the period.  As apercentage of revenue, our net income grew to 4.4% from 4.2% in the prior yearperiod.

 

**Diluted shares & earnings per share:**

We completed a 3-for-2 stock split onMarch 31, 2005.  All share and per shareamounts in this quarterly report reflect the pro forma effects of this split.  For the quarter ended March 31, 2005, totaldiluted shares was 33.3 million compared to 32.3 million during thecorresponding prior year quarter.  Theincrease was due to the following factors: (1) issuance of 533,000 new shares fromstock option exercises; (2) increase in the value of in-the-money stock optionsdue to an increase in the average trading price of our common stock; (3) purchasesunder our employee stock purchase plan; (4) an increase in shares to be issuedrelated to acquisitions; and (5) the dilutive effect of contingentlyconvertible debt.  These increases werepartially offset by our purchase and subsequent retirement of 474,000 shares oftreasury stock in the quarter ended December 31, 2004.  Our earnings per diluted share were $0.16 forthe quarter ended March 31, 2005 versus $0.13 for the prior year quarter endedMarch 31, 2004.  Diluted shares in futureperiods could increase due to the dilutive effects of our $86.3 millionconvertible senior notes.  These notesare contingently convertible into cash and shares of our common stock based ona conversion price of $12.01 per share. In the quarter ended March 31, 2005, the weighted average price pershare of our common stock was $12.26, which is only slightly above this threshold.  As a result, the impact on diluted shares forthe quarter was minimal.  However, forthe month of April 2005, the average closing price of our common stock was$14.10 per share.  If our average closingprice for the entire quarter ending June 30, 2005 is $14.10 per share, ourtotal diluted shares for the quarter will increase by 900,000 compared to thequarter ended March 31, 2005.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

During the quarter ended March 31,2005, we financed our operations and acquisition activities through operatingcash flows and the use of cash proceeds generated from our $86.3 millionoffering of 2.25% convertible senior notes, completed in November 2004.  During the quarter ended March 31, 2005, ourpositive operating cash flows and cash provided by the issuance of common stockfrom stock option exercises and from our employee stock purchase plan more thanoffset our use of cash to fund acquisitions and other capital expenditures.  Our cash and cash equivalents declined by $8.2million during the quarter ended March 31, 2005, but this was due to our net investmentof $10.4 million of cash into financial instruments that qualify as short-terminvestments.  In total, our net cash andshort-term investments increased by $2.2 million during the quarter.

 

**Operating Cash Flows:**

We generated $7.2 million in positive cash flow from operations in thequarter ended March 31, 2005 compared to $5.2 million of positive operating cashflow in the corresponding prior year period. Our positive operating cash flow in the quarter ended March 31, 2005 wasprimarily due to our net income of $5.3 million and consistent collections ofaccounts receivable.  In addition, wereduced our drug inventory during the quarter, though a portion of thisreduction was offset by a reduction in accounts payable.  Both accounts payable and inventory werehigher at December 31, 2004 as a result of a large, year-end inventory purchaseof certain drugs in order to take advantage of favorable pricing.  We paid for, and dispensed, most of thisinventory in the quarter ended March 31, 2005, resulting in declines in bothinventory and accounts payable.  Our consistentcollection of accounts receivable is evidenced by our steady days’ salesoutstanding (DSO), which declined from 55 days to 54 days during the quarter.

 

**InvestingCash Flows:**

Investingactivities used $18.5 million in cash in the quarter ended March 31, 2005compared to $2.1 million used in investing activities in the correspondingprior year period.  We used $7.1 million incash for acquisitions during the quarter ended March 31, 2005.  Our principal acquisition completed in thequarter was our purchase of the Option Care franchise in St. Cloud, Minnesota,for which we used $7.0 million in cash. We also used a net $10.4 million in cash to acquire short-terminvestments.  As of December 31, 2004,this $10.4 million was invested in financial instruments of a type and durationas to be considered cash equivalents rather than short-term investments.   During the quarter ended March 31, 2005, wespent $1.0 million for the purchase of equipment and other depreciable assets,of which

 

16

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$600,000 wasspent on revenue-producing medical equipment, such as infusion pumps and otherdurable medical equipment, $400,000 was spent on infrastructure improvementssuch as computer hardware and office furniture and fixtures, and $100,000 wasspent on software development projects. Of our $2.1 million use of cash for investing activities during thequarter ended March 31, 2004, $1.1 million was used for acquisitions.  The remaining $1.0 million was used toacquire equipment and other depreciable assets, of which $700,000 was spent oninfusion pumps and other revenue-generating medical equipment, $200,000 wasspent on infrastructure items such as furniture, fixtures and computerequipment, and $100,000 was spent on ongoing software development projects.

