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Omnicare 10-Q 2011
form10q-q3.htm

 


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

 

 
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011

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

Commission File Number 1-8269

 
 
 
Omnicare, Inc.
 
(Exact name of Registrant as specified in its Charter)

   
Delaware
31-1001351
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
   
100 East RiverCenter Boulevard
Covington, Kentucky
41011
(Address of Principal Executive Offices)
(Zip Code)

(859) 392-3300
(Registrant’s telephone number)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  x       Accelerated filer  ¨       Non-Accelerated filer  ¨       Smaller reporting company  ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No x
 
Common Stock Outstanding
 
Number of Shares
Date
Common Stock, $1 par value
114,341,314
 
September 30, 2011
 
 


 
 
 
 

 
 
 
 
 
 
 

 
OMNICARE, INC. AND
 
SUBSIDIARY COMPANIES
 
FORM 10-Q QUARTERLY REPORT SEPTEMBER 30, 2011
 
INDEX
       
     
PAGE
PART 1 – FINANCIAL INFORMATION
       
ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)
 
       
 
Consolidated Statements of Income -
 
   
Three and nine months ended – September 30, 2011 and 2010
3
       
 
Consolidated Balance Sheets -
 
   
September 30, 2011 and December 31, 2010
4
       
 
Consolidated Statements of Cash Flows -
 
   
Nine months ended – September 30, 2011 and 2010
5
     
 
Notes to Consolidated Financial Statements
6
     
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
30
     
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
43
     
ITEM 4.
CONTROLS AND PROCEDURES
44
     
PART II – OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
45
     
ITEM 1A.
RISK FACTORS
45
     
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
48
     
ITEM 6.
EXHIBITS
49

 
 
 
2

 
 
 
 
 
 PART I - FINANCIAL INFORMATION:>

ITEM 1. - FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF INCOME
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
(in thousands, except per share data)


 
Three months ended,
 
Nine months ended
 
 
September 30,
 
September 30,
 
 
2011
 
2010
 
2011
 
2010
 
                 
Net sales
$ 1,544,360   $ 1,516,207   $ 4,625,837   $ 4,500,003  
Cost of sales
  1,198,299     1,182,815     3,608,423     3,498,012  
Gross profit
  346,061     333,392     1,017,414     1,001,991  
Selling, general and administrative expenses
  191,293     190,745     573,934     559,435  
Provision for doubtful accounts
  24,255     22,376     73,142     65,304  
Settlement, litigation and other related charges
  6,742     36,731     32,571     71,598  
Separation, benefit plan termination and related costs
  -     64,760     -     64,760  
Other miscellaneous charges
  6,718     8,022     10,939     19,072  
Operating income
  117,053     10,758     326,828     221,822  
Investment income
  21     4,096     572     6,865  
Interest expense
  (49,840 )   (30,975 )   (106,641 )   (99,295 )
Amortization of discount on convertible notes
  (6,107 )   (7,615 )   (17,969 )   (22,419 )
Income (loss) from continuing operations before income taxes
  61,127     (23,736 )   202,790     106,973  
Income tax expense (benefit)
  23,343     (14,100 )   79,570     35,423  
Income (loss) from continuing operations
  37,784     (9,636 )   123,220     71,550  
Loss from discontinued operations
  (9,900 )   (93,630 )   (67,479 )   (112,365 )
Net income (loss)
$ 27,884   $ (103,266 ) $ 55,741   $ (40,815 )
                         
Earnings (loss) per common share - Basic:
                       
Continuing operations
$ 0.34   $ (0.08 ) $ 1.09   $ 0.61  
Discontinued operations
  (0.09 )   (0.81 )   (0.59 )   (0.96 )
Net income (loss)
$ 0.25   $ (0.89 ) $ 0.49   $ (0.35 )
Earnings (loss) per common share - Diluted:
                       
Continuing operations
$ 0.33   $ (0.08 ) $ 1.07   $ 0.61  
Discontinued operations
  (0.09 )   (0.81 )   (0.59 )   (0.96 )
Net income (loss)
$ 0.24   $ (0.89 ) $ 0.49   $ (0.35 )
Dividends per common share
$ 0.0400   $ 0.0325   $ 0.1125   $ 0.0775  
Weighted average number of common shares outstanding:
                       
Basic
  112,729     115,554     113,443     116,909  
Diluted
  114,644     115,554     114,930     117,520  
Comprehensive income (loss)
$ 24,002   $ (69,432 ) $ 48,946   $ (8,245 )

The Notes to the Consolidated Financial Statements are an integral part of these statements.
 
 
 
 
3

 
 
 

 
CONSOLIDATED BALANCE SHEETS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
(in thousands, except share data)

 
September 30,
 
December 31,
 
 
2011
 
2010
 
ASSETS
       
Current assets:
       
Cash and cash equivalents
$ 679,643   $ 494,484  
Restricted cash
  1,999     2,019  
Accounts receivable, less allowances of $378,418 (2010-$401,027)
  953,836     1,011,823  
Inventories
  357,642     418,965  
Deferred income tax benefits
  154,471     150,644  
Other current assets
  210,006     332,607  
Current assets of discontinued operations
  3,330     47,254  
Total current assets
  2,360,927     2,457,796  
             
Properties and equipment, at cost less accumulated depreciation of $309,483 (2010-$284,533)
  213,283     204,717  
Goodwill
  4,301,702     4,234,821  
Identifiable intangible assets, less accumulated amortization of $237,452 (2010-$219,107)
  250,229     259,809  
Other noncurrent assets
  200,163     156,941  
Noncurrent assets of discontinued operations
  69     49,329  
Total noncurrent assets
  4,965,446     4,905,617  
Total assets
$ 7,326,373   $ 7,363,413  
             
LIABILITIES AND STOCKHOLDERS' EQUITY
           
Current liabilities:
           
Accounts payable
$ 225,980   $ 233,396  
Accrued employee compensation
  61,216     59,417  
Current debt
  26,298     3,537  
Other current liabilities
  211,906     275,543  
Current liabilities of discontinued operations
  8,546     22,361  
Total current liabilities
  533,946     594,254  
Long-term debt, notes and convertible debentures (Note 5)
  2,116,632     2,106,758  
Deferred income tax liabilities
  785,351     737,383  
Other noncurrent liabilities
  108,193     109,074  
Total noncurrent liabilities
  3,010,176     2,953,215  
Total liabilities
  3,544,122     3,547,469  
Commitments and contingencies (Note 8)
           
Stockholders' equity:
           
             
Preferred stock, no par value, 1,000,000 shares authorized, none issued and outstanding
  -     -  
Common stock, $1 par value, 200,000,000 shares authorized, 131,671,200 shares issued (2010-129,634,300 shares issued)
  131,671     129,634  
Paid in capital (Note 5)
  2,481,581     2,424,978  
Retained earnings
  1,622,649     1,579,672  
Treasury stock, at cost-17,329,900 shares (2010-13,011,700 shares )
  (459,859 )   (333,554 )
Accumulated other comprehensive income
  6,209     15,214  
Total stockholders' equity
  3,782,251     3,815,944  
Total liabilities and stockholders' equity
$ 7,326,373   $ 7,363,413  
 
The Notes to Consolidated Financial Statements are an integral part of these statements.
 
 
 
 
4

 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED
(in thousands)

 
Nine months ended
 
 
September 30,
 
 
2011
 
2010
 
Cash flows from operating activities:
       
Net income (loss)
$ 55,741   $ (40,815 )
Add: Loss from discontinued operations
  67,479     112,365  
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
           
Depreciation expense
  35,544     34,192  
Amortization expense
  61,782     84,185  
Write-off of debt issuance costs, net
  5,260     2,060  
Debt redemption tender premium
  (16,144 )   (7,591 )
Benefit plan termination and related costs
  -     25,187  
Changes in assets and liabilities, net of effects from acquisition and divestiture of businesses:
           
Accounts receivable, net of provision for doubtful accounts
  76,645     105,726  
Inventories
  65,950     (8,527 )
Other current and noncurrent assets
  104,030     (11,138 )
Accounts payable
  (24,395 )   (46,616 )
Accrued employee compensation
  1,993     4,739  
Current and noncurrent liabilities
  14,056     15,468  
Net cash flows from operating activities of continuing operations
  447,941     269,235  
Net cash flows from operating activities of discontinued operations
  869     1,473  
Net cash flows from operating activities
  448,810     270,708  
Cash flows from investing activities:
           
Acquisition of businesses, net of cash received
  (101,844 )   (111,483 )
Divestiture of businesses, net
  10,599     -  
Capital expenditures
  (39,080 )   (18,285 )
Other
  (2,812 )   10,522  
Net cash flows used in investing activities of continuing operations
  (133,137 )   (119,246 )
Net cash flows used in investing activities of discontinued operations
  (567 )   (401 )
Net cash flows used in investing activities
  (133,704 )   (119,647 )
Cash flows from financing activities:
           
