Attached files

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EX-12 - STATEMENT OF COMPUTATION - OMNICARE INCexhibit12.htm
EX-32.2 - EXHIBIT 32.2 CERTIFICATION - OMNICARE INCexhibit32-2.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION - OMNICARE INCexhibit31-2.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION - OMNICARE INCexhibit31-1.htm
EX-32.1 - EXHIBIT 32.1 CERTIFICATION - OMNICARE INCexhibit32-1.htm
EX-10.1 - KEEFE SEPARATION AND CONSULTING AGREEMENT - OMNICARE INCexhibit10-1.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 June 30, 2010

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
    118,161,387  
June 30, 2010


 
 

 

OMNICARE, INC. AND

SUBSIDIARY COMPANIES

FORM 10-Q QUARTERLY REPORT JUNE 30, 2010

INDEX

                                                                                                          PAGE
PART I - FINANCIAL INFORMATION:

ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)
 
     
 
Consolidated Statements of Income –
Three and six months ended – June 30, 2010 and 2009
 
3
     
 
Consolidated Balance Sheets –
June 30, 2010 and December 31, 2009
 
4
     
 
Consolidated Statements of Cash Flows –
Six months ended – June 30, 2010 and 2009
 
5
     
 
Notes to Consolidated Financial Statements
6
     
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
47
     
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
 
83
     
ITEM 4.
CONTROLS AND PROCEDURES
84


PART II - OTHER INFORMATION:

ITEM 1.
LEGAL PROCEEDINGS
85
     
ITEM 1A.
RISK FACTORS
91
     
ITEM 2.
UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
102
     
ITEM 6.
EXHIBITS
102




 
 

 

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
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net sales
  $ 1,519,121     $ 1,540,507     $ 3,043,355     $ 3,082,612  
Cost of sales
    1,182,864       1,168,778       2,354,768       2,320,546  
Repack matters (Note 10)
    466       815       909       1,917  
Gross profit
    335,791       370,914       687,678       760,149  
Selling, general and administrative expenses
    198,521       203,491       393,694       419,624  
Provision for doubtful accounts
    21,012       22,710       43,037       47,981  
Restructuring and other related charges (Note 9)
    5,480       5,883       12,519       12,800  
Litigation and other related charges (Note 10)
    29,361       28,357       34,867       70,022  
Repack matters (Note 10)
    221       381       971       1,272  
Acquisition and other related costs (Note 3)
    (164 )     2,011       63       2,850  
Operating income
    81,360       108,081       202,527       205,600  
Investment income
    1,105       1,032       2,769       3,439  
Interest expense
    (39,712 )     (29,775 )     (68,320 )     (61,062 )
Amortization of discount on convertible notes (Note 5)
    (7,473 )     (6,927 )     (14,804 )     (13,724 )
Income from continuing operations before income taxes
    35,280       72,411       122,172       134,253  
Income tax provision
    13,879       30,417       46,471       60,031  
Income from continuing operations
    21,401       41,994       75,701       74,222  
Loss from discontinued operations (Note 2)
    (9,802 )     (13,275 )     (13,250 )     (14,609 )
Net income
  $ 11,599     $ 28,719     $ 62,451     $ 59,613  
                                 
Earnings (loss) per common share - Basic:
                               
Continuing operations
  $ 0.18     $ 0.36     $ 0.64     $ 0.64  
Discontinued operations
    (0.08 )     (0.11 )     (0.11 )     (0.13 )
Net income
  $ 0.10     $ 0.25     $ 0.53     $ 0.51  
                                 
Earnings (loss) per common share - Diluted:
                               
Continuing operations
  $ 0.18     $ 0.36     $ 0.64     $ 0.63  
Discontinued operations
    (0.08 )     (0.11 )     (0.11 )     (0.12 )
Net income
  $ 0.10     $ 0.24     $ 0.53     $ 0.51  
Dividends per common share
  $ 0.0225     $ 0.0225     $ 0.0450     $ 0.0450  
Weighted average number of common
                               
shares outstanding:
                               
Basic
    117,434       116,852       117,598       116,652  
Diluted
    118,116       117,640       118,285       117,490  
Comprehensive income
  $ 9,310     $ 27,223     $ 61,187     $ 57,898  

The Notes to 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)

   
June 30,
2010
   
December 31,
2009
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 394,911     $ 275,709  
Restricted cash
    2,936       15,264  
Accounts receivable, less allowances of $342,771 (2009-$332,603)
    1,162,536       1,208,595  
Unbilled receivables, CRO
    18,687       21,868  
Inventories
    361,182       368,477  
Deferred income tax benefits
    123,363       113,575  
Other current assets
    219,706       197,492  
Current assets of discontinued operations
    9,969       18,627  
Total current assets
    2,293,290       2,219,607  
Properties and equipment, at cost less accumulated depreciation of $342,588 (2009-$324,995)
    205,102       208,969  
Goodwill
    4,280,260       4,273,695  
Identifiable intangible assets, less accumulated amortization of $205,165 (2009-$186,424)
    279,664       297,153  
Rabbi trust assets for settlement of pension obligations
    142,275       133,040  
Other noncurrent assets
    168,560       145,781  
Noncurrent assets of discontinued operations
    36,197       45,859  
Total noncurrent assets
    5,112,058       5,104,497  
Total assets
  $ 7,405,348     $ 7,324,104  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  $ 219,470     $ 256,886  
Accrued employee compensation
    31,015       43,688  
Deferred revenue, CRO
    15,625       11,226  
Current debt
    2,485       127,071  
Other current liabilities
    164,175       173,972  
Current liabilities of discontinued operations
    5,908       7,206  
Total current liabilities
    438,678       620,049  
Long-term debt, notes and convertible debentures (Note 5)
    2,187,378       1,980,239  
Deferred income tax liabilities
    603,374       571,622  
Other noncurrent liabilities
    285,484       276,201  
Total noncurrent liabilities
    3,076,236       2,828,062  
Total liabilities
    3,514,914       3,448,111  
                 
