##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 or
 o
    
    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.
  Delaware
    
    36-3791193(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification No.)485 Half Day Road, Suite 300
    
    60089Buffalo Grove, Illinois
    
    (Zip Code)(Address of principal executive offices)
 (847) 465-2100
 Not applicable
 þ o
  o þ o
 o þ
  Issued and OutstandingClass
    
    as of August 1, 2007Common Stock  $0.01 par value
    
    34,725,892




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##### 



OPTION CARE, INC. AND SUBSIDIARIES
 INDEX
 DESCRIPTION
 PART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed consolidated balance sheetsJune 30,2007 and December 31, 2006Condensed consolidated statements of incomeThree and Six months ended June 30, 2007 and 2006Condensed consolidated statements of cash flowsSix months ended June 30, 2007 and 2006Notes to condensed consolidated financial statementsItem 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures about Market RiskItem 4.
    
    Controls and ProceduresPART II
    
    OTHER INFORMATIONItem 1.
    
    Legal ProceedingsItem 1A.
    
    Risk FactorsItem 2.
    
    Unregistered Sales of Equity Securities and Use of ProceedsItem 3.
    
    Defaults Upon Senior SecuritiesItem 4.
    
    Submission of Matters to a Vote of Security HoldersItem 5.
    
    Other InformationItem 6.
    
    ExhibitsSIGNATURES302 Certification of Chief Executive Officer302 Certification of Sr. VP and Chief Financial OfficerSection 1350 Certifications
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Option Care, Inc. and Subsidiaries
 
 Condensed Consolidated Balance Sheets
  June 30, 2007
    
    
    December 31, 2006(Unaudited)AssetsCurrent assets:Cash and cash equivalents, unrestricted
    
    $
    
    
    
    $
    3,171Cash, restricted
    
    
    
    
    
    
    7,554Short-term investments
    
    
    
    
    
    
    5,700Trade accounts receivable, net
    
    
    125,976
    
    
    
    122,503Inventory
    
    
    19,824
    
    
    
    23,096Deferred income tax benefit
    
    
    5,600
    
    
    
    3,883Other current assets
    
    
    13,550
    
    
    
    10,421Total current assets
    
    
    164,950
    
    
    
    176,328Equipment and other fixed assets, net
    
    
    26,695
    
    
    
    24,398Goodwill, net
    
    
    202,247
    
    
    
    165,323Other assets, net
    
    
    10,101
    
    
    
    10,336Total assets
    
    $
    403,993
    
    
    $
    376,385Liabilities and stockholders equityCurrent liabilities:Cash overdraft
    
    $
    1,162
    
    
    $
    Trade accounts payable
    
    
    34,549
    
    
    
    43,601Accrued wages and related employee benefits
    
    
    8,302
    
    
    
    6,899Deferred purchase price liability
    
    
    4,739
    
    
    
    2,892Current portion of long-term debt
    
    
    86,260
    
    
    
    23Other current liabilities
    
    
    3,582
    
    
    
    5,818Total current liabilities
    
    
    138,594
    
    
    
    59,233Long-term debt, less current portion
    
    
    16,594
    
    
    
    86,372Deferred income tax liability
    
    
    11,099
    
    
    
    9,377Other liabilities
    
    
    1,298
    
    
    
    1,214Minority interest
    
    
    863
    
    
    
    826Total liabilities
    
    
    168,448
    
    
    
    157,022Stockholders equity:Common stock, $.01 par value per share,
60,000 shares authorized, 34,578 and
34,466 shares issued and outstanding at
June 30, 2007 and December 31, 2006,
respectively
    
    
    346
    
    
    
    345Common stock to be issued, 218 and 134
shares at June 30, 2007 and December 31,
2006, respectively
    
    
    2,497
    
    
    
    1,550Additional paid-in capital
    
    
    150,250
    
    
    
    148,108Retained earnings
    
    
    82,452
    
    
    
    69,360Total stockholders equity
    
    
    235,545
    
    
    
    219,363Total liabilities and stockholders equity
    
    $
    403,993
    
    
    $
    376,385
 See notes to condensed consolidated financial statements
 3




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##### Table of Contents



Option Care, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Income
   Three months ended
    
    
    Six months endedJune 30
    
    
    June 302007
    
    
    2006
    
    
    2007
    
    
    2006Revenue:Home infusion and related healthcare services
    
    $
    67,737
    
    
    $
    64,519
    
    
    $
    132,177
    
    
    
    121,634Specialty infusion pharmacy services
    
    
    55,142
    
    
    
    48,496
    
    
    