 

**Financing Cash Flows:**

Financing activities provided $3.1million in positive cash flow in the quarter ended March 31, 2005, compared to $500,000used in financing activities in the prior year quarter ended March 31, 2004.  In the current year quarter, $3.7 million incash was generated from the issuance of common stock, principally from employeestock option exercises.  This cash inflowwas partially offset by our use of $400,000 to pay dividends to ourshareholders.  We also used $200,000 topay deferred financing costs related to our convertible senior notes and tomake scheduled payments on our other debts. In the prior year quarter, issuance of stock generated $800,000, butthis cash inflow was more than offset by the use of $900,000 to acquiretreasury stock and $400,000 to make scheduled payments on capital leases andother fixed-rate debt.

 

**Convertible Senior Notes:**

In November 1, 2004, we completed an$86.3 million offering of 2.25% convertible senior notes, due 2024.  The purpose of the offering was to financeour future growth initiatives.  The fundsmay be used for acquisitions, stock repurchases, operating cash needs and othergeneral corporate purposes.  The initialoffering was completed on November 2, 2004 for $75.0 million, with an optionfor an additional $11.3 million.  Thisoption was exercised in full on November 9, 2004.  We will pay 2.25% interest per annum on theprincipal amount of the notes, payable semi-annually in arrears on May 1 andNovember 1 of each year, with the first payment due May 1, 2005.  The notes are convertible into cash and, ifapplicable, shares of our common stock based on our stock’s market price andother conditions.  The notes cannot beredeemed by us prior to November 1, 2009. On each of November 1, 2009, November 1, 2014 and November 1, 2019, theholders can require us to purchase all or a portion of the outstanding notesfor their principal amount plus accrued interest.  At any time on or after November 1, 2009, wemay redeem the notes, in whole or in part, at a redemptionprice equal to 100% of the principal amount of the notes we redeem, plus anyaccrued and unpaid interest.  We incurreddeferred financing costs of $3.2 million related to this offering, consistingof underwriting, legal and other related costs.   These costs will be amortized over afive-year period.

 

**Accounts Receivable:**

The following table sets forthinformation regarding our accounts receivable as of the dates indicated (dollaramounts in thousands):

 

| ** **                                                   | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
|                                                         |       |                |       |                   |       |
| Accounts  receivable                                         |       | $                   | 80,029     |                   | $          | 76,809 |   |
| Less allowance  for doubtful accounts                        |       | (5,948              | )          | (6,879                 | )          |
|                                                         |       |                |       |                   |       |
| Accounts  receivable, net of allowance for doubtful accounts |       | $                   | 74,081     |                   | $          | 69,930 |   |
|                                                         |       |                |       |                   |       |
| Days sales  outstanding (DSO)(1)                             |       | 54                  |       | 55                     |       |

 

----

(1)   DSO iscalculated using the exhaustion method based on accounts receivable net ofallowance for doubtful accounts, and considers only our specialty pharmacyservice line and infusion and related healthcare services line.

 

Our accounts receivable, net of baddebt reserves, was $74.1 million as of March 31, 2005 compared to $69.9 millionas of December 31, 2004.  Thisincrease in accounts receivable was related to our increase in sequentialquarterly revenue, which grew from $112.7 million in the quarter ended December31, 2004 to $120.8 million in the quarter ended March 31, 2005.

 

17

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The following table sets forth thepercentage breakdown of our trade accounts receivable by aging category and bymajor payor as of the dates indicated:

 

| ** **                     | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------|------------|---------------------|------------|------------------------|------------|
| By Aging  Category (1):        |       |                |       |                   |       |
| Aged 0-90 days                 |       | 74                  | %          | 72                     | %          |
| Aged 91-180 days               |       | 13                  | %          | 13                     | %          |
| Aged 181-365  days             |       | 8                   | %          | 9                      | %          |
| Aged over 365  days            |       | 5                   | %          | 6                      | %          |
| Total                          |       | 100                 | %          | 100                    | %          |
|                           |       |                |       |                   |       |
| By Major Payor:                |       |                |       |                   |       |
| Managed care and  other payors |       | 83                  | %          | 82                     | %          |
| Medicare and  Medicaid         |       | 17                  | %          | 18                     | %          |
| Total                          |       | 100                 | %          | 100                    | %          |

----

(1)   Accountsreceivable by aging category considers only accounts of our specialty pharmacyservice line and infusion and related healthcare service line.

