沃博聯公司 (WBA) 2003 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the second quarter earnings release conference call. (CALLER INSTRUCTIONS).

At this time, I would like to turn today's conference over to Ms. Lisa Wilson.

Thank you, and good morning.

I'm Lisa Wilson of In-Site Communications, Option Care's investor relations firm.

Thank you for joining today's conference call.

By now you should have a copy of the press release issued by the Company this morning.

If you have not received it, please call Leticia Carrillo (ph) at 847-229-7731, and it will be faxed to you promptly.

We have with us today Rajat Rai, Chief Executive Officer;

Rick Smith;

President and Chief Operating Officer; and Paul Mastrapa, Chief Financial Officer of Option Care.

The Company will provide an overview of its second quarter 2003 operations and results, which will be followed by a question and answer session.

We expect the call to last approximately 45 minutes.

In keeping with SEC Reg FD guidelines, this call may also be accessed by Web cast through the Company's Website at OptionCare.com.

Any remarks that Option Care may make about future expectations, plans and prospects, for Option Care, constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements.

As a result, these various important factors, including those discussed in Option Care's annual report on Form 10-K for the year ended December 31st, 2002, which is on file with the SEC.

Option Care anticipates that subsequent events and developments may cause its estimates to change, or it may elect to update these forward-looking statements at some point in the future.

Option Care specifically disclaims any obligation to do so.

Now, I would like to turn the call over to Rajat Rai, who will discuss the operational highlights of the quarter.

Rajat?

Thank you, Lisa.

Good morning, everyone, and thank you for joining our second quarter earnings conference call.

As noted in the press release that we issued this morning, while we reported a double-digit revenue growth, we were confronted with several factors, namely in our Texas markets, that impacted our progress, in addition to planned transition costs in the areas of technology, reimbursement and growth initiatives.

I will review the highlights of the quarter, and Rick Smith, our President and Chief Operating Officer, will discuss the status of our Texas operations and key objectives for the remainder of the year.

Our revenue and earnings were in line with our expectations.

Our sales during the quarter increased 12 % from the prior period, included (ph) same-store growth of 10 %.

As expected, overall revenues declined $7.8 million or 8 % from the first quarter 2003 due to the seasonal decline in the revenues from Synagis (ph).

We remain focused on cash flow, and continue to make progress.

We were cash flow positive from operations by $8.1 million in the second quarter.

During the quarter, we learned that MedImmune decided to limit the number of providers for Synagis during the 2003/2004 season.

Importantly, they included Option Care as a home healthcare provider for Synagis, giving us the opportunity to sell Synagis nationally.

We look forward to working with MedImmune when the season for Synagis begins in October of this year.

Additionally, we entered into a preferred distribution agreement with Genentech for Xolair, which was approved in late June to treat moderate to severe persistent asthma.

We began shipping Xolair towards the end of July, and are working closely with Genentech for the launch process.

We are excited about these opportunities and will continue to build relationships with manufacturers -- partners for the distribution of additional products.

We look forward to updating you in due course of time.

For the remainder of the year, we will focus on sales growth in both home infusion and Specialty Pharmacy services.

In particular, we will be working to secure new management contracts in our Specialty Pharmacy business.

While I'm optimistic about these opportunities, this segment of our business has experienced slower-than-expected growth in 2003, largely due to contract maturations as well as slower sales from new contracts.

Furthermore, we have seen more choice programs come into the market as compared to mandatory programs.

We have a robust pipeline of managed care targets, and are allocating additional sales resources to further our efforts with new management contracts.

We're also concentrating on evaluating opportunities to secure additional business with existing customers.

We're also continuing the rollout of our new technology platform emphasis.

Implementation of the platform is progressing on-schedule, and within our planned budget.

And, we expect four to five conversions by the end of this year.

In addition, we are in the process of actively evaluating acquisition opportunities in both our franchisees, as well as independents.

I'm optimistic that we will be able to close one or more opportunistic acquisitions before year-end, 2003, subject to a strict criteria with which we conduct our due diligence.

I would like to emphasize, however, that we plan to resolve the Texas situation before becoming aggressive on the acquisition front again.

Finally, we are in the process of strengthening our management team, and have taken a number of steps in that front.

As you know, we hired Rick Smith as the President and Chief Operating Officer.

We also recruited Paul Kaiser (ph) to build and execute our manufacturer relationships for Specialty Pharmacy Services.

He has significant experience working with big pharma like Soland (ph) Pharmacia for new product launches.

In addition, we hired Larry Niracore (ph) to head up our operations for Specialty Pharmacy Services.

Larry headed up operations for CVS ProCare in the past.

Both Paul and Larry will report in to Bruce Kutinsky.

Also, (indiscernible) Paterro, who was our Executive Vice President of Home Infusion Services has resigned to pursue other business ventures.

Now, I would like to turn the call over to Rick Smith to discuss the new organizational structure, and give you some insights into developments of Texas and other initiatives that are underway in our company.

Rick?