    138,227
    
    
    
    101,707Specialty distribution pharmacy services
    
    
    63,545
    
    
    
    40,938
    
    
    
    127,126
    
    
    
    83,526Other
    
    
    2,583
    
    
    
    3,355
    
    
    
    4,420
    
    
    
    5,432Total revenue
    
    
    189,007
    
    
    
    157,308
    
    
    
    401,950
    
    
    
    312,299Cost of revenue:Cost of goods sold
    
    
    122,487
    
    
    
    93,846
    
    
    
    266,891
    
    
    
    192,013Cost of services provided
    
    
    18,214
    
    
    
    17,558
    
    
    
    37,201
    
    
    
    33,586Total cost of revenue
    
    
    140,701
    
    
    
    111,404
    
    
    
    304,092
    
    
    
    225,599Gross profit
    
    
    48,306
    
    
    
    45,904
    
    
    
    97,858
    
    
    
    86,700Selling, general and administrative expenses
    
    
    32,792
    
    
    
    31,801
    
    
    
    65,078
    
    
    
    60,219Provision for doubtful accounts
    
    
    3,714
    
    
    
    3,456
    
    
    
    8,103
    
    
    
    6,918Depreciation and amortization
    
    
    1,346
    
    
    
    1,225
    
    
    
    2,613
    
    
    
    2,370Total operating expenses
    
    
    37,852
    
    
    
    36,482
    
    
    
    75,794
    
    
    
    69,507Operating income
    
    
    10,454
    
    
    
    9,422
    
    
    
    22,064
    
    
    
    17,193Interest income (expense), net
    
    
    (370
    )
    
    
    (217
    )
    
    
    (604
    )
    
    
    (427
    )Other income (expense), net
    
    
    (92
    )
    
    
    (365
    )
    
    
    (240
    )
    
    
    (209
    )Income before income taxes
    
    
    9,992
    
    
    
    8,840
    
    
    
    21,220
    
    
    
    16,557Income tax provision
    
    
    3,980
    
    
    
    3,388
    
    
    
    8,463
    
    
    
    5,929Net income from continuing operations
    
    $
    6,012
    
    
    $
    5,452
    
    
    $
    12,757
    
    
    $
    10,628Discontinued operations:Loss on discontinued operations, net of income taxes
    
    
    (76
    )
    
    
    (251
    )
    
    
    (56
    )
    
    
    (637
    )Net income
    
    $
    5,936
    
    
    $
    5,201
    
    
    $
    12,701
    
    
    $
    9,991Net income per basic share:Continuing operations
    
    $
    0.17
    
    
    $
    0.16
    
    
    $
    0.37
    
    
    $
    0.32Discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )Total
    
    $
    0.17
    
    
    $
    0.15
    
    
    $
    0.37
    
    
    $
    0.30Net income per diluted share:Continuing operations
    
    $
    0.16
    
    
    $
    0.15
    
    
    $
    0.35
    
    
    $
    0.30Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Total
    
    $
    0.16
    
    
    $
    0.15
    
    
    $
    0.35
    
    
    $
    0.28Shares used in computing net income per share:Basic
    
    
    34,726
    
    
    
    33,991
    
    
    
    34,684
    
    
    
    33,572Diluted
    
    
    36,875
    
    
    
    35,198
    
    
    
    36,526
    
    
    
    35,161Cash dividends per share
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    0.04
 See notes to condensed consolidated financial statements
 4




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Option Care, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows
   Six Months EndedJune 302007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    12,701
    
    
    $
    9,991Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    4,255
    
    
    
    3,975Provision for doubtful accounts
    
    
    8,142
    
    
    
    7,079Deferred income taxes
    
    
    5
    
    
    
    209Income from equity investees
    
    
    149
    
    
    
    243Non-cash stock compensation expense
    
    
    1,097
    
    
    
    452Changes in assets and liabilities, net of effect of acquisitionsAccounts and notes receivable
    
    
    (8,784
    )
    
    
    (125
    )Inventory
    
    
    3,532
    
    
    
    (1,248
    )Accounts payable
    
    
    (8,215
    )
    
    
    (10,853
    )Income taxes payable
    
    
    (1,082
    )
    
    
    (114
    )Change in other assets and liabilities
    
    
    (3,280
    )
    
    
    3,748Net cash provided by operating activities
    
    
    8,520
    
    
    
    13,357Cash flows from investing activities:Purchases of short-term investments
    
    
    (4,000
    )
    
    
    (4,000
    )Sales of short-term investments
    
    
    9,700
    
    
    
    41,042Purchases of equipment and other, net
    
    
    (5,748
    )
    