 

Our dayssales outstanding (DSO) declined to 54 days as of March 31, 2005 compared to 55days as of December 31, 2004.  Thisconsistency in our DSO is the result of consistent billing and collectionsperformance.

 

As of March 31, 2005, we had cash andcash equivalents of $11.6 million and short-term investments of $85.8 millioncompared to cash and cash equivalents of $19.8 million and short-terminvestments of $75.4 million at December 31, 2004.  We generated positive cash flow fromoperations of $7.2 million during the quarter ended March 31, 2005, whichallowed us to increase our combined total of cash and cash equivalents andshort-term investments by $2.2 million.  Webelieve that cash flow from operations and our current reserves of cash andshort-term investments will be sufficient to meet our operating cash needs forthe immediate future, including any interest due on our $86.3 million of 2.25%convertible senior notes.  In the eventthat additional capital is required, there can be no assurance that suchcapital can be obtained from other sources on terms acceptable to us, if atall.

 

Our business strategy includes the selective acquisition of additionallocal pharmacy facilities and specialty pharmacy operations.  Accordingly, we may require additionalcapital in order to complete these acquisitions.  It is impossible to predict the amount of capitalthat may be required for acquisitions, and there is no assurance thatsufficient financing for these activities will be available on terms acceptableto us, if at all.

 

**Goodwill and Other Intangible Assets**

 

As of March 31,2005, we had net goodwill and other intangible assets of $75.5 million,consisting of $72.0 million of goodwill and $3.5 million of other intangibleassets such as non-compete agreements and managed carecontracts.  As of December 31, 2004, netgoodwill and other intangible assets equaled $68.9 million, consisting of $65.4million of goodwill and $3.5 million of other intangible assets.  During the quarter ended March 31, 2005,goodwill increased $6.6 million as a result of acquisitions completed duringthe quarter.  Other intangible assetsincreased by $100,000 as a result of these acquisitions, offset by amortizationof $100,000 during the quarter.

 

As required by Statements of Financial AccountingStandards No. 142, *Goodwill and OtherIntangible Assets (SFAS No. 142)*, we do not amortize goodwill, buttest our goodwill for impairment annually each October 1, or whenever weidentify events or conditions that could potentially result in impairment ofour goodwill.  During the quarter endedMarch 31, 2005, no impairment of goodwill was identified.

 

18

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**Regulatory and Other Developments**

 

***HealthInsurance Portability and Accountability Act of 1996 (HIPAA)****.*  To improve theefficiency and effectiveness of the health care system, the Health InsurancePortability and Accountability Act (HIPAA) of 1996, Public Law 104-191,included “Administrative Simplification” provisions that required theDepartment of Health and Human Services (HHS) to adopt national standards forelectronic health care transactions. At the same time, Congress recognized thatadvances in electronic technology could erode the privacy of healthinformation. Consequently, Congress incorporated provisions into HIPAA thatmandated the adoption of Federal privacy protections for individuallyidentifiable health information.

 

In response to the HIPAAmandate, in December 2000, HHS published a final regulation in the form ofthe Privacy Rule, which became effective on April 14, 2001. This PrivacyRule set national standards for the protection of health information, asapplied to the three types of covered entities: health plans, health careclearinghouses, and health care providers who conduct certain health caretransactions electronically. In August 2002, HHS adopted certainmodifications necessary to ensure that the Privacy Rule worked as intended.Pursuant to the Privacy Rule, as of April 14, 2003, covered entities wererequired to have standards in place to protect and guard against the misuse ofindividually identifiable health information.

 

The Privacy Ruleestablished a foundation of Federal protections for the privacy of protectedhealth information. The Privacy Rule does not replace federal, state, or otherlaws that grant individuals even greater privacy protections, and covered entitiesare free to retain or adopt more protective policies or practices. We haveimplemented the standards set forth in the Privacy Rule, and these standardswere in place on April 14, 2003.  Webelieve that we and all of our franchisees are in compliance with the PrivacyRule or any more stringent federal or state laws relating to privacy.