Payments on Term A loan
  -     (125,000 )
Proceeds from long-term borrowings and obligations
  600,000     400,000  
Payments on long-term borrowings and obligations
  (626,921 )   (227,373 )
Fees paid for financing arrangements
  (12,222 )   (17,028 )
Increase in cash overdraft balance
  6,585     4,752  
Proceeds (payments) for stock awards and exercise of stock options, net of stock tendered in payment
  33,085     (13,308 )
Payments for Omnicare common stock repurchase (Note 2)
  (120,114 )   (82,761 )
Dividends paid
  (12,745 )   (9,109 )
Other
  2,687     (4,615 )
Net cash flows used in financing activities of continuing operations
  (129,645 )   (74,442 )
Net cash flows used in financing activities of discontinued operations
  -     -  
Net cash flows used in financing activities
  (129,645 )   (74,442 )
Net increase in cash and cash equivalents
  185,461     76,619  
Less increase in cash and cash equivalents of discontinued operations
  302     1,072  
Increase in cash and cash equivalents of continuing operations
  185,159     75,547  
Cash and cash equivalents at beginning of period
  494,484     275,707  
Cash and cash equivalents at end of period
$ 679,643   $ 351,254  

The Notes to Consolidated Financial Statements are an integral part of these statements.
 
 
 
5

 
 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
UNAUDITED

Note 1 – Basis of Presentation

Omnicare, Inc. and its consolidated subsidiaries (“Omnicare” or the “Company”) have prepared the accompanying unaudited Consolidated Financial Statements in accordance with the accounting policies described in its consolidated financial statements and the notes thereto included in the Current Report on Form 8-K dated July 29, 2011 (“July 2011 Current Report”), and the interim reporting requirements of Form 10-Q.  Accordingly, certain information and disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  The Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and related notes included in the July 2011 Current Report and any related updates included in the Company’s periodic quarterly Securities and Exchange Commission (“SEC”) filings.  Certain reclassifications of prior year amounts have been made to conform to the current year presentation.  All amounts disclosed in the Consolidated Financial Statements and related notes are presented on a continuing operations basis unless otherwise stated.

Note 2 – Significant Accounting Policies

Interim Financial Data

The interim financial data is unaudited; however, in the opinion of Omnicare management, all known adjustments (which are normal in nature, except as disclosed herein) necessary for a fair statement of the Omnicare consolidated results of operations, financial position and cash flows for the interim periods presented have been made.  All significant intercompany accounts and transactions have been eliminated.

Stock-Based Compensation

Stock-based compensation expense recognized in the Consolidated Statements of Income for stock options and stock awards totaled approximately $5.3 million and $15.7 million for the three and nine months ended September 30, 2011, respectively, and approximately $22.4 million and $34.2 million for the three and nine months ended September 30, 2010, respectively.
 
 
 
 
6

 

 
Accounts Receivable

The following table is an aging of the Company’s gross accounts receivable (net of allowances for contractual adjustments), aged based on payment terms and categorized based on the three primary overall types of accounts receivable characteristics (in thousands):


 
September 30, 2011
 
 
Current and 0-180 Days Past-Due
 
181 Days and Over Past-Due
 
Total
 
Medicare (Part D and Part B), Medicaid
           
and Third-Party payors
$ 271,348   $ 213,738   $ 485,086  
Facility payors
  386,024     218,459     604,483  
Private Pay payors
  85,666     157,019     242,685  
                   
Total gross accounts receivable
$ 743,038   $ 589,216   $ 1,332,254  
                   
 
December 31, 2010
 
Medicare (Part D and Part B), Medicaid
                 
and Third-Party payors
$ 260,788   $ 185,934   $ 446,722  
Facility payors
  389,887     312,996     702,883  
Private Pay payors
  96,047     167,198     263,245  
                   
Total gross accounts receivable
$ 746,722   $ 666,128   $ 1,412,850  


Acquisitions

During the first nine months of 2011, Omnicare completed two acquisitions of businesses, which were not, individually or in the aggregate, significant to the Company.

On September 7, 2011, Omnicare commenced a tender offer for all of the outstanding shares of the common stock of PharMerica Corporation (“PharMerica”) for $15.00 per share in cash.  The transaction has a total value of approximately $716 million, which includes the assumption of PharMerica’s net debt and any related refinancing thereof.  The tender offer is conditioned on, among other things, (i) there being validly tendered and not withdrawn, at least a majority of the total number of PharMerica shares outstanding on a fully diluted basis; (ii) the board of directors of PharMerica redeeming or invalidating its "poison pill" stockholder rights plan; (iii) the board of directors of PharMerica approving Omnicare's acquisition of PharMerica under Section 203 of the Delaware General Corporation Law (the "DGCL") or Omnicare being satisfied that Section 203 of the DGCL is inapplicable to the acquisition; (iv) the expiration or termination of all waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations thereunder (the "HSR Act"); and (v) PharMerica not entering into any agreement or transaction having the effect of impairing Omnicare's ability to acquire PharMerica or otherwise diminishing the expected value to Omnicare of the acquisition.  On September 22, 2011, Omnicare received a request for additional information (“Second Request”) from the Federal Trade Commission (“FTC”) under notification requirements of the HSR Act in connection with its tender offer for PharMerica.  The FTC’s request extends the waiting period under the HSR Act during which the FTC is permitted to review the proposed transaction until 10 days after Omnicare has substantially complied with the Second Request.  The Company’s tender offer is scheduled to expire at 5:00 p.m., New York City time, on December 2, 2011, unless extended.  Notwithstanding Omnicare’s intent to acquire PharMerica, there can be no assurance that the PharMerica acquisition will ultimately be completed.
 
 
 
 
7

 
 

Fair Value

The Company’s financial assets and liabilities, measured at fair value on a recurring basis, were as follows (in thousands):

     
Based on
 
 
Fair Value
 
Quoted Prices in Active Markets (Level 1)
 
Other Observable Inputs (Level 2)
 
Unobservable Inputs
(Level 3)
 
September 30, 2011
               
7.75% interest rate swap agreements - fair value hedge (1)
 $ 33,904    $ -    $ 33,904     -  
Derivatives
  -     -     -     -  
Total
$ 33,904   $ -   $ 33,904   $ -  
                         
December 31, 2010
                       
Rabbi trust assets
$ 85,741   $ 85,741   $ -   $ -  
7.75% interest rate swap agreement - fair value hedge
$ (829 ) $ -   $ (829 ) $ -  
6.875% interest rate swap agreement - fair value hedge
  (3,461 )   -     (3,461 )   -  
Derivatives
  -     -     -     -  
Total
$ (4,290 ) $ -   $ (4,290 ) $ -  
 
 (1)           The Company’s swap agreements are discussed in further detail at the “Debt” note of the Notes to Consolidated Financial Statements in this Filing and in the Company’s July 2011 Current Report.

The fair value of the Company’s fixed-rate debt facilities, excluding the previously disclosed swap values, is based on quoted market prices in an active market and is summarized as follows (in thousands):


Fair Value of Financial Instruments
 
 
September 30, 2011
 
December 31, 2010
 
Financial Instrument
Book Value
 
Fair Value
 
Book Value
 
Fair Value
 
6.125% senior subordinated notes, due 2013
$ 50,000   $ 50,100   $ 250,000   $ 251,300  
6.875% senior subordinated notes, due 2015
  100,000     103,900     525,000     535,500  
7.75% senior subordinated notes, due 2020
  550,000     574,800     400,000     415,500  
                         
3.75% convertible senior subordinated notes, due 2025
                       
       Carrying value
  359,325     -     353,505     -  
       Unamortized debt discount
  215,675     -     221,495     -  
       Principal amount
  575,000     651,800     575,000     636,400  
                         
4.00% junior subordinated convertible debentures, due 2033
                       
       Carrying value
  203,059     -     201,282     -  
       Unamortized debt discount
  141,941     -     143,718     -  
       Principal amount
  345,000     277,800     345,000     266,900  
                         
3.25% convertible senior debentures, due 2035
                       
       Carrying value
  381,209     -     370,837     -  
       Unamortized debt discount
  71,291     -     81,663     -  
       Principal amount
  452,500     408,400     452,500     427,600  
 
 
 
 
8

 
 

 
Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) balances by component and in the aggregate, follow (in thousands):


   
September 30,
 
December 31,
 
   
2011
 
2010
 
Cumulative foreign currency translation adjustments
  $ 7,511   $ 15,239  
Unrealized (loss) gain on fair value of investments
    (280 )   997  
Pension and postemployment benefits
    (1,022 )   (1,022 )
Total accumulated other comprehensive income, net
  $ 6,209   $ 15,214  

The amounts are net of applicable tax benefits which were not material at September 30, 2011 and December 31, 2010.