    
    (5,823
    )Payments for acquisitions, net of cash acquired
    
    
    (37,427
    )
    
    
    (38,778
    )Net cash used in investing activities
    
    
    (37,475
    )
    
    
    (7,559
    )Cash flows from financing activities:Cash overdraft
    
    
    1,162
    
    
    
    Decrease in restricted cash
    
    
    7,554
    
    
    
    882Increase in financing costs
    
    
    
    
    
    
    (70
    )Income tax benefit from exercise of stock options
    
    
    32
    
    
    
    618Payments on capital leases and other debt
    
    
    (42
    )
    
    
    (10
    )Net borrowings on credit agreement
    
    
    16,500
    
    
    
    Proceeds from issuance of stock
    
    
    1,961
    
    
    
    2,627Payments of dividends to common stockholders
    
    
    (1,383
    )
    
    
    (1,335
    )Net cash provided by financing activities
    
    
    25,784
    
    
    
    2,712Net increase (decrease) in cash and cash equivalents
    
    
    (3,171
    )
    
    
    8,510Cash and cash equivalents, beginning of period
    
    
    3,171
    
    
    
    6,816Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    15,326
 See notes to condensed consolidated financial statements
 5




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Option Care, Inc. and Subsidiaries
 
 Notes to Condensed Consolidated Financial Statements
 June 30, 2007
  1. Basis of Presentation
   2. Short-Term and Long-Term Debt
  2.25% Convertible Senior Notes, due 2024
    6




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$35 Million Revolving Credit Facility with LaSalle Bank National Association
  7




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##### Table of Contents



3. Earnings Per Share Data
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302007
    
    
    2006
    
    
    2007
    
    
    2006Basic:Net income from continuing operations
    
    $
    6,012
    
    
    $
    5,452
    
    
    $
    12,757
    
    
    $
    10,628Net (loss) from discontinued operations
    
    
    (76
    )
    
    
    (251
    )
    
    
    (56
    )
    
    
    (637
    )Net income
    
    $
    5,936
    
    
    $
    5,201
    
    
    $
    12,701
    
    
    $
    9,991Average shares outstanding
    
    
    34,726
    
    
    
    33,991
    
    
    
    34,684
    
    
    
    33,572Basic earnings from continuing operations per share
    
    $
    0.17
    
    
    $
    0.16
    
    
    $
    0.37
    
    
    $
    0.32Basic (loss) from discontinued operations per share
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )Basic earnings per share
    
    $
    0.17
    
    
    $
    0.15
    
    
    $
    0.37
    
    
    $
    0.30Diluted:Net income from continuing operations
    
    $
    6,012
    
    
    $
    5,452
    
    
    $
    12,757
    
    
    $
    10,628Net (loss) from discontinued operations
    
    
    (76
    )
    
    
    (251
    )
    
    
    (56
    )
    
    
    (637
    )Net income
    
    $
    5,936
    
    
    $
    5,201
    
    
    $
    12,701
    
    
    $
    9,991Average shares outstanding
    
    
    34,726
    
    
    
    33,991
    
    
    
    34,684
    
    
    
    33,572Net effect of dilutive stock options  based on the
treasury stock method (1)
    
    
    858
    
    
    
    906
    
    
    
    812
    
    
    
    979Net effect of dilutive contingently convertible debt (2)
    
    
    1,291
    
    
    
    301
    
    
    
    1,030
    
    
    
    610Total diluted shares
    
    
    36,875
    
    
    
    35,198
    
    
    
    36,526
    
    
    
    35,161Diluted earnings from continuing operations per share
    
    $
    0.16
    
    
    $
    0.15
    
    
    $
    0.35
    
    
    $
    0.30Diluted loss from discontinued operations per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Diluted earnings per share
    
    $
    0.16
    
    
    $
    0.15
    
    
    $
    0.35
    
    
    $
    0.28
 
 (1)
    
    For the quarter ended June 30, 2007, there were no anti-dilutive stock options. For the
six months ended June 30, 2007, there were 531,000 anti-dilutive options. For the quarter and six months ended June 30, 2006, there were 316,000 and 235,000 anti-dilutive stock options, respectively.(2)
    
    Weighted average shares issuable upon conversion of all $86.3 million of our 2.25% convertible
senior notes due 2024. 4. Operating Segments
  Home infusion and related healthcare services
 8




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##### Table of Contents



specialty infusion pharmacy services specialty
distribution pharmacy services
 Specialty infusion pharmacy services
 Specialty distribution pharmacy services
 Other revenue
 5. Significant Customers and Concentration of Credit Risk
   Revenue
    