Thanks, Rajat.

Good morning, everyone.

I’d like to discuss the situation that has occurred in our Texas market plus our areas of focus for the rest of the year to ensure a high level of momentum going into 2004.

Our Texas situation is the result of many acquired locations being consolidated into a separate location in each market.

During these consolidations, the markets were impacted by a high-level of turnover, several system conversions, multiple lines of businesses that were involved, multiple provider numbers and retaining and retraining staff in each marketplace.

The difficulties incurred by these multisided integrations has resulted in a DSO for Texas of about 160 days, which is well above acceptable levels at our other operating locations, and our company-wide DSO of 75 days.

After assessing the situation in mid-June, I immediately added two new members to our management team who have significant experience in acquisition integration, including systems, operations and reimbursement.

We next assembled a task force and put an immediate plan in place to improve operations and systems, identify and retain the appropriate staff members, and increase the focus on collecting yield receivables.

The systems integration conversion is now complete, and all of our Texas employees have been retrained on the new systems.

We went back to basics in some areas of the market to identify root causes of the issues that were impacting our performance.

For instance, we rolled out daily management tools to the staff, enabling us to monitor progress.

We separated differed Accounts Receivable amounts into different classes, enabling us to put multiple Accounts Receivable resolution strategies in place.

We also brought in some outside collection agencies to assist in working substantial levels of the older receivables, which will enable our employees to focus on current activities and larger payer projects.

The two new managers that have been added to strengthen our operations and corporate reimbursement areas are Dave Evans (ph) and Rodney Rice (ph).

We hired Dave as Vice President of Strategic Operations.

Dave has 18 years of industry experience in financial operations, mergers and acquisition analysis, due diligence and integration, all of which he is leveraging as head of our Texas task force.

We hired Rodney Rice as Vice President of Reimbursement.

Rodney has 15 years of experience in successfully managing the cash collection cycle in our industry.

He is focused on the Texas operation, as well as implementing the necessary policies, procedures and leadership skills to affect operations company-wide.

Having worked with both of these gentlemen prior to joining Option Care, I am confident that the Texas situation will continue to improve as we work through all of the accounts during the third quarter.

While we're seeing higher levels of collections on the current Accounts Receivables in the Texas market, the level of collections on the older accounts has been disappointing to the Company.

In particular, the receivables over 150 days totaled $7 million at the end of the second quarter.

As a result of all the resources that we have now committed to the Texas market, we should have improved visibility on these aged receivables by the end of the third quarter.

If necessary, we will increase our bad debt reserves (technical difficulty) covered for any potential future write-offs.

I want to emphasize that this issue affects only our Texas location.

In the remainder of the organization, our overall Accounts Receivable and cash collections are well on-track, as evidenced by our strong operating cash flow and the continued reduction in company-wide days sales outstanding, or DSO, which is currently 67 days, excluding the Texas location.

Texas will involve some basic blocking and tackling, and some rebuilding.

But, there's nothing overly difficult in dealing with the issues in Texas.

Furthermore, Texas is not our sole focus, as we look ahead for the continued success of this company.

We are very focused on building continuing revenue and operating income momentum in all of our business lines.

We gathered all of our Option Care area vice presidents and general managers together in mid-July to set the stage for the rest of the year in building great momentum to head into 2004.

In the second half of 2003, we will be introducing new clinical programs that we believe will contribute in growing same-store revenue.

There will be greater focus on growth in core infusion therapy, specialty therapy and other managed care pull-through opportunities, which will include disease carve-out (ph) opportunities.

Essentially, the focus will be leverage in our clinical programs across all lines of business to enhance revenue opportunities.

I am very excited about Option Care's platform.

We have the ability to offer many models of pharmacy distribution, either from a central point or locally, in each of the 140 markets we reach through our network.

In addition, all of our models leverage our 20 plus years of clinical management expertise, which is second to none in the industry.

I look forward to the future growth of our company.

With that, I will turn it over to Paul Mastrapa.

Thanks, Rick, and good morning.

For the quarter, our revenue was $85 million, a 12 % increase from the $76 million reported in the second quarter of 2002.

Organic growth was 10 % for the quarter.

Net income was $3.8 million for the second quarter, unchanged from the second quarter of last year.

Diluted earnings per share was 18 cents, in line with the 18 cents for the second quarter of 2002.

For the six months ended June 30, revenue increased 20 % to $177 million from $148 million for the prior year period.

Net income for the first six months was $7.8 million, or 37 cents per share, an increase of 8 % from the 34 cent per share in 2002.

The impact of our Texas collection efforts and resulting write-offs on a year-to-date basis is approximately 5 cents per share.

As mentioned, we will complete our analysis of the collectibility (ph) of the Texas A.R. in the third quarter, and if necessary increase our reserves, to get the financial effects of this issue behind us.

Revenue growth across all of our service lines remains solid.

Our infusion pharmacy and related services increased 12 % from the prior year.

And our Specialty Pharmacy Services increased 13 % from Q2 of last year.