Income Taxes

The quarterly and year-to-date effective tax rates are different than the federal statutory rate largely as a result of the impact of state and local income taxes and certain non-deductible litigation costs.  The year over year change in the effective tax rate is primarily due to a larger reduction of income tax expense in the 2010 period versus 2011 relating to the reversal of certain unrecognized tax benefits for tax positions settled through the expiration of statutes of limitations.

Separation, Benefit Plan Termination and Related Costs

As previously reported, Joel F. Gemunder retired from his position as the Company's President and Chief Executive Officer and as a member of the Board of Directors of the Company, effective July 31, 2010.  Also, Cheryl D. Hodges, Senior Vice President and Secretary of the Company, resigned from the Company effective July 31, 2010.  In connection with the separation of these former executives, the Company recorded a charge of approximately $40 million for Separation related expenses, primarily related to severance, accelerated vesting of stock options and restricted stock as well as accrued vacation.
 
 
On September 30, 2010, the Company terminated the defined benefit portion of its Excess Benefit Plan (“the Plan”) which was not a qualified plan under the Internal Revenue Code of 1986, as amended.  As a result of the termination, each active participant’s terminated plan liability was determined, based primarily on the participant’s compensation and duration of employment, as of September 30, 2010.  As a result of the Plan termination, the Company recognized a one-time charge to expense of approximately $25 million in the third quarter of 2010 for benefit plan termination and related costs, primarily comprised of the recognition of previously deferred actuarial losses.

 
 
 
9

 
 
 
 
Other Miscellaneous Charges

Other Miscellaneous Charges consist of the following (in thousands):


   
Three months ended,
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Acquisition and other related costs
  $ 6,718     $ 3,915     $ 10,939     $ 3,978  
Restructuring and other related charges
    -       3,335       -       10,329  
Stock option expense
    -       933       -       3,509  
Debt related costs
    -       -       -       446  
Repack matters - SG&A
    -       (161 )     -       810  
Subtotal - other miscellaneous charges
    6,718       8,022       10,939       19,072  
Repack matters - COS
    -       (2,836 )     -       (1,927 )
Total - other miscellaneous charges, net
  $ 6,718     $ 5,186     $ 10,939     $ 17,145  
 
Common Stock Repurchase Program

On May 3, 2010, Omnicare announced that the Company’s Board of Directors (“BOD”) authorized a two-year program to repurchase, from time to time, shares of Omnicare’s outstanding common stock having an aggregate value of up to $200 million.  On May 26, 2011, the BOD approved an additional $100 million of share repurchase authorization extending until December 31, 2012.  In the nine months ended September 30, 2011, the Company repurchased approximately 4.1 million shares at an aggregate cost of approximately $120 million, for a cumulative amount of approximately 8.5 million shares and approximately $221 million through September 30, 2011.  Accordingly, the Company had approximately $79 million of combined share repurchase authority remaining as of September 30, 2011.

Recently Issued Accounting Standards

In September 2011, the Financial Accounting Standards Board (“FASB”) amended the authoritative guidance regarding the testing for Goodwill Impairment.  Under the amendments, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value reporting of a reporting unit is less than the carrying amount, then performing the two-step impairment test is unnecessary.  The changes are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, however, early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011.  The Company will early adopt the new authoritative guidance in the fourth quarter of 2011 in connection with its annual impairment test.
 
 
 
 
10

 
 

 
Note 3 – Discontinued Operations

Non-Core Disposal Group
In 2009, the Company commenced activities to divest certain home healthcare and related ancillary businesses (“the Disposal Group”) that are non-strategic in nature.  In 2010, Omnicare divested the home infusion business portion of the Disposal Group.  Also, in 2010, the Company entered into a letter of intent (“LOI”) regarding its disposition of the remaining durable medical equipment (“DME”) portion of the Disposal Group.  In the third quarter of 2011, the prior LOI was terminated, and a new LOI was entered into with a separate party.  In connection with these activities, and as a result of the Company’s third quarter 2011 fair value assessment, Omnicare recorded a loss in discontinued operations for the DME portion of the Disposal Group totaling $18.8 million.  The Company currently intends to close the DME transaction as soon as practicable, subject to certain conditions and applicable approvals.  Additionally, in the second quarter of 2011, the Company divested of its Tidewater Group Purchasing Organization (“Tidewater”) as the Company determined it was no longer a good strategic fit within the Company’s portfolio of assets.  The Company does not consider the operations of the Disposal Group and Tidewater (collectively, the “Non-Core Disposal Group”) as significant, individually or in the aggregate, to the operations of Omnicare.

In the nine months ended September 30, 2011, the Non-Core Disposal Group recorded an impairment loss of $23.8 million to reduce the carrying value of DME and Tidewater to fair value based on the LOI and final terms of the divestiture, respectively.  In the nine months ended September 30, 2010, the Non-Core Disposal Group recorded an impairment loss of approximately $10.3 million to reduce the carrying value of the Disposal Group to fair value as of September 30, 2010.  The net assets held for sale of the Non-Core Disposal Group are required to be measured at the lower of cost or fair value less costs to sell.  Prior to divestiture, the fair values are based on a market approach utilizing both selected guideline public companies and comparable industry transactions, which would be considered “Level 3” inputs within the fair value hierarchy.  The fair value amount is estimated, reviewed quarterly and finalized upon disposition of the individual components of the Non-Core Disposal Group.

CRO Services
As previously disclosed by the Company, the Contract Research Services organization (“CRO Services”) industry has been facing unfavorable market conditions.  The Company determined that its CRO Services business was no longer a good strategic fit within the Company’s portfolio of assets.  In light of these factors, and in connection with the reallocation of resources started in the second half of 2010, the Company committed to a plan to divest of its CRO Services business in the first quarter of 2011 and completed the divestiture in April 2011.  For the nine months ended September 30, 2011, CRO Services recorded an impairment loss of $51.5 million to reduce the carrying value of the CRO Services operations to fair value based on the final terms of the divestiture.  During the three and nine months ended September 30, 2010, CRO Services recorded a previously disclosed goodwill impairment loss of approximately $91 million.

The results from operations for all periods presented have been revised to reflect the results of the Non-Core Disposal Group and CRO Services as discontinued operations, including the impairment losses, as well as certain expenses of the Company related to the divestitures.

Selected financial information related to the discontinued operations of the Non-Core Disposal Group and CRO Services follows (in thousands):


 
Three months ended,
 
Nine months ended
 
 
September 30,
 
September 30,
 
 
2011
 
2010
 
2011
 
2010
 
Net sales - Non-Core Disposal Group ("NCDG")
$ 5,594   $ 16,114   $ 21,280   $ 48,213  
Net sales - CRO Services
  -     26,403     32,146     83,496  
Net sales - total discontinued
  5,594     42,517     53,426     131,709  
                         
Loss from operations of NCDG, pretax
  (1,317 )   (1,598 )   (2,472 )   (9,069 )
Loss from operations of CRO Services, pretax
  -     (3,773 )   (4,921 )   (12,751 )
Loss from operations - total discontinued, pretax
  (1,317 )   (5,371 )   (7,393 )   (21,820 )
                         
Income tax benefit - NCDG
  525     474     980     3,455  
Income tax benefit - CRO Services
  -     1,792     1,923     5,009  
Income tax benefit - total discontinued
  525     2,266     2,903     8,464  
                         
Loss from operations of NCDG, aftertax
  (792 )   (1,124 )   (1,492 )   (5,614 )
Loss from operations of CRO Services, aftertax
  -     (1,981 )   (2,998 )   (7,742 )
Loss from operations - total discontinued, aftertax
  (792 )   (3,105 )   (4,490 )   (13,356 )
                         
Impairment loss on NCDG, pretax
  (18,770 )   -     (23,835 )   (10,343 )
Impairment income (loss) on CRO Services, pretax
  229     (90,628 )   (51,544 )   (90,628 )
Income tax (expense) benefit of impairment loss on NCDG
  6,959     -     (2,720 )   1,859  
Income tax (expense) benefit of impairment loss on CRO Services
  2,474     103     15,110     103  
Impairment loss on total discontinued, aftertax
  (9,108 )   (90,525 )   (62,989 )   (99,009 )
                         
Loss from discontinued operations of NCDG
  (12,603 )   (1,124 )   (28,047 )   (14,098 )
Income /(loss) from discontinued operations of CRO Services
  2,703     (92,506 )   (39,432 )   (98,267 )
Loss from discontinued operations - total
$ (9,900 ) $ (93,630 ) $ (67,479 ) $ (112,365 )

 
 
 
11

 
 
 
Note 4 – Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the nine months ended September 30, 2011 are as follows (in thousands):

     
 
Total
 
Goodwill balance as of December 31, 2010
$ 4,234,821  
       
Goodwill acquired in the nine months ended September 30, 2011
  60,962  
Other
  5,919  
       
Goodwill balance as of September 30, 2011
$ 4,301,702  


The “Other” caption above includes the settlement of acquisition matters relating to prior-year acquisitions (including, where applicable, payments pursuant to acquisition agreements such as deferred payments, indemnification payments and payments originating from earnout provisions, as well as adjustments for the finalization of purchase price allocations, including identifiable intangible asset valuations).  “Other” also includes the effect of adjustments due to foreign currency translations, which relate to the Company’s Canadian pharmacy operations.