    Accounts ReceivableThree months ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    December 31,2007
    
    2006
    
    2007
    
    2006
    
    2007
    
    2006Blue Cross and Blue Shield of Florida
    
    
    12
    %
    
    
    13
    %
    
    
    11
    %
    
    
    13
    %
    
    
    12
    %
    
    
    8
    %Blue Cross and Blue Shield of
Michigan
    
    
    12
    %
    
    
    
    %
    
    
    11
    %
    
    
    
    %
    
    
    4
    %
    
    
    4
    %Medicare
    
    
    8
    %
    
    
    9
    %
    
    
    8
    %
    
    
    8
    %
    
    
    9
    %
    
    
    10
    %Medicaid
    
    
    10
    %
    
    
    12
    %
    
    
    13
    %
    
    
    12
    %
    
    
    7
    %
    
    
    9
    %All other payors (1)
    
    
    58
    %
    
    
    66
    %
    
    
    57
    %
    
    
    67
    %
    
    
    68
    %
    
    
    69
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    No other payor represents 10% or more of revenue or accounts receivable as of the dates and for
the periods presented. 9




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6. Seasonal Revenue Trends
   Synagis®
    
    
    % of Totalrevenue
    
    
    Revenue (1)Quarter ended March 31, 2006
    
    $
    27,102
    
    
    
    17.5
    %Quarter ended June 30, 2006
    
    
    8,327
    
    
    
    5.3
    %Quarter ended September 30, 2006
    
    
    1,780
    
    
    
    1.2
    %Quarter ended December 31, 2006
    
    
    25,676
    
    
    
    13.2
    %Fiscal year 2006
    
    $
    62,885
    
    
    
    9.5
    %Quarter ended March 31, 2007
    
    $
    40,180
    
    
    
    18.9
    %Quarter ended June 30, 2007
    
    
    8,552
    
    
    
    4.5
    %
 
 (1)
    
    Percent of total revenue is calculated based on total revenue from continuing operations. 7. Acquisitions
       10




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Three Months Ended
    
    
    Six Months EndedJune 30, 2007
    
    
    June 30, 2007Purchase Price:Paid in Cash
    
    $
    35,128
    
    
    $
    37,427Earn-out payable
    
    
    (26,248
    )
    
    
    1,847Liabilities assumed
    
    
    605
    
    
    
    711Total
    
    $
    9,485
    
    
    $
    39,985Allocation of Purchase Price:Goodwill
    
    $
    6,284
    
    
    $
    36,924Accounts receivable, net
    
    
    2,632
    
    
    
    2,564Other tangible assets
    
    
    544
    
    
    
    472Other intangible assets
    
    
    25
    
    
    
    25Total
    
    $
    9,485
    
    
    $
    39,985
  AccumulatedGoodwill
    
    
    Amortization
    
    
    Goodwill, netDecember 31, 2006
    
    $
    169,263
    
    
    $
    (3,940
    )
    
    $
    165,323Current year acquisitions
    
    
    9,166
    
    
    
    
    
    
    
    9,166Additional consideration toward prior year acquisitions
    
    
    27,758
    
    
    
    
    
    
    
    27,758June 30, 2007
    
    $
    206,187
    
    
    $
    (3,940
    )
    
    $
    202,247
 Consolidation
of Variable Interest Entities
 8. Discontinued Operations
  11




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Three Months Ended
    
    Six Months EndedJune 30
    
    June 302007
    
    2006
    
    2007
    
    2006Total Revenue
    
    $
    (39
    )
    
    $
    1,834
    
    
    $
    363
    
    
    $
    3,938(Loss) from discontinued operations before income taxes
    
    
    (125
    )
    
    
    (407
    )
    
    
    (91
    )
    
    
    (983
    )Income tax provision
    
    
    (49
    )
    
    
    (156
    )
    
    
    (35
    )
    
    
    (346
    )(Loss) from discontinued operations
    
    $
    (76
    )
    
    $
    (251
    )
    
    $
    (56
    )
    
    $
    (637
    )
 9. Franchise-related Revenue
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Franchise-related revenue:Royalties
    
    $
    1,300
    
    
    $
    1,344
    
    
    $
    2,550
    
    
    $
    2,794Vendor rebates and administration fees
    
    
    207
    
    
    
    179
    
    
    
    338
    
    
    
    429Franchise termination and settlement
fees
    
    
    546
    
    
    
    1,427
    
    
    
    846
    
    
    