Our gross profit continues to remain stable within our service lines.

Infusion and related services gross profit was 43.4 % for the second quarter as compared to 42.2 % for the prior year's second quarter.

And 42.0 % for the prior quarter ended March 31st of this year.

Specialty Pharmacy gross profit was 21.9 % for the second quarter this year as compared to 19.1 for the prior year period.

Overall gross profit for the second quarter increased to 32.6% as compared to 31.2% for the prior year quarter, with a consistent mix between our service lines.

The increase in gross profit resulted from more effective purchasing as we renegotiated our agreement with our prime wholesaler.

This reflects our ability to continue to derive lower cost of goods as we scale our business.

Operating expenses as a percentage revenue increased to 25 % for the second quarter of 2003, as compared to 23 % for the prior year.

The increase in operating expenses as a percentage of revenue was a result of higher than expected bad debts, which increased to 2.7 % of revenue from 1.9 % in the prior year, resulting from the write-offs from the enhanced collection efforts in Texas.

The remaining 1.2 % increase in SG&A as a percentage of revenue is a result of the anticipated incremental costs related to our ad (ph) system and other operating costs, in particular, liability and insurance-related expenses.

Now to summarize cash flow.

Option Care had another quarter of outstanding cash flow.

The Company generated $8.1 million of positive operating cash flow, well exceeding our net income for the quarter.

Year-to-date, through June 30, our cash collections on operations has been 104 % of the revenue we have reported over the same period.

Cash used in investing activities for the quarter was $9.9 million, broken down as follows -- $8.8 million for prior period acquisition obligations; and $1.1 million for equipment purchases, infrastructure improvement and revenue-producing medical equipment.

The remaining contingent acquisition liability amounts to approximately $4 million for two of last year's acquisitions, and will be paid during the third quarter of this year.

Days sales outstanding were 75 days at the end of the second quarter, a decrease of two days from the prior quarter ended March 31st.

As we discussed, the DSO for Texas is 160 days.

Without the Texas receivables, our company-wide DSO is 67 days, an improvement of two days from the end of the third quarter -- I'm sorry, the end of the first quarter.

We are confident that our focused collection efforts on Texas receivables will result in a continued reduction in our overall DSOs.

We ended the second quarter with approximately zero cash.

Our credit facility is structured to sweep excess cash balances on a daily basis to minimize our interest expense while we have borrowings on our credit facility.

We ended the second quarter having drawn $6.6 million on our $60 million credit facility, unchanged from the prior quarter ended March 31st.

Our additional availability as of June 30 was approximately $28 million.

Rajai?

Thank you, Paul.

Before we open the lines for questions, I wanted to have some closing comments.

In the first half of 2003, we made good progress on multiple, strategic, and operational priorities.

We were confronted with fixing our operations in Texas and getting new systems ready to roll out.

Unfortunately, these distractions did not allow us to focus on growth.

But, I am very confident in the current status of business, the new management team that we have hired, and our prospects for continued growth in the second half of the year and beyond.

I look forward to updating you on our progress in the next quarter's conference call.

I will have the operator now open the lines for questions.

Operator?

(CALLER INSTRUCTIONS).

Grant Jackson with First Analysis.

Good morning, gentlemen.

On the specialty growth, you noted slower revenue growth on the managed care side of the business -- what can be done about it?

Are the oncology GPOs (ph) affecting us?

Are the distributors like Caremark, McKesson or someone like Priority (ph) getting contracts which you are not?

That's the first question.

And the second is on Synagis, is there anything that an Accredo or a Caremark would have in a relationship with MedImmune that you would not have, them being a national distributor, you being a national home health care distributor -- if you could just define the differences there.

Grant, to answer your first question, I'm not certain that the GPOs have an impact on what we're doing -- or trying to accomplish with managed care organizations.

Because the G.P. (ph) has a relationship with the distributors who have a relationship with the physician.

But, I guess, to the extent that if it's a non-mandatory contract, if a physician has better purchasing opportunities through a GPO than they might have in the past without the GPOs, to the extent that there's greater penetration, of GPOs, then, would that not impact you in any way?

Grant, I think the issue is two-pronged.

One is philosophically, does managed care would like to continue to have the physician (indiscernible) buy and bill for the drug.

And two, the issue of pricing and reimbursement.

We believe that we can offer a better solution in cost savings to the managed care organization with our model.

Yeah, but if it's non-mandatory, then you obviously also have to win over the physician.

If you can just talk about how that's going?

Well, you know, we are also looking at some alternatives, some solutions to managed care in the event there are choice programs that we act as a specialty benefit manager, in terms of managing the overall cost for the injectables for managed care organizations.

That would include a choice program, where we act as an agent to the managed care working with the physicians.

So, we're looking at those possibilities and alternatives.

So, the bottom line is that you believe that it would not negatively impact the physician in your choice programs?

That's correct.

But, you know, the other issue also is (indiscernible) legislation and spending -- legislations -- as you may be aware of.