The Company’s intangible amortization expense for the three and nine months ended September 30, 2011 was approximately $10 million and $30 million, respectively, and was approximately $10 million and $29 million for the three and nine months ended September 30, 2010, respectively.

Note 5 – Debt

A summary of debt follows (in thousands):

 
September 30,
 
December 31,
 
 
2011
 
2010
 
Revolving loans (see below)
$ -   $ -  
6.125% senior subordinated notes, due 2013 (see below)
  50,000     250,000  
6.875% senior subordinated notes, due 2015 (see below)
  100,000     525,000  
Senior term loan, due 2016  (see below)
  450,000     -  
7.75% senior subordinated notes, due 2020 (see below)
  550,000     400,000  
3.75% convertible senior subordinated notes, due 2025
  575,000     575,000  
4.00% junior subordinated convertible debentures, due 2033
  345,000     345,000  
3.25% convertible senior debentures, due 2035
  452,500     452,500  
Capitalized lease and other debt obligations
  15,433     13,961  
Subtotal
  2,537,933     2,561,461  
Add (subtract) interest rate swap agreements
  33,904     (4,290 )
(Subtract) unamortized debt discount
  (428,907 )   (446,876 )
(Subtract) current portion of debt
  (26,298 )   (3,537 )
Total long-term debt, net
$ 2,116,632   $ 2,106,758  

 
 
 
12

 
 
 
Significant changes in the Company’s debt during the nine months ended September 30, 2011 are described in the remainder of this note.  The Company’s debt instruments which are not discussed in this note, have been disclosed in further detail at the “Debt” note of the Notes to Consolidated Financial Statements in Omnicare’s July 2011 Current Report.

Revolving Loans
On August 24, 2011, the Company entered into a $750 million senior unsecured credit agreement, maturing on August 24, 2016 (the “Senior Credit Agreement”).  The Senior Credit Agreement consists of a $300 million five-year unsecured revolving credit facility (the “2011 Revolving Credit Facility”) and a $450 million, five-year senior unsecured term loan facility (the “Term Loan”).  The Senior Credit Agreement also provides for an uncommitted incremental facility that permits the Company, subject to certain conditions, to increase the commitments under the Senior Credit Agreement by up to $300 million in the aggregate; provided that no lender is obligated to participate in any such increase.  The Senior Credit Agreement is guaranteed by the subsidiaries of the Company, subject to certain exceptions.  The interest rate applicable to the Senior Credit Agreement is, at the Company’s option, a floating base rate plus an applicable margin or the London interbank offered rate (“LIBOR”) plus an applicable margin.  Initially, the applicable margins were set at 1.50% with respect to the floating base rate loans and 2.50% with respect to the LIBOR loans.  The applicable margins for the Senior Credit Agreement may increase or decrease based on the Company’s consolidated total leverage ratio as specified in the Senior Credit Agreement.  The interest rate on the Term Loan was 2.74% at September 30, 2011.

The Senior Credit Agreement contains certain financial covenants requiring maintenance of certain interest coverage and leverage ratios, and customary affirmative and negative covenants.  In connection with entering into the Senior Credit Agreement, the Company recorded $15.3 million in deferred debt issuance costs, of which approximately $0.3 million was amortized to expense in the three and nine months ended September 30, 2011.

On August 24, 2011, in connection with entering into the Senior Credit Agreement, the Company’s existing $400 million senior secured revolving credit facility, dated as of May 18, 2010 (the “2010 Revolving Credit Facility”) was terminated.  There were no outstanding loans under the 2010 Revolving Credit Facility at the time of its termination.  Existing letters of credit under the 2010 Revolving Credit Facility were rolled over into or transferred to the Senior Credit Agreement.  In connection with the termination of the 2010 Revolving Credit Facility, the Company wrote off approximately $2.5 million of deferred debt issuance costs, which was recorded in interest expense for the three and nine months ended September 30, 2011.

At September 30, 2011, there was no outstanding balance under the Company’s 2011 Revolving Credit Facility.  As of September 30, 2011, the Company had approximately $20 million outstanding relating to standby letters of credit, substantially all of which were subject to automatic annual renewals.
 
 
 
 
13

 
 

 
7.75% Senior Subordinated Notes Due 2020
On September 20, 2011, Omnicare completed its offering of an additional $150 million aggregate principal amount of its 7.75% Senior Subordinated Notes due 2020 (the “Additional 7.75% Notes”).  After consummation of this offering, the aggregate principal amount outstanding of the Company’s 7.75% Senior Subordinated Notes, due 2020 (the “7.75% Notes”), including the additional notes, was $550 million.  In connection with the issuance of the Additional 7.75% Notes, the Company deferred $3.0 million in debt issuance costs, of which an immaterial amount was amortized to expense in the three and nine months ended September 30, 2011.

In connection with its offering of the Additional 7.75% Notes, the Company entered into two swap agreements (the “Additional 7.75% Swap Agreements”).  Under the Additional 7.75% Swap Agreements, which hedge against exposure to long-term U.S. dollar interest rates, the Company receives a fixed rate of 7.75% and pays a floating rate based on LIBOR with an interest period of six months, plus a weighted average spread of 5.32%.  The floating rate is determined semi-annually, in arrears, two London Banking Days prior to the first of each December and June.  The Company records interest expense on the Additional 7.75% Notes at the floating rate.  The Additional 7.75% Swap Agreements, which match the terms of the Additional 7.75% Notes, are designated and accounted for as a fair value hedge.  Accordingly, changes in the fair value of the Additional 7.75% Swap Agreements is offset by changes in the recorded carrying value of the related Additional 7.75% Notes.

The weighted average floating interest rate on the interest rate swap agreements was 4.83% at September 30, 2011.

The fair value of the interest rate swap agreements, including the Additional 7.75% Swap Agreements, was approximately $34 million at September 30, 2011, and is recorded in “Other noncurrent assets” or “Other noncurrent liabilities” on the Consolidated Balance Sheets, as applicable, and as an adjustment to the book carrying value of the related 7.75% Notes.

6.125% Senior Subordinated Notes Due 2013
In the first nine months of 2011, the Company redeemed $200 million aggregate principal amount of its outstanding 6.125% Senior Subordinated Notes, due 2013 (the “6.125% Notes”).  In connection with the redemption of the 6.125% Notes, the Company incurred debt redemption costs of approximately $0.1 million and $1.4 million, which were recorded in interest expense for the three and nine months ended September 30, 2011, respectively.  The redemption of the remaining $50 million aggregate principal amount of 6.125% Notes was completed on October 20, 2011.

6.875% Senior Subordinated Notes, due 2015
In the three and nine months ended September 30, 2011, the Company redeemed $425 million aggregate principal amount of its outstanding 6.875% Senior Subordinated Notes, due 2015 (the “6.875% Notes”).  In connection with the redemption of the 6.875% Notes, the Company incurred net debt redemption costs of approximately $17.6 million consisting primarily of a $14.6 million call premium and net write-off of approximately $3.0 million of deferred debt issuance costs, which were recorded in interest expense for the three and nine months ended September 30, 2011.  The redemption of the remaining $100 million aggregate principal amount of 6.875% Notes was completed on October 17, 2011.

In the second quarter of 2011, the interest rate swap agreement on the 6.875% Notes was terminated, and the Company began paying interest at the 6.875% stated rate effective May 11, 2011.
 
 
 
 
14

 
 

 
The Company amortized to expense approximately $1.5 million and $1.7 million of deferred debt issuance costs during the three months ended September 30, 2011 and 2010, respectively, and $4.3 million and $6.4 million during the nine months ended September 30, 2011 and 2010, respectively, including the amounts disclosed in the preceding paragraphs.