    1,427Total franchise-related revenue
    
    $
    2,053
    
    
    $
    2,950
    
    
    $
    3,734
    
    
    $
    4,650
 10. Stock-based Compensation
 Share-Based Payment
  11. Income Taxes
 Accounting for
Uncertainty in Income Taxes Accounting for
Income Taxes.
   12




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12. Quarterly Dividends
   13. Comprehensive Income
  14. Definitive Merger Agreement
    15. Subsequent Events
  13




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 FORWARD LOOKING STATEMENTS
  BUSINESS OVERVIEW
   Merger Agreement
  14




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SUMMARIZED INFORMATION ABOUT REVENUE AND GROSS PROFIT
  Three Months Ended June 30
    
    
    Six Months Ended June 302007
    
    
    2006
    
    
    2007
    
    
    2006% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofREVENUE
    
    Revenue
    
    
    Total
    
    
    Revenue
    
    
    Total
    
    
    Revenue
    
    
    Total
    
    
    Revenue
    
    
    TotalHome infusion and
related healthcare
services
    
    $
    67,737
    
    
    
    35.8
    %
    
    $
    64,519
    
    
    
    41.1
    %
    
    $
    132,177
    
    
    
    32.9
    %
    
    $
    121,634
    
    
    
    39.0
    %Specialty infusion
pharmacy services
    
    
    55,142
    
    
    
    29.2
    %
    
    
    48,496
    
    
    
    30.9
    %
    
    
    138,227
    
    
    
    33.9
    %
    
    
    101,707
    
    
    
    32.6
    %Specialty
distribution
pharmacy services
    
    
    63,545
    
    
    
    33.6
    %
    
    
    40,938
    
    
    
    26.0
    %
    
    
    127,126
    
    
    
    32.1
    %
    
    
    83,526
    
    
    
    26.7
    %Other
    
    
    2,583
    
    
    
    1.4
    %
    
    
    3,355
    
    
    
    2.1
    %
    
    
    4,420
    
    
    
    1.1
    %
    
    
    5,432
    
    
    
    1.7
    %Total
    
    $
    189,007
    
    
    
    100.0
    %
    
    $
    157,308
    
    
    
    100.0
    %
    
    $
    401,950
    
    
    
    100.0
    %
    
    $
    312,299
    
    
    
    100.0
    %
 15




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##### Table of Contents



Three Months Ended June 30
    
    
    Six Months Ended June 302007
    
    
    2006
    
    
    2007
    
    
    2006Gross
    
    
    Gross
    
    
    Gross
    
    
    Gross
    
    
    Gross
    
    
    Gross
    
    
    Gross
    
    
    GrossGROSS PROFIT
    
    Profit
    
    
    Profit %
    
    
    Profit
    
    
    Profit %
    
    
    Profit
    
    
    Profit %
    
    
    Profit
    
    
    Profit %Home infusion and
related healthcare
services
    
    $
    30,825
    
    
    
    45.5
    %
    
    $
    28,415
    
    
    
    44.0
    %
    
    $
    59,210
    
    
    
    44.8
    %
    
    $
    53,953
    
    
    
    44.4
    %Specialty infusion
pharmacy services
    
    
    11,143
    
    
    
    20.2
    %
    
    
    10,887
    
    
    
    22.4
    %
    
    
    26,148
    
    
    
    18.9
    %
    
    
    20,569
    
    
    
    20.2
    %Specialty
distribution
pharmacy services
    
    
    3,755
    
    
    
    5.9
    %
    
    
    3,247
    
    
    
    7.9
    %
    
    
    8,081
    
    
    
    6.4
    %
    
    
    6,746
    
    
    
    8.1
    %Other
    
    
    2,583
    
    
    
    100.0
    %
    
    
    3,355
    
    
    
    100.0
    %
    
    
    4,419
    
    
    
    100.0
    %
    
    
    5,432
    
    
    
    100.0
    %Total
    
    $
    48,306
    
    
    
    25.6
    %
    
    $
    45,904
    
    
    
    29.2
    %
    
    $
    97,858
    
    
    
    24.3
    %
    
    $
    86,700
    
    
    
    27.8
    %
    16




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##### Table of Contents



RESULTS OF OPERATIONS
  Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    Amount
    
    
    RevenueRevenue:Home infusion and related healthcare
services
    
    $
    67,737
    
    
    
    35.8
    %
    
    $
    64,519
    
    
    
    41.0
    %
    
    $
    132,177
    
    
    
    32.9
    %
    
    $
    121,634
    
    
    
    39.0
    %Specialty infusion pharmacy services
    
    
    55,142
    
    
    
    29.2
    %
    
    
    48,496
    
    
    