You know, everybody's looking to cut costs, including the government.

And, we feel that some parts of the legislation that is proposed favors our model pretty heavily.

And, depending on the outcome of it, it would just sort of solidify the concept that we have created.

As far as the question on Synagis, you know, MedImmune has limited the distribution network.

The way we've (indiscernible) heard from other distributors is we want a model which is unique in terms in providing Synagis to the patient's home and/or bringing the patients to our infusion suite.

So, we have more favor towards that kind of model than a pure distribution model.

And, any sense, you know, -- are there any benefits, whether it be price or distribution, that an Accredo or Caremark would have, just based on their national agreement with MedImmune?

I'm not familiar if any price discrepancies or different pricing tiers (ph) for different providers.

I'm not familiar with that.

Thanks.

I will wait for some other questions later.

David MacDonald with Leerink Swan.

Good morning, guys.

Rajat, you talked a little bit about a couple more conversions on the IT system will be done by the end of this year.

Can you guys give us some sense of when the IT spend will actually start to ramp down?

Is that an early '04 event?

And just, is it running about a penny a quarter in terms of how much that's impacting your EPS?

And then I've got a couple of follow-ups.

Yeah, we're on track for (indiscernible), David.

We're looking at about four to five conversions by the end of the year.

As far as the question on the IT spending, you know, we had projected and we're on-track for that spending -- about 6 to 7 cents a year.

So it's averaging more than a penny a quarter.

Okay.

And, the wind down costs would not be seen in 2004 because we will busy throughout 2004 in the instrumentation.

So I would expect some time towards the second half of 2005, we will see the wind down.

Okay, in terms of the --

Let me just add that there will be some residual costs to maintain and support the system on an ongoing basis.

Okay.

Also just a quick follow-up on Texas.

I was wondering if you could try to give a little bit of sense of what has been the impact of Texas?

So, if we can assume that by the end of Q3, Texas is cleaned up, and bad debt starts to move back towards historical levels, what type of additional kicker, in say Q4, or more importantly, in 2004, can we expect as some of the issues in Texas get resolved?

David, the Texas situation is a very unique situation for the company.

You know, we've done (indiscernible) transactions in the last three years or so.

So, this was one which was very different, because of the size, scope and the type of businesses and locations that we had acquired, and sort of blending them into the Option Care system and consolidating all different systems, employees and the pharmacy locations.

So, it was a very unique situation.

I think that, by the end of the third quarter, and I am pretty comfortable that we will -- we will get back that issue and resolve that issue, and get back to our original business if you may.

And, I don't really see any distractions, going forward.

As far as the bad debt is concerned, I think our normal range has been within 2 to 2.3 %.

So we expect to get down to that in the fourth quarter.

Okay.

And have the DSOs -- have the receivables that are under 150 days actually been coming down since you've gotten some of these issues resolved, and it's basically just the 150 and over, that, you know, we need to be focused on?

This is Paul.

Yes, that's the case.

Since the first six months of this year, our overall Texas receivables have dropped, but our aged receivables have gone up.

So the current receivables as we've implemented our training, our processes - the improvements that Rick has mentioned -- has had an improvement in our short-term cash collections.

We are really now focused on this older bulge of A.R. that we've just got to work our way through and figure out what the collectibility on it is.

Okay.

Just the last question.

Rajat, can you talk a little bit about acquisitions as you guys get those ramped back up?

Where will the focus be?

Will it be on the traditional, home infusion?

Either franchise pharmacies or independents?

Or, will you guys also be looking at maybe some small specialty businesses?

You know, we are going back to the acquisitions.

And obviously, we want to get this Texas issue resolved.

That is not going to necessarily be a deterrent in us acquisitions making acquisitions; so we want to get that behind us once, forever, so that we can focus on our growth heavily.

There are a lot of opportunities.

I am personally involved in the acquisition efforts of the company now.

And, I see a lot of opportunities all over the country, independents -- there are small specialty pharmacy companies also on the horizon.

So, we just have to make sure that we find the best.

And we're really hoping that by the fourth quarter, we will be able to close at least one.

Okay.

Thanks, Raj.

Kevin Casey with Casey Capital.

The receivables in Texas -- is that that (technical difficulty) million?

Or, is that the total that's over 150 days?

The $7 million is the A.R. that is greater than 150 in Texas, Kevin.

What about for the whole company?

You know, that really is not necessarily our problem, Kevin.

Okay.

And then, normally, you guys don't acquire receivables.

Did you guys acquire them in this case?

No, we did not acquire the receivables in this case.

So then there's going to be -- I guess the earn-out is going to be lower, or... is that basically what's going to happen in this acquisition?

No, this acquisition did not have (indiscernible).

Okay.

But, did you acquire the receivables or no?

No, we did not acquire the receivables.

So they are your receivables, not yours?

These are the receivables that we generated ourselves.

Oh, that you generated after you acquired them?

That is correct.

Oh, okay.

All right.

I got it.

So it's just -- okay -- it's basically blocking and tackling, down there, then?