The Company has three convertible securities, its 3.75% Convertible Senior Subordinated Notes, due 2025 (the “3.75% Convertible Notes”), the Series B 4.00% junior subordinated convertible debentures, due 2033 (the “4.00% Convertible Debentures”), and its 3.25% convertible senior debentures, due 2035 (with optional repurchase right, at par, of holders on December 15, 2015) (the “3.25% Convertible Debentures”).  Issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are required to separately account for the liability and equity components in a manner that reflects the entity’s calculated nonconvertible debt borrowing rate when the debt was issued.  The carrying amounts of the Company’s convertible debt and related equity balances, are as follows (in thousands):


 
September 30,
 
December 31,
 
 
2011
 
2010
 
Carrying value of equity component
$ 619,223   $ 619,223  
             
Principal amount of convertible debt
$ 1,372,500   $ 1,372,500  
Unamortized debt discount
  (428,907 )   (446,876 )
Net carrying value of convertible debt
$ 943,593   $ 925,624  

As of September 30, 2011, the remaining amortization period for the debt discount was approximately 14.25, 21.75 and 4.25 years for the 3.75% Convertible Notes, 4.00% Convertible Debentures and 3.25% Convertible Debentures, respectively.

The effective interest rates for the liability components of the 3.75% Convertible Notes, 4.00% Convertible Debentures and 3.25% Convertible Debentures were 8.25%, 8.01% and 7.625%, respectively, for the period ended September 30, 2011.

 
 
 
15

 
 
 
Note 6 – Earnings (Loss) Per Share Data

The following is a reconciliation of the basic and diluted earnings (loss) per share (“EPS”) computations for both the numerator and denominator (in thousands, except per share data):


 
Three months ended September 30,
 
 
Income
 
Common Shares
 
Per Common
 
2011:
(Numerator)
 
(Denominator)
 
Share Amounts
 
Basic EPS
           
Income from continuing operations
$ 37,784       $ 0.34  
Loss from discontinued operations
  (9,900 )       (0.09 )
Net income
  27,884     112,729   $ 0.25  
Effect of Dilutive Securities
                 
Convertible securities
  72     1,382        
Stock options, warrants and awards
  -     533        
Diluted EPS
                 
Income from continuing operations plus assumed conversions
  37,856         $ 0.33  
Loss from discontinued operations
  (9,900 )         (0.09 )
Net income plus assumed conversions
$ 27,956     114,644   $ 0.24  
                   
2010:
                 
Basic EPS
                 
Loss from continuing operations
$ (9,636 )       $ (0.08 )
Loss from discontinued operations
  (93,630 )         (0.81 )
Net loss
  (103,266 )   115,554   $ (0.89 )
Effect of Dilutive Securities
                 
4.00% junior subordinated convertible debentures
  -     -        
Stock options, warrants and awards
  -     -        
Diluted EPS
                 
Loss from continuing operations
  (9,636 )       $ (0.08 )
Loss from discontinued operations
  (93,630 )         (0.81 )
Net loss
$ (103,266 )   115,554   $ (0.89 )
 
 
 
 
 
16

 
 
 

 
Nine months ended September 30,
 
 
Income
 
Common Shares
 
Per Common
 
2011:
(Numerator)
 
(Denominator)
 
Share Amounts
 
Basic EPS
           
Income from continuing operations
$ 123,220       $ 1.09  
Loss from discontinued operations
  (67,479 )       (0.59 )
Net income
  55,741     113,443   $ 0.49  
Effect of Dilutive Securities
                 
Convertible securities
  216     644        
Stock options, warrants and awards
  -     843        
Diluted EPS
                 
Income from continuing operations plus assumed conversions
  123,436         $ 1.07  
Loss from discontinued operations
  (67,479 )         (0.59 )
Net income plus assumed conversions
$ 55,957     114,930   $ 0.49  
                   
2010:
                 
Basic EPS
                 
Income from continuing operations
$ 71,550         $ 0.61  
Loss from discontinued operations
  (112,365 )         (0.96 )
Net loss
  (40,815 )   116,909   $ (0.35 )
Effect of Dilutive Securities
                 
4.00% junior subordinated convertible debentures
  217     275        
Stock options, warrants and awards
  -     336        
Diluted EPS
                 
Income from continuing operations plus assumed conversions
  71,767         $ 0.61  
Loss from discontinued operations
  (112,365 )         (0.96 )
Net loss plus assumed conversions
$ (40,598 )   117,520   $ (0.35 )

EPS is reported independently for each amount presented.  Accordingly, the sum of the individual amounts may not necessarily equal the separately calculated amounts for the corresponding period.

The Company is required to include additional shares in its diluted shares outstanding calculation based on the treasury stock method when the average Omnicare stock market price for the applicable period exceeds $27.43, $40.82 and $79.53 for the 3.75% Convertible Notes, 4.00% Convertible Debentures, and 3.25% Convertible Debentures, respectively.

During the three and nine months ended September 30, 2011 and 2010, the anti-dilutive effect associated with certain stock options, warrants and awards was excluded from the computation of diluted EPS, since the exercise price was greater than the average market price of the Company’s common stock during these periods.  The aggregate number of stock options, warrants and awards excluded from the computation of diluted EPS for the three months ended September 30, 2011 and 2010 totaled 2.7 million and 6.2 million, respectively, and for the nine months ended September 30, 2011 and 2010, totaled 2.7 million and 4.9 million respectively.  The three months ended September 30, 2010 loss per share has been computed using basic weighted average shares outstanding only, as the impact of the Company’s potentially dilutive instruments, representing an additional 0.4 million of potentially dilutive shares, was anti-dilutive during this period, due to the net loss incurred.
 
 
 
 
17

 
 
 
Note 7 – Restructuring and Other Related Charges

Company-wide Reorganization Program:

During 2010, the Company initiated a “Company-wide Reorganization Program” (the “CWR Program”), including a reshaping of the organization with the objective of deploying resources closer to the customers, allowing Omnicare to become more responsive to customer needs, better leveraging the Omnicare platform and better positioning the Company for potential growth.  The program is anticipated to be completed in the next twelve months and is currently estimated to result in restructuring and other related charges of approximately $13 million, which is largely related to severance, employment agreement buyout and lease termination costs.

As of September 30, 2011, the Company has made cumulative payments of approximately $2.5 million of severance and other employee-related costs for the CWR Program.  The Company had liabilities of approximately $2.1 million at December 31, 2010, of which approximately $1.4 million was utilized in the nine months ended September 30, 2011.  The remaining liabilities of $0.7 million at September 30, 2011 represent amounts not yet paid relating to actions taken in connection with the program (primarily severance and employment agreement buy-outs) and will be settled as these matters are finalized.

Omnicare Full Potential Program:

In connection with the previously disclosed “Omnicare Full Potential” Plan, a major initiative primarily designed to re-engineer the Company’s pharmacy operating model to increase efficiency and enhance customer growth, which was completed in 2010, the Company had liabilities of approximately $7.7 million at December 31, 2010, of which $2.9 million was utilized in the nine months ended September 30, 2011.  The remaining liabilities of $4.8 million at September 30, 2011 represent amounts not yet paid relating to actions taken in connection with the program (primarily lease termination payments) and will be settled as these matters are finalized.

Note 8 – Commitments and Contingencies

Omnicare continuously evaluates contingencies based upon the best available information.  The Company believes that liabilities have been recorded to the extent necessary in cases where the outcome is considered probable and reasonably estimable.  To the extent that resolution of contingencies results in amounts that vary from the Company’s recorded liabilities, future earnings will be charged or credited accordingly.

On October 5, 2011, a qui tam complaint, entitled United States ex rel. Donald Gale v. Omnicare, Inc., No. 1:10-cv-0127, was served on the Company. The case had been filed on January 19, 2010 under seal with the U.S. District Court for the Northern District of Ohio, Eastern Division. The complaint was unsealed by the Court on June 9, 2011 after the U.S. Department of Justice notified the court that it has declined to intervene in this action.  The complaint was brought by Donald Gale as a private party qui tam relator on behalf of the federal government. The action alleges civil violations of the False Claims Act based on allegations that the Company provided certain customer facilities with discounts and other forms of remuneration in return for referrals of business in violation of the Anti-Kickback Statute, and offered pricing terms in violation of the "most favored customer" pricing laws of various state Medicaid plans.  The Company believes that the allegations are without merit and intends to vigorously defend itself in this action if pursued.

On August 4, 2011, a qui tam complaint, entitled United States of America ex rel. Fox Rx, Inc. v. Omnicare, Inc. and Neighborcare, Inc., No. 1:11-cv-0962, that was filed under seal with the U.S. District Court for the Northern District of Georgia, was unsealed by the Court.  The U.S. Department of Justice has declined to intervene in this action.  The Company has not been served with the complaint in this action.  The complaint was brought by Fox Rx, Inc. as a qui tam relator on behalf of the federal government.  The action alleges civil violations of the False Claims Act based on allegations that the Company billed Medicare Part D for medically unnecessary antipsychotic drugs, increased the dispensing fees by artificially shortening the supply of prescribed medication, submitted claims for antipsychotic drugs without complying with Fox Rx, Inc.’s prior approval requirements, and waived or failed to collect copayments from patients to induce the use of prescription drugs. The Company believes that the allegations are without merit and intends to vigorously defend itself in this action if pursued.
 