 

Additionally, theAdministrative Simplification provisions address electronic health caretransactions and the security of electronic health information systems.  Providers are required to comply with thestandards by specific compliance dates established by HHS.  For standards relating to electronic healthcare transactions, the compliance date was originally set for October 16,2002.  If the covered entity filed for anextension, the compliance date was postponed until October 16, 2003.  The security standards applicable toindividually identifiable health information maintained electronically wererequired to be implemented by April 21, 2005. We were materially compliant with these standards by the applicablecompliance dates.  The standards for aunique national health identifier for providers used in connection withelectronic healthcare transactions must be implemented by May 23, 2007.  We expect to be able to materially complywith this regulation by its applicable compliance date.

 

Penalties fornon-compliance with the Privacy Rule and other HIPAA AdministrativeSimplification provisions range from a civil penalty of $100 for each violation(which can total up to $25,000 per person per year), to criminal penalties,including up to $50,000 and/or one year imprisonment, up to $100,000 and/orfive years imprisonment if the offense is committed under false pretenses andup to $250,000 and/or ten years imprisonment for violating a standard with theintent to sell, transfer or use individually identifiable health informationfor commercial advantage, personal gain or malicious harm.

 

In addition to regulatingprivacy of individual health information and other provisions relating toAdministrative Simplification, HIPAA includes several anti-fraud and abuselaws, extends criminal penalties to private health care benefit programs and,in addition to Medicare and Medicaid, to other federal health care programs,and expands the Office of Inspector General’s authority to exclude persons andentities from participating in the Medicare and Medicaid programs.

** **

**ITEM 3.**** Quantitative and Qualitative Disclosures AboutMarket Risk**

 

We are subject to market risk primarily in relation to our cash andcash equivalents and short-term investments. As of March 31, 2005, we had no variable-rate debt.  In November 2004, we completed an $86.3million offering of 2.25% convertible senior notes due 2024.  The interest rate on this debt is fixed.  However, the interest rate we may earn on thecash generated from this offering, as well as cash generated from ouroperations, is subject to market fluctuations. We utilize a mix of investment maturities based on our anticipated cashneeds and evaluation of existing interest rates and market conditions.

 

19

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The following table sets forth our cash and cash equivalents andshort-term investments as of March 31, 2005 and December 31, 2004 (inthousands):

 

| ** **                     | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------|------------|---------------------|------------|------------------------|------------|
|                           |       |                |       |                   |       |
| Cash and cash  equivalents (1) |       | $                   | 11,604     |                   | $          | 19,816 |   |
| Short-term  investments (2)    |       | 85,814              |       | 75,370                 |       |
| Total                          |       | $                   | 97,418     |                   | 95,186     |   |
|                                |            |                     |            |                        |            |  |  |

 

----

(1)   Cashequivalents includes highly-liquid investments having a maturity of threemonths or less at time of purchase

(2)   Short-terminvestments consist of commercial paper with maturities of three months or moreat time of acquisition, as well as variable-rate municipal demand notes,preferred stocks and similar instruments that are either perpetual in nature orhave final maturities greater than three months.

 

While we attempt to minimize market risk and maximize return, changesin market conditions may significantly affect the income we earn on our cashand cash equivalents and short-term investments.  Based on our actual cash and cash equivalentsand short-term investment balances at March 31, 2005, a 100 basis point declinein interest rates would reduce our interest income by $974,000 on an annualizedbasis.

 

**ITEM 4.****  Controls and Procedures**

 

We carried out anevaluation, under the supervision and with the participation of our management,including our chief executive officer and chief financial officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures, (as defined in Rules 13a-15(e) under the Securities ExchangeAct of 1934 (the Exchange Act)) as of March 31, 2005. Based upon thatevaluation, the chief executive officer and chief financial officer concludedthat our disclosure controls and procedures are effective as of March 31, 2005.Disclosure controls and procedures are controls and procedures that aredesigned to ensure that information required to be disclosed in our reportsfiled or submitted under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

In addition, no change inour internal control over financial reporting (as defined inRule 13a-15(f) under the Exchange Act) occurred during our fiscal quarterended March 31, 2005 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II.****  OTHER INFORMATION**

 

**ITEM 1.****  Legal Proceedings**

** **

We are subject to claimsand legal actions that may arise in the ordinary course of business. However,we maintain insurance to protect against such claims or legal actions. We arenot aware of any litigation, either pending or filed, that we believe is likelyto have a material adverse effect on our results of operation or financialcondition.