And, you know.

And the issue here, Kevin, if I were to go back and restate what we had said before, it was an issue of lack of integration of multiple acquisitions that we had done, going back (indiscernible) to year-end 2001.

And as we worked through combining systems, locations, working through employee turnover issues, we discovered this year that (indiscernible) improvements and greater than 150 day A.R.

And as I said before, it's a unique situation for us.

But the current book of business is good and profitable.

We just need to get past these issues, and we're confident that we will put these issues behind us by the end of this quarter.

We are pretty comfortable with the steps that we have taken through Rick's efforts and things that he has done in the last 45 days to put this issue to rest.

John Ransom with Raymond James.

Sorry to beat this Texas horse, but we're going to have at it little more.

Was this the Alina (ph) deal?

No, it wasn't.

It was not the Alina deal?

The Alina deal was in Minneapolis, and that is going pretty well.

Was that the $8.8 million earn-out?

Or what did the $8.8 million -- which deal did that refer to?

That was the pharmacy that we bought that focused on hemophilia last year.

(multiple speakers) hemophilia (multiple speakers) --

That's also doing pretty well, actually.

It's (indiscernible) by the amount of earn-out that we have to pay.

Okay.

So, going back to Texas, then, of the $7 million in receivables that are over 150, how many of those -- how much of that has already been reserved on the bad debt side?

We have our bad debt reserve, John, for the overall Texas receivables.

Our overall bad debt reserve in Texas, right now, is about $1.5 million.

That's the 5 cents you referred to?

No, no.

The 5 cents that I referred to is as we've seen in increase in write-off activity as well as contractual adjustments from our Texas efforts and first half of the year, we wanted to maintain our reserve levels.

So, we flushed quite a bit of those through earnings to make sure that we maintained what we hope is an appropriate level of reserves in Texas.

As we are seeing that level of write-off activity, we are getting very uncomfortable with, you know, the collectibility of that older A.R.

So, $7 million -- the 1.5 is all of your Texas -- that's not just the seven -- it's just to cover your entire Texas receivables?

That's right.

So, in other words, you could flush $7 million through earnings, potentially, in the third quarter.

If you don't collect any more of the Texas over 150, there's a $7 million potential earnings set (ph) coming?

We have to go through the analysis, John, on each and every receivable that's outstanding greater than 150 before we make that determination.

What is the Company's policy relative to taking bad debt reserves?

Is there a day's threshold?

Or, how does that work?

What we do is, we've completed hindsight analyses on an annual basis, where we look at the actual collection and write-off history per each bucket on our aging.

That gives us, then, you know, a retrospective analysis on what our actual reserve levels should be based on historical analysis.

So, we then apply those on a monthly basis -- that formula, on an office by office basis.

I then also look at any changes in trends on a specific office -- are cash collections declining?

Are the DSO's increasing?

What are the specific issues in there?

Are there any other payer issues?

There's a quantitative as well as qualitative measures that we look at to, you know, evaluate the adequacy of our reserves.

Overall, in fact, when I look at our non-Texas reserves through this year, in our overall trends in our non-Texas receivables, our reserves have actually continued to increase, as a percentage of our aged receivables in non-Texas, and our cash collections, as I've mentioned, have continued to stay really strong.

So, there's a lot of factors, you know, you have to look at on an office-specific basis and on an aggregate level on how well -- on what your adequacy of your reserves are.

But, overall, you're dealing with a longer DSO in this industry, and there's a lot of estimation in this process.

So, it's not a, you know, it's not an exact science.

How much of the $7 million is self-pay?

I would say approximately about 800,000.

So, the rest is truly insurance billing -- insurance billings -- that have been caught up in denial or --

That's right.

-- the process.

A lot of these billings, to echo what Rick had mentioned, a lot of these billings are good patients; and what happened through our integration process is we didn't follow the processes needed in order to get reimbursed in a timely manner.

It may be that we didn't get an authorization, we didn't follow the contract terms, there was a misinterpretation of the contract requirements, etc.

So, those are some of the issues that we're working our way through.

So, you think it's more of a matter of checking the boxes to get paid versus having a huge uncollectible?

Or, you don't know at this point?

Well, we're getting our answer (indiscernible) situation, John.

And I think while we go through the exercise of going through each and every receivable, we will have that determination by the end of this quarter.

Do you think the 2.7 % bad debt ratio is a good proxy for a go forward bad debt number?

Is that going to be permanently 80 (ph) (indiscernible) higher than it has been?

Or do you think that's a blip?

That's a blip, John, because of the Texas issues that I talked about on a year-to-date basis.

Again, when I look at our overall same-store receivables, our receivables are at 67 days without this Texas bulge that we have.

The write-off history and the reserve history has been consistent with prior years.

I'd expect, you know, once we deal with this Texas issue, for our bad debts to be in the 2 to 2.3 % range, on an ongoing basis, which is fairly consistent with our historical trends.

So, what we're going to see, then, in the third quarter is somewhere between a zero and $7 million charge?