 
 
 
18

 
 

 
On August 24, 2011, a class action complaint entitled Ansfield v. Omnicare, Inc., et al. was filed on behalf of a putative class of all purchasers of the Company's common stock from January 10, 2007 through August 5, 2010 against the Company and certain of its current and former officers in the United States District Court for the Eastern District of Kentucky, alleging violations of federal securities law in connection with alleged false and misleading statements with respect to the Company's compliance with federal and state Medicare and Medicaid laws and regulations.  The complaint seeks unspecified money damages.  The Company believes that the claims asserted in the complaint are entirely without merit and intends to defend against them vigorously.
 
On October 21, 2011, a class action complaint entitled Jacksonville Police & Fire Pension Fund v. Omnicare, Inc. et al. was filed on behalf of the same putative class of purchasers as is referenced in the Ansfield complaint described above, against the Company and certain of its current and former officers, in the U.S. District Court for the Eastern District of Kentucky.  Plaintiffs allege substantially the same violations of federal securities law as are alleged in the Ansfield complaint.  The complaint seeks unspecified money damages.  The Company has not been served with the complaint in this action.  The Company believes that the claims asserted in the complaint are entirely without merit and intends to defend against them vigorously.

On December 13, 2010, a qui tam complaint entitled United States ex rel. Bartz v. Ortho-McNeil Pharmaceuticals, Inc., Johnson & Johnson, Janssen Pharmaceutica, Inc., Janssen Pharmaceutica Products, LP, McKesson Corporation, McKesson Specialty Pharmaceutical, LLC and Omnicare, Inc., Civil Action No. 05-cv-6010, which had been filed under seal with the U.S. District Court in Philadelphia, Pennsylvania, was ordered unsealed by the court.  The complaint was brought by Scott Bartz, a former employee of Johnson & Johnson, as a private party qui tam relator on behalf of the federal government and several state and local governments.  The U.S. Department of Justice has notified the court that it has declined to intervene.  The action alleges civil violations of the False Claims Act based on allegations that Johnson & Johnson and its affiliates provided the Company and McKesson with rebates, free drugs and other remuneration in order to limit Johnson & Johnson’s rebate liability to Medicaid.  The court granted Johnson & Johnson’s motion to transfer the action to U.S. District Court in Boston, Massachusets in February 2011.  The Company filed a motion to dismiss the complaint on May 27, 2011.  On June 10, 2011, the relator filed a notice of intent to voluntarily dismiss its claims against the Company, which is pending.  The Company believes that the allegations are without merit and intends to vigorously defend itself in this action if pursued.

On October 29, 2010, a qui tam complaint entitled United States ex rel. Banigan and Templin, et al. v. Organon USA, Inc., Omnicare, Inc. and Pharmerica, Inc., Civil No. 07-12153-RWZ, that had been filed under seal with the U.S. District Court in Boston, Massachusetts, was ordered unsealed by the court.  The complaint was brought by James Banigan and Richard Templin, former employees of Organon, as private party qui tam relators on behalf of the federal government and several state and local governments.  The action alleges civil violations of the False Claims Act based on allegations that Organon USA, Inc. and its affiliates paid the Company and several other long-term care pharmacies rebates, post-purchase discounts and other forms of remuneration in return for purchasing pharmaceuticals from Organon and taking steps to increase the purchase of Organon's drugs in violation of the Anti-Kickback Statute.  The U.S. Department of Justice has notified the court that it has declined to intervene in this action.  The Company filed a motion to dismiss the complaint on July 7, 2011.  The Company believes that the allegations are without merit and intends to vigorously defend itself in this action if pursued.

The Drug Enforcement Administration ("DEA") is investigating alleged errors and deficiencies in paperwork requirements for controlled substance dispensing at several of the Company's pharmacies in Ohio.  The United States Attorney's Office, Northern District of Ohio ("AUSA"), is conducting an investigation relating to this matter, and may seek monetary penalties.  The AUSA is also conducting a criminal investigation of the Company and several current and former employees in connection with the DEA audits.  The Company is cooperating with these investigations and intends to vigorously defend itself if these matters are pursued.  The Company recorded a provision for this matter in the quarters ended June 30, 2011 and December 31, 2010.

On April 14, 2010, a purported shareholder derivative action, entitled Manville Personal Injury Settlement Trust v. Gemunder, et al., Case No. 10-CI-01212, was filed in Kentucky State Court, against members of the Board and certain current and former officers of the Company, individually, purporting to assert claims for breach of fiduciary duty, unjust enrichment, gross mismanagement, and waste of corporate assets arising out of alleged violations of federal and state laws prohibiting the payment of illegal kickbacks and the submission of false claims in connection with the Medicare and Medicaid healthcare programs.  Plaintiff alleges that the Board and senior management caused the company to violate these laws, which has resulted in over $100 million in fines and penalties paid by Omnicare and exposed the Company and certain individual defendants to potential civil and criminal liability.  On April 27, 2011 the court entered an order denying defendants’ motion to dismiss the complaint for failure to make a pre-suit demand and failure to state a claim.  Defendants filed a notice of appeal from the decision in the Kentucky Court of Appeals, and plaintiff moved to dismiss that appeal on the grounds that the order denying defendants’ motion to dismiss is not subject to an immediate appeal under Kentucky law.  On October 6, 2011, the Kentucky Court of Appeals granted plaintiff’s motion on the grounds that the appeal was premature.  The individual defendants have denied all allegations of wrongdoing, believe the claims against them to be completely without merit and intend to vigorously defend themselves in this action.

On April 2, 2010, a purported class action lawsuit, entitled Spindler, et al. v. Johnson & Johnson Corp., Omnicare, Inc. and Does 1-10, Case No. CV-10-1414, was filed in the United States District Court for the Northern District of California, San Francisco Division, against Johnson & Johnson (“J&J”), the Company and certain unnamed defendants asserting violations of federal antitrust law and California unfair competition law arising out of certain arrangements between J&J and the Company.  Plaintiffs allege, among other things, that the Company violated these laws by entering into agreements with J&J to promote J&J products.  On January 21, 2011, the court dismissed the amended complaint and granted permission to file a new amended complaint, which was filed in February 2011.  The Company filed a motion to dismiss the second amended complaint in March 2011.  On August 1, 2011, the court dismissed the second amended complaint but gave plaintiffs permission to file a further amended complaint within 20 days.  Plaintiffs did not do so, and the Company filed a proposed order seeking final dismissal with prejudice on August 23, 2011.

On January 8, 2010, a qui tam complaint, entitled United States ex rel. Resnick and Nehls v. Omnicare, Inc., Morris Esformes, Phillip Esformes and Lancaster Ltd. d/b/a Lancaster Health Group, No. 1:07cv5777, that was filed under seal with the U.S. District Court in Chicago, Illinois was unsealed by the court.  The U.S. Department of Justice and the State of Illinois have notified the court that they have declined to intervene in this action.  The complaint was brought by Adam Resnick and Maureen Nehls as private party “qui tam relators” on behalf of the federal government and two state governments.  The action alleges civil violations of the False Claims Act and certain state statutes based on allegations that Omnicare acquired certain institutional pharmacies at above-market rates in violation of the Anti-Kickback Statute and applicable state statutes.  On December 1, 2010, Resnick filed a motion to withdraw as a relator, which the court granted on December 14, 2010.  The Company believes that the allegations are without merit and intends to vigorously defend itself in this action.

On or about March 12, 2010, a qui tam complaint entitled State of Illinois, ex rel. Adam B. Resnick and Maureen Nehls v. Omnicare, Inc. Morris Esformes, Phillip Esformes, and Tim Dacy, No. D6 L 1926 that was filed under seal in Illinois state court, was unsealed by the court.  The State of Illinois notified the court that it declined to intervene in the action.  This complaint was brought by the same two qui tam relators, Adam Resnick and Maureen Nehls, that brought the complaint in the United States District Court in Chicago described above.  This complaint is based on allegations nearly identical to a portion of the allegations contained in that federal action.  The Company has not been served with the complaint in this action.  The Company believes that the allegations are without merit and intends to vigorously defend itself in this action if pursued.