    30.9
    %
    
    
    138,227
    
    
    
    33.9
    %
    
    
    101,707
    
    
    
    32.6
    %Specialty distribution pharmacy services
    
    
    63,545
    
    
    
    33.6
    %
    
    
    40,938
    
    
    
    26.0
    %
    
    
    127,126
    
    
    
    32.1
    %
    
    
    83,526
    
    
    
    26.7
    %Other
    
    
    2,583
    
    
    
    1.4
    %
    
    
    3,355
    
    
    
    2.1
    %
    
    
    4,420
    
    
    
    1.1
    %
    
    
    5,432
    
    
    
    1.7
    %Total revenue
    
    
    189,007
    
    
    
    100.0
    %
    
    
    157,308
    
    
    
    100.0
    %
    
    
    401,950
    
    
    
    100.0
    %
    
    
    312,299
    
    
    
    100.0
    %Cost of revenue:Cost of goods sold
    
    
    122,487
    
    
    
    64.8
    %
    
    
    93,846
    
    
    
    59.6
    %
    
    
    266,891
    
    
    
    66.4
    %
    
    
    192,013
    
    
    
    61.4
    %Cost of services provided
    
    
    18,214
    
    
    
    9.6
    %
    
    
    17,558
    
    
    
    11.2
    %
    
    
    37,201
    
    
    
    9.3
    %
    
    
    33,586
    
    
    
    10.8
    %Total cost of revenue
    
    
    140,701
    
    
    
    74.4
    %
    
    
    111,404
    
    
    
    70.8
    %
    
    
    304,092
    
    
    
    75.7
    %
    
    
    225,599
    
    
    
    72.2
    %Gross profit
    
    
    48,306
    
    
    
    25.6
    %
    
    
    45,904
    
    
    
    29.2
    %
    
    
    97,858
    
    
    
    24.3
    %
    
    
    86,700
    
    
    
    27.8
    %Selling, general and administrative
expenses
    
    
    32,792
    
    
    
    17.4
    %
    
    
    31,801
    
    
    
    20.2
    %
    
    
    65,078
    
    
    
    16.2
    %
    
    
    60,219
    
    
    
    19.3
    %Provision for doubtful accounts
    
    
    3,714
    
    
    
    2.0
    %
    
    
    3,456
    
    
    
    2.2
    %
    
    
    8,103
    
    
    
    2.0
    %
    
    
    6,918
    
    
    
    2.2
    %Depreciation and amortization
    
    
    1,346
    
    
    
    0.7
    %
    
    
    1,225
    
    
    
    0.8
    %
    
    
    2,613
    
    
    
    0.7
    %
    
    
    2,370
    
    
    
    0.8
    %Total operating expenses
    
    
    37,852
    
    
    
    20.1
    %
    
    
    36,482
    
    
    
    23.2
    %
    
    
    75,794
    
    
    
    18.9
    %
    
    
    69,507
    
    
    
    22.3
    %Operating income
    
    
    10,454
    
    
    
    5.5
    %
    
    
    9,422
    
    
    
    6.0
    %
    
    
    22,064
    
    
    
    5.5
    %
    
    
    17,193
    
    
    
    5.5
    %Interest income (expense), net
    
    
    (370
    )
    
    
    (0.2
    )%
    
    
    (217
    )
    
    
    (0.1
    )%
    
    
    (604
    )
    
    
    (0.1
    )%
    
    
    (209
    )
    
    
    (0.1
    )%Other expense, net
    
    
    (92
    )
    
    
    
    %
    
    
    (365
    )
    
    
    (0.3
    )%
    
    
    (240
    )
    
    
    (0.1
    )%
    
    
    (427
    )
    
    
    (0.1
    )%Income from continuing operations
before income taxes
    
    
    9,992
    
    
    
    5.3
    %
    
    
    8,840
    
    
    
    5.6
    %
    
    
    21,220
    
    
    
    5.3
    %
    
    
    16,557
    
    
    
    5.3
    %Income tax provision
    
    
    3,980
    
    
    
    2.1
    %
    
    
    3,388
    
    
    
    2.1
    %
    
    
    8,463
    
    
    
    2.1
    %
    
    
    5,929
    
    
    
    1.9
    %Net income from continuing operations
    
    $
    6,012
    
    
    
    3.2
    %
    
    $
    5,452
    
    
    
    3.5
    %
    
    $
    12,757
    
    
    
    3.2
    %
    
    $
    10,628
    
    
    
    3.4
    %Discontinued operations:Loss on discontinued operations, net of
income taxes
    
    
    (76
    )
    