And then a bad debt provision between 2 and 2.3 following the third quarter?

Is that fair?

That's correct.

Mitra Ramgopal with Sidoti.

Good morning, guys.

Could you just quickly give us a broader review in terms of Texas and revenue that contributes to the overall company just to gauge its importance?

And you did mention the divestiture of a couple of locations.

Do you anticipate any more in the second half of the year?

And finally, from earnings guidance, you took it down to 80 cents, but I think it excludes any potential impact from additional reserves.

Do you anticipate, before reporting the third quarter, coming out with new guidance?

This is Paul Mastrapa.

First in terms of Texas, our overall Texas business is about a 25 to $30 million annual business -- in that range.

Did I answer that first question?

Yes.

In terms of our guidance for the year, you know, we are not factoring in any additional -- any estimation at the moment on what the effect of our review of the collectibility of the Texas receivables will be.

As we get our arms around that, if those result in incremental reserves, you know, then we will adjust our guidance accordingly.

Also in terms of divestiture of additional locations?

In terms of divestitures, we reviewed that in detail at the end of last year, especially as we were getting to rollout our information system platform, just to make sure that we weren't putting investments in markets that we did want to be in.

So, that was complete at the end of last year.

We have sold both of those locations.

The reserves that we took at the end of last year for those closures have proven to be adequate for the cost that we've experienced in those closures.

We are very confident with every other location that we have that it's a market that we want to be in; there's good growth opportunities, and we want to be there.

And this, finally, in terms of Synagis being strong in the fourth quarter and you'll be starting to market Xolair -- I guess your anticipation from revenue from both products still wasn't enough in terms of you lowering your revenue guidance as a potential offset?

You know, (indiscernible) Xolair is a new product.

Obviously, we don't have much visibility and experience with that.

Synagis, we've been pretty comfortable with the growth opportunities there.

Xolair, also, what I've heard (indiscernible) is it's going to be (indiscernible) be a good product.

But really we didn't have much visibility on the revenue stream from that particular product.

And also, in our initial guidance, we had given out, you know, we had numbers reported on the discontinued operations.

As well as we were expecting, you know, higher growth from our managed care specialty business, which did turn out to be where we think it should have been.

We are optimistic we're going to get back on track with our sales growth for the remainder of the year.

But we felt that it was important to let the investors know that we're not going to make our revenue target for the year.

Ann Barlow (ph) with Southwest Securities.

Good morning -- several questions.

First of all, could you give us a recap on the expense of the number of locations consolidated, the number of employees involved, etc., in Texas?

And while all this was going on, I guess my question is, who was responsible for really more or less dropping the ball on the reimbursement collections, you know, which was a big acquisition, obviously that had to have been a focus, or should have been.

Just kind of wondered what has changed, going forward, to give us better comfort on acquisitions in the future?

And then, I would also like to stay -- circle back -- just to the overall sales effort on the specialty pharmacy side -- get a little better detail from you guys as to what you have planned in the back half of the year.

I know you've added some senior managers, which I think obviously, is a positive.

But just kind of address those two issues.

This is Rajat.

Let me just go back to your question on acquisitions.

I think I mentioned a little while ago on this call that we have completed about 18 transactions in the last three years or so, and since (ph) we really started to initiate an acquisition strategy for the company.

And, this one or two acquisitions that we did in Texas really had this negative impact on our business and our company.

So, (indiscernible) financially to every transaction that we have done, we have done some very good acquisitions and they are doing pretty well for the company.

Going back to the Texas acquisition, we had four locations in Dallas that needed to be combined, and there were three locations in the Houston market that needed to be combined.

Plus, we got into the respiratory DME (ph) business in Texas.

So, we had the infusion business, as well as the respiratory DME business that we acquired.

So, we needed to manage four locations in Dallas and three locations in Houston.

In addition, there were three other locations in other markets that needed to be managed as part of the integration process.

As far as the number of employees are concerned, I don't have a count -- but, easily north of 100 employees all throughout the state of Texas.

So, not only we saw in the integration process, that we didn't do a good job in system integration.

But there was a delay in merging all these different businesses and locations into one.

And it took us over a year to get that accomplished.

And in the meanwhile, that was happening, obviously, we had this issue with reimbursement and receivables.

And, there was also an issue with employee turnover.

We were also merging -- there were four -- three different philosophies of different acquired entities into one.

And, it just took us a much longer time.

Now, in the other acquisitions that we have done, we did not have to go through this exercise.

They were pretty straightforward, and obviously, the results of those acquisitions was much better.

But let me just reemphasize that there is enough business to make enough money out of those locations.

So, on a going forward basis, I can tell you that we will make sure that the problem is behind us, and it becomes a non-issue for the company, going forward.

You are going to manage the overall collection effort on future acquisitions differently than what you did here?

Absolutely.

Absolutely.

We have now learned from what we have learned out of Texas, and we have sort of refined -- we are refining our strategy, going forward, on the integration process.