 

We maintain insurance forgeneral and professional liability claims in the amount of $1 million perclaim and $3 million in aggregate, plus $5 million in umbrellacoverage. Accordingly, the maximum coverage for a first claim is$6 million and the maximum aggregate coverage for all claims in a policyyear is $8 million. We also require each franchisee to maintain generaland professional liability insurance covering both the franchise and us, atcoverage levels that we believe to be sufficient. These insurance policiesprovide coverage on a claims-made or occurrence basis and have certainexclusions from coverage. There can be no assurance that insurance coveragewill be adequate to cover claims that may be asserted against us, or thatadequate insurance will be available in the future at acceptable cost, if atall. To the extent that liability insurance is not adequate to cover liabilityclaims against us, we will be responsible for the excess.

 

20

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**ITEM 2****.****  Unregistered Sales of Equity Securities**

 

On February 3, 2005, we acquired all of the outstanding stock of theOption Care franchise in St. Cloud, Minnesota. The initial purchase price was$7.6 million, net of franchise termination fees, paid in a combination of cashof $6.7 million and, at our option, 74,547 shares of our common stock issued tothe former owners. The 74,547 shares will be issued at an effective sale priceof $11.49 per share, which was the closing price of our common stock onFebruary 1, 2005. The common stock will be issued pursuant to the exemptionfrom registration provided by Rule 506 of Regulation D and/or Section 4(2) ofthe Securities Act of 1933.

 

**ITEM 3****.**** Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**ITEM 5****.**** Other Information**

 

None.

 

**ITEM 6****.**** Exhibits**

 

See Exhibit Index.

 

21

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**SIGNATURE**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Company has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                    |     | OPTION  CARE, INC. |
|-------------------------|----------|-------------------------|
| Date: May 10, 2005 |     | By:                     | /s/ Paul Mastrapa |   |
| * *                | * * | * *                | *Chief Financial Officer* |
| * *                | * * | * *                | *(Principal Accounting Officer  and* *Principal  Financial Officer)* |

 

22

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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 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.                                                                                                                        |
|               |       |                                                                                                                                                                                                                                                                                                                                                    |
| 4.1                |       | Indenture Agreement by and  among Option Care, Inc. and LaSalle Bank National Association, including the  Form of our 2.25% Convertible Senior Notes due 2024. Filed as Exhibit 4.1 to  our Current Report on Form 8-K filed on November 11, 2004 and incorporated by  reference herein.                                                                |
|               |       |                                                                                                                                                                                                                                                                                                                                                    |
| 4.2                |       | Registration Rights Agreement  dated as of November 2, 2004 by and among Option Care, UBS Securities LLC and  Piper Jaffray & Co. Filed as Exhibit 4.2 to our Current Report on Form  8-K filed on November 11, 2004 and incorporated by reference herein.                                                                                          |
|               |       |                                                                                                                                                                                                                                                                                                                                                    |
| 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.                                                                                  |
|               |       |                                                                                                                                                                                                                                                                                                                                                    |
| 10.8               |       | 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.                                                                                                                                                       |
|               |       |                                                                                                                                                                                                                                                                                                                                                    |
| 10.10              |       | 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.                                                                                                               |
|               |       |                                                                                                                                                                                                                                                                                                                                                    |
| 10.22              |       | 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.                                    |
|               |       |                                                                                                                                                                                                                                                                                                                                                    |
| 10.24              |       | 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. *                                                                                                                                                            |
|               |       |                                                                                                                                                                                                                                                                                                                                                    |
| 10.26              |       | Participation Agreement between  Health Options, Inc. and Option Care, Inc. effective as of June 1,  1997. 2001. Filed as Exhibit 10.26 to Amendment No. 1 to Option  Care’s Annual Report on Form 10-K/A filed September 10, 2001 and  incorporated by reference herein.                                            |
|               |       |                                                                                                                                                                                                                                                                                                                                                    |
| 10.27              |       | Prescription Drug Agreement  among Blue Cross and Blue Shield of Florida, Inc., Health  Options, Inc. and Option Care, Inc. dated March 8, 2000. Filed  as Exhibit 10.27 to Amendment No. 1 to Option Care’s Annual Report  on Form 10-K/A filed September 10, 2001 and incorporated by reference  herein. |

 