    
    (0.1
    )%
    
    
    (251
    )
    
    
    (0.2
    )%
    
    
    (56
    )
    
    
    (0.0
    )%
    
    
    (637
    )
    
    
    (0.2
    )%Net income
    
    $
    5,936
    
    
    
    3.1
    %
    
    $
    5,201
    
    
    
    3.3
    %
    
    $
    12,701
    
    
    
    3.2
    %
    
    $
    9,991
    
    
    
    3.2
    %
 17




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##### Table of Contents



Three and Six Months Ended June 30, 2007 and 2006
   Revenue:
 ®
 Home infusion and related healthcare services revenue:
 .
 Specialty infusion pharmacy services revenue:
 ® ® ® ®
 Specialty distribution pharmacy services revenue:
  18




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##### Table of Contents



Other revenue:
  Cost of revenue:
    Gross profit margin:
  Three months ended
    
    Six months endedJune 30
    
    June 302007
    
    2006
    
    2007
    
    2006(restated)
    
    
    
    
    
    (restated)Gross Margin:Home infusion and related healthcare services
    
    
    45.5
    %
    
    
    44.0
    %
    
    
    44.8
    %
    
    
    44.4
    %Specialty infusion pharmacy services
    
    
    20.2
    %
    
    
    22.4
    %
    
    
    18.9
    %
    
    
    20.2
    %Specialty distribution pharmacy services
    
    
    5.9
    %
    
    
    7.9
    %
    
    
    6.4
    %
    
    
    8.1
    %Gross profit margin, excluding other revenue
    
    
    24.5
    %
    
    
    27.6
    %
    
    
    23.5
    %
    
    
    26.5
    %Other revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Total gross profit margin
    
    
    25.6
    %
    
    
    29.2
    %
    
    
    24.3
    %
    
    
    27.8
    %
  Selling, general and administrative expenses:
  19




---



##### Table of Contents



Provision for doubtful accounts:
  Depreciation and amortization:
  Operating income:
  Interest income/(expense):
  Income taxes:
  Net income from continuing operations:
  Diluted shares & earnings per share:
  20




---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
   Operating Cash Flows:
  Investing Cash Flows:
   Financing Cash Flows:
   21




---



##### Table of Contents



Convertible Senior Notes:
  Credit Agreement with LaSalle Bank N.A.:
  Accounts Receivable:
  June 30,
    
    March 31,
    
    December 31,2007
    
    2007
    
    2006Accounts receivable
    
    $
    137,373
    
    
    $
    142,845
    
    
    $
    133,239Less allowance for doubtful accounts
    
    
    (11,397
    )
    
    
    (12,234
    )
    
    
    (10,736
    )Accounts receivable, net of
allowance for doubtful accounts
    
    $
    125,976
    
    
    $
    130,611
    
    
    $
    122,503Days sales outstanding (DSO)(1)
    
    63 days
    
    55 days
    
    56 days
 
 (1)
    
    DSO is calculated using the exhaustion method, whereby the net accounts receivable balance is
exhausted against each preceding months or partial months net revenue. The DSO calculation
excludes revenue not related to patient care, such as franchise royalties and other fees and
software license and support revenue, and trade accounts receivable purchased in business
acquisitions.
   June 30,
    
    March 31,
    
    December 31,2007
    
    2007
    
    2006By Aging Category (1):Aged 0-90 days
    
    
    65
    %
    
    
    71
    %
    
    
    71
    %Aged 91-180 days
    
    
    17
    %
    
    
    14
    %
    
    
    14
    %Aged 181-365 days
    
    
    12
    %
    
    
    10
    %
    
    
    11
    %Aged over 365 days
    
    
    6
    %
    
    
    5
    %
    
    
    4
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %By Payor Type:Managed care and other payors
    
    
    84
    %
    
    
    81
    %
    
    
    81
    %Medicare and Medicaid
    
    
    16
    %
    
    
    19
    %
    
    
    19
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    Accounts receivable by aging category considers only accounts of our home infusion and related
healthcare services, specialty
infusion pharmacy services, and our specialty distribution pharmacy services lines. The shift in
accounts receivable toward older aging categories was due to a number of factors, primary of which
was an increased aging of our Blue Cross Blue Shield of 22




---



##### Table of Contents



Florida accounts receivable due to that
payers failure to timely adjudicate claims. OptionCare is working with the payer to resolve this
issue. Capital Resources:
    Goodwill and Other Intangible Assets
  June 30, 2007
    