 
 
 
19

 
 
 
On June 11, 2010, a qui tam complaint, entitled United States ex rel. Stone v. Omnicare Inc., No. 1:09cv4319, that was filed under seal with the U.S. District Court in Chicago, Illinois was unsealed by the court. The U.S. Department of Justice and the various states named in the complaint have notified the court that they have declined to intervene in this action. The complaint was brought by John Stone, the Company’s former Vice President of Internal Audit, as a private party qui tam relator on behalf of the federal government and several state governments. The action alleges civil violations of the False Claims Act and certain state statutes based on allegations that the Company submitted claims for reimbursement for certain ancillary services that did not conform with Medicare and Medicaid regulations, submitted claims for reimbursement from newly acquired pharmacies that were in violation of certain Medicaid and Medicare regulations, violated certain FDA regulations regarding the storage and handling of a particular drug, and violated certain Medicaid billing regulations relating to usual and customary charges. Relator also asserts against the Company a retaliatory discharge claim under the False Claims Act.  On November 1, 2010, the Company filed a motion to dismiss the lawsuit.  Relator responded and conceded to dismissal of one of the counts.  On July 7, 2011, the court granted the Company's motion in part and denied it in part.  The court granted the motion as to the allegations that the Company submitted claims for reimbursement for certain ancillary services that did not conform with Medicare and Medicaid regulations and submitted claims for reimbursement from newly acquired pharmacies that were in violation of certain Medicaid and Medicare regulations; the court dismissed those counts without prejudice.  The court denied the Company's motion as to the allegations that the Company violated certain FDA regulations regarding the storage and handling of a particular drug and retaliated against Relator.   On September 15, 2011, Relator filed an Amended Complaint.  He repeated his claim that the Company submitted false claims for certain ancillary services that did not conform with Medicare and Medicaid regulations.  Relator also asserted a claim in the Amended Complaint that the Company submitted false claims to the Nevada Medicaid program for a particular drug.  Relator repeated his retaliatory discharge claim.  The Company will file a motion to dismiss the Amended Complaint on or before November 15, 2011.  The Company believes that the allegations are without merit and intends to vigorously defend itself in this action.

On November 19, 2010, the Company was served with a second amended qui tam complaint entitled United States ex rel. Rostholder v. Omnicare, Inc. and Omnicare Distribution Center, LLC f/k/a Heartland Repack Services LLC, No. CCB-07-1283, that was filed under seal with the U.S. District Court in Baltimore, Maryland in July 2009.  The U.S. Department of Justice notified the court on April 22, 2009 that it declined to intervene in this action.  The complaint was brought by Barry Rostholder as a private party qui tam relator on behalf of the federal government and several state and local governments.  The action, in general, alleges civil violations of the False Claims Act based on allegations that the Company submitted claims for reimbursement for drugs that were repackaged at its Heartland repackaging facility in violation of certain FDA regulations.  These allegations arise from the previously disclosed issues experienced by the Company at its Heartland repackaging facility, which suspended operations in 2006.  On September 30, 2011, the Company filed a motion to dismiss the lawsuit in its entirety.  The Company believes that the claims in the complaint are without merit and intends to vigorously defend itself in this action if pursued.

As part of the previously disclosed civil settlement agreement entered into by the Company with the U.S. Attorney’s Office, District of Massachusetts in November 2009, the Company also entered into an amended and restated corporate integrity agreement (“CIA”) with the Department of Health and Human Services Office of the Inspector General with a term of five years from November 2, 2009.  Pursuant to the CIA, the Company is required, among other things, to (i) create procedures designed to ensure that each existing, new or renewed arrangement with any actual or potential source of health care business or referrals to Omnicare or any actual or potential recipient of health care business or referrals from Omnicare does not violate the Anti-Kickback Statute, 42 U.S.C. (§) 1320a-7b(b) or related regulations, directives and guidance, including creating and maintaining a database of such arrangements; (ii) retain an independent review organization to review the Company’s compliance with the terms of the CIA and report to OIG regarding that compliance; and (iii) provide training for certain Company employees as to the Company’s requirements under the CIA.  The requirements of the Company’s prior corporate integrity agreement obligating the Company to create and maintain procedures designed to ensure that all therapeutic interchange programs are developed and implemented by Omnicare consistent with the CIA and federal and state laws for obtaining prior authorization from the prescriber before making a therapeutic interchange of a drug and to maintain procedures for the accurate preparation and submission of claims for federal health care program beneficiaries in hospice programs, have been incorporated into the amended and restated CIA without modification.  The requirements of the CIA have resulted in increased costs to maintain the Company’s compliance program and greater scrutiny by federal regulatory authorities.  Violations of the corporate integrity agreement could subject the Company to significant monetary penalties.  Consistent with the CIA, the Company is reviewing its contracts to ensure compliance with applicable laws and regulations.  As a result of this review, pricing under certain of its consultant pharmacist services contracts have been increased and will continue to be increased, and these price increases have resulted and may continue to result in the loss of certain contracts.

In February 2006, two substantially similar putative class action lawsuits were filed in the United States District Court for the Eastern District of Kentucky, and were consolidated and entitled Indiana State Dist. Council of Laborers & HOD Carriers Pension & Welfare Fund v. Omnicare, Inc., et al., No. 2:06cv26.  The amended consolidated complaint was filed against Omnicare, three of its officers and two of its directors and purported to be brought on behalf of all open-market purchasers of Omnicare common stock from August 3, 2005 through July 27, 2006, as well as all purchasers who bought their shares in the Company's public offering in December 2005.  The complaint contained claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (and Rule 10b-5) and Section 11 of the Securities Act of 1933 and sought, among other things, compensatory damages and injunctive relief.  Plaintiffs alleged that Omnicare (i) artificially inflated its earnings (and failed to file GAAP-compliant financial statements) by engaging in improper generic drug substitution, improper revenue recognition and overvaluation of receivables and inventories; (ii) failed to timely disclose its contractual dispute with UnitedHealth Group Inc.; (iii) failed to timely record certain special litigation reserves; and (iv) made other allegedly false and misleading statements about the Company’s business, prospects and compliance with applicable laws and regulations.  The defendants filed a motion to dismiss the amended complaint on March 12, 2007, and on October 12, 2007, the court dismissed the case.  On November 9, 2007, plaintiffs appealed the dismissal to the United States Court of Appeals for the Sixth Circuit.  On October 21, 2009, the Sixth Circuit Court of Appeals generally affirmed the district court's dismissal, dismissing plaintiff's claims for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.  However, the appellate court reversed the dismissal for the claim brought for violation of Section 11 of the Securities Act of 1933, and returned the case to the district court for further proceedings.  On December 30, 2010, plaintiffs filed a motion in the district court requesting permission to file a third amended complaint.  On February 4, 2011, the defendants filed a motion to dismiss the sole remaining claim in plaintiff's second amended complaint.  On July 14, 2011, the court granted both motions and deemed the third amended complaint filed.  This complaint asserts a claim under Section 11 of the Securities Act of 1933 on behalf of all purchasers of Omnicare common stock in the December 2005 public offering.  The new complaint alleges that the 2005 registration statement contained false and misleading statements regarding Omnicare's policy of compliance with all applicable laws and regulations with particular emphasis on allegations of violation of the federal anti-kickback law in connection with three of Omnicare's acquisitions, Omnicare's contracts with two of its suppliers and its provision of pharmacist consultant services.  On August 19, 2011, the defendants filed a motion to dismiss plaintiffs' most recent complaint.  The Company believes that the allegations are without merit and intends to vigorously defend itself in this action.

On February 13, 2006, two substantially similar shareholder derivative actions, entitled Isak v. Gemunder, et al., Case No. 06-CI-390, and Fragnoli v. Hutton, et al., Case No. 06-CI-389, were filed in Kentucky State Circuit Court, Kenton Circuit, against the members of Omnicare’s board of directors, individually, purporting to assert claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment arising out of the Company’s alleged violations of federal and state health care laws based upon the same purportedly improper generic drug substitution that is the subject of the federal purported class action lawsuits.  The complaints seek, among other things, damages, restitution and injunctive relief.  The Isak and Fragnoli actions were later consolidated by agreement of the parties.  The Company believes that the allegations are without merit and intends to vigorously defend itself in this action.

The three and nine months ended September 30, 2011 included charges of $6.7 million and $32.6 million, respectively, and approximately $36.7 million and $71.6 million for the three and nine months ended September 30, 2010, respectively, reflected in “Settlement, litigation and other related charges” of the Consolidated Statements of Income, primarily for estimated litigation-related settlements and professional expenses for resolution of certain regulatory matters with various states, certain large customer disputes, costs associated with the settlement of the investigation by the United States Attorney’s Office, District of Massachusetts; the investigation by the federal government and certain states relating to drug substitutions; and purported class and derivative actions against the Company.  In connection with Omnicare’s participation in Medicare, Medicaid and other healthcare programs, the Company is subject to various inspections, audits, inquiries and investigations by governmental/regulatory authorities responsible for enforcing the laws and regulations to which the Company is subject.  Further, the Company maintains a compliance program which establishes certain routine periodic monitoring of the accuracy of the Company’s billing systems and other regulatory compliance matters and encourages the reporting of errors and inaccuracies.  As a result of the compliance program, Omnicare has made, and will continue to make, disclosures to the applicable governmental agencies of amounts, if any, determined to represent over-payments from the respective programs and, where applicable, those amounts, as well as any amounts relating to certain inspections, audits, inquiries and investigations activity are included in "Settlement, litigation and other related charges” of the Consolidated Statements of Income.
 