Top priority and emphasis will be given to reimbursement, and it has been.

But we're going to make sure that we take extra precautionary efforts to make sure that we remain current.

This is Paul.

In addition, in terms of some more specifics around that, at the beginning of this year as part of our overall strengthening of the infrastructure of the company, we've completely revamped and rolled out our policies and procedures regarding reimbursement -- one of the first, I think infrastructure investments we've made.

And secondarily, we have really created a corporate reimbursement function to provide the oversight and necessary support to make sure that not only acquisitions are integrated appropriately from a revenue and a cash collection basis, but also to make sure the we have good controls over the rest of our businesses.

Ann, this is Rick.

We've also invested in seasoned management talent that have significant operations, acquisition integration, system and reimbursement expertise.

In terms of defining a good plan, a strong plan, and then moving quickly, through the integration and the culture of the acquired location, is that of the company.

And so, there's a great deal of focus that will be applied in future acquisitions.

Okay.

What about the sales effort on the pharmacy side?

Well, we have obviously, as we're working in the first half of the year and focusing on infrastructure and reimbursement issues, we are now sort of renewing our sales efforts.

And that's underway right now.

We are hiring -- we've hired some new people and we're hiring some more new people, and will be hiring in the future to strengthen our sales team and increase the sales efforts in the company, overall -- not only just the specialty side, but also on the home infusion front.

As you know, the managed care model that we have in place for specialty is a longer (indiscernible).

We've got a very nice pipeline.

There is a lot of interest.

We hope that we can get some new contracts soon.

Van Brady (ph) with Presidio Management.

Good morning, gentlemen.

Personally, I had to get on the call late, Rajat, and missed the presentation -- got in on the Q&A.

I think I heard you say that, because of the evolving problems in Texas, that you had held off on any acquisitions.

Was that the main reason?

Because, after the March quarter conference call you felt that the systems in place has shaken down alright, and would no longer be a inhibiting -- the IT systems, that is -- inhibiting factor in making acquisitions -- that you had a good pipeline and were very excited about it.

Yet, we went through a whole quarter without any acquisitions being announced (ph).

So, maybe you covered all this.

But, if you wouldn't mind, could you clarify that for me?

Yes.

Van, what we have said in the last quarter about this (indiscernible) -- the IP (ph) systems would not be an inhibiting (ph) factor for us making acquisitions, and we were actively looking for making acquisitions.

So, with that said, we are starting to look at making acquisitions.

But, we just needed to get past this new issue that we have in Texas and getting that behind us, which we will, by the end of this quarter -- and then getting back on acquisitions again.

So, our really intent (ph) and hope is to make some acquisitions.

And I'm hoping that we will close at least one by the end of the year.

Okay.

Well, you have the cash to move forward in that area, and you say there's... (multiple speakers)

We have the availability of borrowing cash from a lender.

I know you do.

And you have -- what you say -- a lot of very interesting prospects.

So...

That is correct.

That has always been a game plan for the company, and we should look forward to that being implemented into the fourth quarter and beyond?

Absolutely.

Okay.

Thank you.

Grant Jackson with First Analysis.

A couple of things.

One, what, specifically, did you learn out of the Texas acquisition that you can apply to your acquisition game plan going forward?

In other words, was it a particular mix of products?

Was it just too complex an acquisition and you thought you could get a lot of synergy from combining locations?

That's the first question.

And then, I am not necessarily understanding why you have to get past the Texas acquisition -- the Texas A.R. issues before making an acquisition.

It sounded like they would be separate people doing the work.

You've got a dedicated team working on the Texas A.R. issues.

And it's really a matter of just working back through what you've already built.

That seems to be -- I can see why the IT issue would prevent you from doing acquisitions;

I'm not sure I understand why the Texas issue would prevent you from doing acquisitions.

Grant, let me just address your second half of your question.

The Texas issues aren't going to prevent us from doing the acquisition.

I just wanted to get (indiscernible) that's an issue.

We just want to get that's (ph) an issue.

While, we are doing that, you know, we are looking at acquisition opportunities.

So, it will take us a few months to propose a deal, because we wanted to -- and what we have learned from the prior experience in Texas, we want to do a bang up job in due diligence, and sort of start thinking of integration 60 days before we close the deal.

So, that's the kind of lesson we have learned that, you know, the mistakes that we have, you know -- that occurred -- that we want to correct in the future.

I guess I'm still not sure that I see the tie between Texas and acquisitions.

Grant, there is no tie between Texas and acquisition strategy. (multiple speakers) two independent issues.

You said you wanted to get past the Texas thing before making acquisitions.

That's why I drew the link between... (multiple speakers)

The Company is obviously focused (indiscernible) prime responsibility is to make sure that, you know, that issue is behind.

And we will know that in the next couple of months.

Was there any, you know, say, mix of product that you did not like out of Texas?

I thought it was -- had a fair amount of Growth Hormone, that sort of thing.

Was it --

No, it was a combination of infusion and respiratory (indiscernible).