23

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| **Exhibit Number** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.28              |       | Amendment to Participation  Agreement between Health Options, Inc. and Option Care, Inc. dated April 1,  2001. Filed as Exhibit 10.28 to Amendment No. 1 to Option Care’s Annual  Report on Form 10-K/A filed September 10, 2001 and incorporated by reference  herein. **                                                                                                                                                                                                                                                                             |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.29              |       | Deferred Compensation Plan for  certain Executives, effective as of January 1, 2001. Filed as Exhibit 10.29  to Amendment No. 1 to Option Care’s Annual Report on Form 10-K/A filed  September 10, 2001 and incorporated by reference herein. **                                                                                                                                                                                                                                                                                                       |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.32              |       | Injectable Drugs Agreement  effective as of September 5, 2001 between Health Option, Inc. and OptionMed,  Inc. Filed on October 10, 2001 as Exhibit 10.1 to Form 8-K/A and incorporated  herein by reference.                                                                                                                                                                                                                                                                                                                                               |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 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.                  |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.34              |       | Employment Agreement between  Richard M. Smith and Option Care, Inc., dated May 7, 2003. Filed as Exhibit  10.34 to our Quarterly Report on Form 10-Q for the quarter ended June 30,  2003 and incorporated by reference herein. *                                                                                                                                                                                                                                                                                                                          |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.35              |       | Employment Offer Letter between  Option Care, Inc. and Paul Mastrapa, dated January  18, 2002. Filed as Exhibit 10.35 to our Quarterly Report on Form 10-Q for the  quarter ended June 30, 2003 and incorporated by reference herein. *                                                                                                                                                                                                                                                                                                                     |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.36              |       | Employment Offer Letter between  Option Care, Inc. and Joseph P. Bonaccorsi, dated  December 31, 2001. Filed as Exhibit 10.36 to our Quarterly Report on Form  10-Q for the quarter ended June 30, 2003 and incorporated by reference  herein. *                                                                                                                                                                                                                                                                                                            |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.37              |       | Fourth Amendment to Credit and  Security Agreement, dated October 23, 2003, by and among Option Care, Inc.  and the domestic subsidiaries 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 10.37 to our Quarterly Report on Form 10-Q for the quarter ended  September 30, 2003 and incorporated by reference herein. |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.38              |       | Fifth Amendment to Credit and  Security Agreement, dated June 15, 2004, by and among Option Care, Inc. and  the domestic subsidiaries 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 10.38 to our  Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 and  incorporated by reference herein.          |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.39              |       | Chief Executive Officer  Employment Agreement between Option Care, Inc. and Rajat Rai, effective May  11, 2004. Filed as Exhibit 10.39 to our Quarterly Report on Form 10-Q for the  quarter ended September 30, 2004 and incorporated by reference herein.*                                                                                                                                                                                                                                                                                                |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.40              |       | Executive Severance Agreement  between Option Care, Inc. and Paul Mastrapa. Filed as Exhibit 10.40 to our  Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and  incorporated by reference herein.*                                                                                                                                                                                                                                                                                                                                   |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.41              |       | Executive Severance Agreement  between Option Care, Inc. and Joseph P. Bonaccorsi. Filed as Exhibit 10.41 to  our Quarterly Report on Form 10-Q for the quarter ended September 30, 2004  and incorporated by reference herein.*                                                                                                                                                                                                                                                                                                                            |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.42              |       | Option Care, Inc. Amended and  Restated Stock Incentive Plan (1997). Filed as Appendix A to Option Care’s  definitive proxy statement for the 2004 Annual Shareholders Meeting and  incorporated by reference herein.*                                                                                                                                                                                                                                                                                                                                 |

 

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| **Exhibit Number** | ** ** | ** **                                                                                                                                                                    |
|--------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                                          |
| 31.1               |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                         |
|               |       |                                                                                                                                                                          |
| 31.2               |       | Certification  of Senior Vice President and Chief Financial Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                               |
|               |       |                                                                                                                                                                          |
| 32                 |       | Certification  of Chief Executive Officer and Senior Vice President and Chief Financial  Officer pursuant to 18 U.S.C. Section 1350, and Rule 13a-14(b) of the  Exchange Act. |

 

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*   Management contracts andcompensatory plans and arrangements.

** Portions of thisExhibit are subject to a Confidential Treatment Request pursuant to Rule 24b-2under the Securities and Exchange Act of 1934, as amended, filed with the SECon September 10, 2001 and amended October 10, 2001.

 

25

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