    December 31, 2006Goodwill, net of accumulated amortization
    
    $
    202,247
    
    
    $
    165,323Other intangible assets, net of accumulated amortization
    
    $
    1,057
    
    
    $
    1,173Total intangible assets, net of accumulated amortization
    
    $
    203,304
    
    
    $
    166,496
  Goodwill and Other Intangible
Assets (SFAS No. 142)
 Regulatory and other developments:
 Average Wholesale Price litigation update. New England Carpenters Health Benefits
Fund, et al. v. First DataBank, et al.
 Health Insurance Portability and Accountability Act of 1996 (HIPAA) .
 23




---



##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  June30,
    
    March 31,
    
    December 31,2007
    
    2007
    
    2006Cash and cash equivalents, unrestricted
    
    $
    
    
    
    $
    7,542
    
    
    $
    3,171Cash, restricted (1)
    
    
    
    
    
    
    
    
    
    
    7,554Total cash and cash equivalents
    
    
    
    
    
    
    7,542
    
    
    
    10,725Short-term investments (2)
    
    
    
    
    
    
    9,500
    
    
    
    5,700Total cash and cash equivalents and
short-term investments
    
    $
    
    
    
    $
    17,042
    
    
    $
    16,425Variable-rate debt (3)
    
    $
    16,500
    
    
    $
    
    
    
    $
    
 24




---



##### Table of Contents



(1)
    
    The restricted cash was related to our issuance of 559,700 shares of stock to the
sellers of Trinity Homecare, LLC, which is a business we acquired during 2006. The
restriction was subsequently lifted upon our registration of the issued shares on January
31, 2007.(2)
    
    Short-term investments consisted of commercial paper and other investments having a
maturity of greater than three months at time of purchase. Short-term investments also
consists of municipal variable rate demand notes, preferred stock and similar instruments
with maturities greater than ten years, but which contain provisions for the periodic
adjustment of interest rate to market, generally each 28 or 35 days.(3)
    
    Variable-rate debt consisted of borrowings under our revolving Credit Agreement with
LaSalle Bank, N.A.
  
 ITEM 4. Controls and Procedures
   25




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
   
 ITEM 1A. Risk Factors
   The entry into the Merger Agreement, the Offer and the anticipated Merger may be disruptive to our
business.
   If our planned acquisition by Walgreens is not completed, our business, operating results and stock
price may be adversely affected.
  
    
    the market price of our common stock could be materially adversely affected following
an announcement that the Offer and the Merger have been abandoned;
    
    we could, under certain circumstances, be required to pay Walgreens a termination fee
of $25.8 million and/or reimbursement of its expenses, up to a maximum of $5 million,
however any amount received by Walgreens as expense reimbursement will reduce the amount
of the termination fee, if subsequently payable;
    
    we could, under certain circumstances, remain liable for all of our costs related to
the transaction, such as legal, accounting and certain investment banking fees, and we expect
these costs to be significant; and
    
    activities relating to the Offer and the Merger may divert our managements attention
from our business and cause disruptions among our employees and our relationships with
customers and business partners, thus detracting from our
 26




---



##### Table of Contents



ability to grow revenue and minimize costs and possibly leading to a loss of revenue and market
position that we may not be able to regain if the transaction does not occur.
 The transactions contemplated under the Merger Agreement result in certain required notices and
application filings with and approvals by various governmental agencies which may affect our
licenses, permits and other authorizations to operate.
  The transactions contemplated under the Merger Agreement may result in required notice and
application filings with and approvals by various governmental payors, which may result in delay in
recognition or loss of revenues from such governmental payors.
  
 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 Securities Holders
   VOTES FOR
    
    VOTES WITHHELDJerome F. Sheldon
    25,255,440
    
    2,448,204
   BROKER NON-VOTES FOR
    
    VOTES AGAINST
    
    ABSTAIN
    
    VOTES14,473,474
    
    10,163,958
    
    14,265
    
    3,051,947
 27




---



##### Table of Contents



VOTES FOR
    
    VOTES AGAINST
    
    ABSTAIN27,529,579
    
    162,883
    
    11,181
 
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
  28




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##### Table of Contents



SIGNATURE
  OPTION CARE, INC.Date: August 9, 2007
    By:
    /s/ Paul MastrapaSenior Vice President and Chief Financial Officer(Principal Accounting Officer and Principal Financial Officer) 29




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber2.1
    
    Agreement and Plan of Merger, dated as of July 2, 2007, among Option Care, Inc., Walgreen Co. and
Bison Acquisition Sub Inc. Filed as Exhibit 2.1 to our Current Report on Form 8-K filed July 3,
2007 and incorporated by reference herein.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.
 30