Okay.

So we shouldn't read into the mix then that maybe you wouldn't be looking for respiratory DME or anything like that?

Not exactly, you know, if there is a good acquisition opportunity that makes sense, and then depending on the market that we're in, we would look into it.

But, that is financially (ph) the focus at this point.

And with Pegasus, were you going to give an update, or was that for the third quarter?

Oh, that's for the third quarter, I would think.

A follow-up from John Ransom with Raymond James.

Was the Shonce (ph) resignation tied to the Texas situation?

No, John, I mean, as Rick came on board, Rick and I talked about, you know, Rick getting to know the business more closely.

And, he needed to have more visibility with the operations and, at that point, we decided that Rick wanted to take charge of the operations himself.

And, you know, (indiscernible) Shonce basically agreed.

And he left on very good terms.

And, Shonce, you know, is doing other good things outside the industry today.

Okay.

And secondly, just to clarify, it says in your press release that you've got -- what?

A $60 million revolver and $5 million drawn.

But I think it was said that you had $28 million availability.

What's the actual availability as of today?

On the revolver?

That's what that is -- $28 million. (multiple speakers) are you looking for where we are today, today, or as of the end of the quarter?

So, did it go from 55 to 28 after the quarter?

Or, is there something in the revolver that's not currently available due to borrowing-based issues or something like that?

Yeah, it's an asset-based facility that's based on A.R.

So the way it's structured is, it's more really an acquisition in line for us as our businesses is spitting off cash on a same store basis.

As we make acquisitions, we are able to include those assets into our borrowing base, thereby increasing our borrowing capacity on the line.

So, $28 million -- how much is drawn on your revolver?

Is it five?

At the end of the quarter, it was just over six.

How much is drawn today?

About the same?

Actually, we're down about another $1.5 million as of today.

Okay.

I'm sorry for being thick (ph), but it (multiple speakers) seems like you would have $55 million available, not $28 million.

What's this 27?

John, that's based on our asset base in the company. (multiple speakers) You know, you made a point that our basic line from 55 20 (ph); that's not correct.

We were always in the same range, even in the first quarter.

I was confused about the availability versus you know, full line.

So it's the $60 million, but only about 28's available because of borrowing base -- is that right?

That's correct; in addition to what we have -- 28 (ph) million is further available.

(indiscernible) $6 million drawn (indiscernible) additional 28.

(laughter).

Let me just ask you in a more simple way.

How much money can you borrow today under your line?

About $35 million, we have the ability today to borrow. (multiple speakers) We borrowed 6.6 and we've got approximately 28.

(laughter) Okay.

Thank you.

Jeff Alan (ph) with Silvercrest Asset Management.

Good morning.

You talked about the liability insurance as a factor in the quarter.

Can you just quantify how much you spent on that and how much was the growth in the cost, year-over-year?

Sure.

There are really two areas that we've seen a fairly dramatic increase in costs on the insurance front.

I think that is symptomatic of the, you know, of the overall hard market that we're facing in insurance.

Our DNO (ph) coverage is the first component of that, which we renewed in the second quarter.

In the second, more larger component of that, is our professional liability insurance.

And there's been a lot of public discussion around the increasing rate of public liability insurance, and we haven't been immune to some of those effects.

We've seen an overall doubling of our rates in those areas; and, on an annual basis, the impact is between 1.5 and 2 cents.

So, it's fairly substantial.

That's for the year, not the quarter?

On an annual basis.

Okay.

And also, can you help us understand, you know, your managed care business, you know, just how, short did it fall of your expectations?

Is it still growing but just at a lesser rate than you expected?

You know, can you help us understand that a little more clearly?

Jeff, this is Rajat.

We had signed some contracts back in 2001 and in 2002.

The contract that we had signed back in 2001 is fully ramped up and matured this year.

That was one component.

The second component was we had signed contracts in 2002.

The original intent was then (ph) going to be more mandatory in nature.

And, that's how we had based our projections for this year.

And, (indiscernible) gravitated towards more choice programs where the physician were given a choice.

So that impacted our revenues.

Obviously, we're not going to see a huge book of revenues coming from those kind of situations.

And just to be clear, you're talking about, PPOs as opposed to HMOs.

Is that --

They are mostly HMO type of relations.

Okay.

So if they're shifting towards PPOs then that takes away some opportunities for you -- is that (multiple speakers)...

No, what I meant was, you can sign -- to get a mandatory agreement where the physicians have no choice but to get the drugs from us.

Or the second approach to managed care contracting would be giving the choice to the physician to continue to buy and bill or send the prescription over to us.

Okay.

So it gravitated more towards choice to the physicians; but the physician would still have the opportunity to continue to buy and bill.

There are no further questions at this time.

If there are no other questions, I would like to thank everybody on the call and their patience.

And, we look forward to our third quarter conference call to give you more updates.

Thank you.

Thank you for participating in today's conference call.

You may now disconnect.

(CONFERENCE CALL CONCLUDED)