 
 
 
20

 
 

 
During 2006, the Company experienced certain quality control and product recall issues, as well as fire damage, at one of its repackaging facilities.  In connection with the resolution of these matters (the “Repack Matters”) the Company decided not to reopen this facility.  The Company has been cooperating with federal and state officials who have been conducting investigations relating to the Repack Matters and certain billing issues.  Addressing these issues served to increase costs.  The Company maintains product recall, property and casualty and business interruption insurance, and the extent of insurance recoveries for these expenses continues to be reviewed by its outside advisors.  The Company incurred increased costs/(credits) [net of recoveries] of approximately $(3.0) million and $(1.1) million for the three and nine months ended September 30, 2010, respectively.

Although the Company cannot know with certainty the ultimate outcome of the matters described in the preceding paragraphs other than as disclosed, there can be no assurance that the resolution of these matters will not have a material adverse impact on the Company’s consolidated results of operations, financial position or cash flows, or that these matters will be resolved in an amount that would not exceed the amount of any pretax charges previously recorded by the Company.

As part of its ongoing operations, the Company is also subject to various inspections, audits, inquiries, investigations and similar actions by third parties, as well as governmental/regulatory authorities responsible for enforcing the laws and regulations to which the Company is subject.  Further, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the government. Some states have adopted similar state whistleblower and false claims provisions. The Company has from time to time received, and may in the future receive, government inquiries from federal and state agencies regarding compliance with various health care laws.  In addition, the Company is involved in various legal actions arising in the normal course of business.  At any point in time, the Company is in varying stages of discussions on these matters.  These matters are continuously being evaluated and, in many cases, are being contested by the Company and the outcome is not predictable.  Consequently, an estimate of the range of loss associated with certain actions cannot be made, and there can be no assurance that the ultimate resolution of these matters, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows.

The Company indemnifies the directors and officers of the Company for certain liabilities that might arise from the performance of their job responsibilities for the Company.  Additionally, in the normal course of business, the Company enters into contracts that contain a variety of representations and warranties and which provide general indemnifications.  The Company’s maximum exposure under these arrangements is unknown, as this involves the resolution of claims made, or future claims that may be made, against the Company, its directors and/or officers, the outcomes of which is unknown and not currently predictable.  Accordingly, no liabilities have been recorded for the indemnifications.
 
 
 
 
21

 
 

 
Note 9 – Segment Information

Following the discontinuance of the operations of the Company’s Clinical Research business, Omnicare operates in one segment, the Pharmacy Services Segment.  Accordingly, no operating segment data has been provided.  The Company is currently evaluating its overall organizational structure and the related internal financial and operational reporting.  It is anticipated that this review will be completed during the fourth quarter of 2011.  Upon completion of this review, changes, if any, in internal financial reporting will be reflected in the Company’s periodic filings.
 
Note 10 – Guarantor Subsidiaries

The Company’s 6.125% Senior Subordinated Notes due 2013, the 6.875% Senior Subordinated Notes due 2015, the 7.75% Senior Subordinated Notes due 2020 and the 3.75% Convertible Notes due 2025 are fully and unconditionally guaranteed on an unsecured, joint and several basis by certain wholly-owned subsidiaries of the Company (the “Guarantor Subsidiaries”).  The following condensed consolidating financial data illustrates the composition of Omnicare, Inc. (“Parent”), the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries as of September 30, 2011 and December 31, 2010 for the balance sheets, as well as the three and nine months ended September 30, 2011 and 2010 for the statements of income, and the statements of cash flows for the nine months ended September  30, 2011 and 2010.  Management believes separate complete financial statements of the respective Guarantor Subsidiaries would not provide information that would be necessary for evaluating the sufficiency of the Guarantor Subsidiaries, and thus are not presented.  The equity method has been used with respect to the Parent company’s investment in subsidiaries.  No consolidating/eliminating adjustment column is presented for the condensed consolidating statements of cash flows since there were no significant consolidating/eliminating adjustment amounts during the periods presented.

Summary Consolidating Statements of Income – Unaudited
(in thousands)


 
Three months ended September 30,
 
     
Guarantor
 
Non-Guarantor
 
Consolidating/Eliminating
 
Omnicare, Inc.
 
2011:
Parent
 
Subsidiaries
 
Subsidiaries
 
Adjustments
 
and Subsidiaries
 
Net sales
$ -   $ 1,513,594   $ 30,766   $ -   $ 1,544,360  
Cost of sales
  -     1,176,595     21,704     -     1,198,299  
Gross profit
  -     336,999     9,062     -     346,061  
Selling, general and administrative expenses
  2,666     183,931     4,696     -     191,293  
Provision for doubtful accounts
  -     23,767     488     -     24,255  
Settlement, litigation and other related charges
  -     6,742     -     -     6,742  
Other miscellaneous charges
  -     6,718     -     -     6,718  
Operating income (loss)
  (2,666 )   115,841     3,878     -     117,053  
Investment income
  170     (149 )   -     -     21  
Interest expense, including amortization
                             
of discount on convertible notes
  (55,748 )   (199 )   -     -     (55,947 )
Income (loss) from continuing operations
                             
before income taxes
  (58,244 )   115,493     3,878     -     61,127  
Income tax (benefit) expense
  (22,447 )   44,277     1,513     -     23,343  
Income (loss) from continuing operations
  (35,797 )   71,216     2,365     -     37,784  
Loss from discontinued operations
  -     (9,559 )   (341 )   -     (9,900 )
Equity of net income of subsidiaries
  63,681     -     -     (63,681 )   -  
Net income (loss)
$ 27,884   $ 61,657   $ 2,024   $ (63,681 ) $ 27,884  
                               
2010:
                             
Net sales
$ -   $ 1,480,757   $ 35,450   $ -   $ 1,516,207  
Cost of sales
  -     1,156,244     26,571     -     1,182,815  
Gross profit
  -     324,513     8,879     -     333,392  
Selling, general and administrative expenses
  3,999     183,124     3,622     -     190,745  
Provision for doubtful accounts
  -     21,800     576     -     22,376  
Settlement, litigation and other related charges
  -     36,731     -     -     36,731  
Separation, benefit plan termination and related costs
  -     64,760     -     -     64,760  
Other miscellaneous charges
  -     8,022     -     -     8,022  
Operating income (loss)
  (3,999 )   10,076     4,681     -     10,758  
Investment income
  278     3,818     -     -     4,096  
Interest expense, including amortization
                             
of discount on convertible notes
  (38,490 )   (100 )   -     -     (38,590 )
Income (loss) from continuing operations
                             
before income taxes
  (42,211 )   13,794     4,681     -     (23,736 )
Income tax (benefit) expense
  (16,010 )   1,013     897     -     (14,100 )
Income (loss) from continuing operations
  (26,201 )   12,781     3,784     -     (9,636 )
Income (loss) from discontinued operations
  -     (76,143 )   (17,487 )   -     (93,630 )
Equity of net income (loss) of subsidiaries
  (77,065 )   -     -     77,065     -  
Net income (loss)
$ (103,266 ) $ (63,362 ) $ (13,703 ) $ 77,065   $ (103,266 )
 
 
 
 
 
22

 

Note 10 – Guarantor Subsidiaries (Continued)

Summary Consolidating Statements of Income – Unaudited
(in thousands)



 
Nine months ended September 30,
 
         
Non-
 
Consolidating/
 
Omnicare,
 
     
Guarantor
 
Guarantor
 
Eliminating
 
Inc. and
 
2011:
Parent
 
Subsidiaries
 
Subsidiaries
 
Adjustments
 
Subsidiaries
 
Net sales
$ -   $ 4,530,322   $ 95,515   $ -   $ 4,625,837  
Cost of sales
  -     3,541,964     66,459     -     3,608,423  
Gross profit
  -     988,358     29,056     -     1,017,414  
Selling, general and administrative expenses
  8,573     551,895     13,466     -     573,934  
Provision for doubtful accounts
  -     71,699     1,443     -     73,142  
Settlement, litigation and other related charges
  -     32,571     -     -     32,571  
Other miscellaneous charges
  -     10,939     -     -     10,939  
Operating income (loss)
  (8,573 )   321,254     14,147     -     326,828  
Investment income
  533     39     -     -     572  
Interest expense, including amortization
                             
of discount on convertible notes
  (123,805 )   (799 )   (6 )   -     (124,610 )
Income (loss) from continuing operations
                             
before income taxes
  (131,845 )   320,494     14,141     -     202,790  
Income tax (benefit) expense
  (50,062 )   124,147     5,485     -     79,570  
Income (loss) from continuing operations
  (81,783 )   196,347     8,656     -     123,220  
Loss from discontinued operations
  -     (64,591 )   (2,888 )   -