Commitments and contingencies (Note 10)
               
                 
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, 128,232,800
               
shares issued (2009-127,824,800 shares issued)
    128,233       127,825  
Paid-in capital (Note 5)
    2,292,373       2,269,905  
Retained earnings
    1,755,727       1,698,620  
Treasury stock, at cost-10,071,400 shares (2009-7,545,000 shares) (Note 1)
    (269,295 )     (205,017 )
Accumulated other comprehensive income (loss)
    (16,604 )     (15,340 )
Total stockholders' equity
    3,890,434       3,875,993  
Total liabilities and stockholders' equity
  $ 7,405,348     $ 7,324,104  

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)


   
Six months ended
June 30,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net income
  $ 62,451     $ 59,613  
Loss from discontinued operations
    13,250       14,609  
Adjustments to reconcile net income to net cash flows from
               
operating activities:
               
Depreciation expense
    23,583       25,467  
Amortization expense
    45,251       45,886  
Write-off of debt issuance costs
    2,060       -  
Tender premium
    (7,323 )     -  
Changes in assets and liabilities, net of effects from acquisition and divestiture
               
of businesses:
               
Accounts receivable and unbilled receivables, net of provision for doubtful accounts
    50,617       72,831  
Inventories
    9,027       112,253  
Other current and noncurrent assets
    (18,442 )     (11,583 )
Accounts payable
    (41,140 )     (89,876 )
Accrued employee compensation
    (12,732 )     (13,865 )
Deferred revenue
    4,399       (8,412 )
Current and noncurrent liabilities
    22,139       55,357  
Net cash flows from operating activities of continuing operations
    153,140       262,280  
Net cash flows from operating activities of discontinued operations
    437       662  
Net cash flows from operating activities
    153,577       262,942  
Cash flows from investing activities:
               
Acquisition of businesses, net of cash received
    (11,855 )     (43,100 )
Capital expenditures
    (11,678 )     (15,315 )
Transfer of cash from trusts for employee health and severance
               
costs, net of payments out of the trust
    11,256       843  
Disbursements for loans and investments
    (2,350 )     -  
Other
    1,072       (1,789 )
Net cash flows used in investing activities of continuing operations
    (13,555 )     (59,361 )
Net cash flows used in investing activities of discontinued operations
    (45 )     (444 )
Net cash flows used in investing activities
    (13,600 )     (59,805 )
Cash flows from financing activities:
               
Net payments on revolving credit facility and term A loan
    (125,000 )     (150,000 )
Proceeds from long-term borrowings and obligations
    400,000       -  
Payments on long-term borrowings and obligations
    (218,478 )     (993 )
Fees paid for financing arrangements
    (17,028 )     -  
Increase (decrease) in cash overdraft balance
    3,127       (137 )
Payments for Omnicare common stock repurchases (Note 1)
    (49,154 )     -  
Proceeds (payments) for stock awards and exercise of stock options,
               
net of stock tendered in payment
    (5,241 )     9,464  
Excess tax benefits from stock-based compensation
    432       2,366  
Dividends paid
    (5,343 )     (5,352 )
Net cash flows used in financing activities of continuing operations
    (16,685 )     (144,652 )
Net cash flows provided by financing activities of discontinued operations
    -       -  
Net cash flows used in financing activities
    (16,685 )     (144,652 )
Effect of exchange rate changes on cash
    (3,698 )     831  
Net increase in cash and cash equivalents
    119,594       59,316  
Less increase in cash and cash equivalents of discontinued operations
    392       218  
Increase in cash and cash equivalents of continuing operations
    119,202       59,098  
Cash and cash equivalents at beginning of period
    275,709       214,668  
Cash and cash equivalents at end of period
  $ 394,911     $ 273,766  

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 - Interim Financial Data, Description of Business and Summary of Significant Accounting Policies

Interim Financial Data

The interim financial data is unaudited; however, in the opinion of the management of Omnicare, Inc., the interim data includes all adjustments (which include only normal adjustments, except as described in the “Debt”, “Restructuring and Other Related Charges” and “Commitments and Contingencies” notes) considered necessary for a fair statement of the consolidated results of operations, financial position and cash flows of Omnicare, Inc. and its consolidated subsidiaries (“Omnicare” or the “Company”).  These financial statements should be read in conjunction with the Consolidated Financial Statements and related notes included in Omnicare’s Annual Report on Form 10-K for the year ended December 31, 2009 (“Omnicare’s 2009 Annual Report”) and any related updates included in the Company’s periodic quarterly Securities and Exchange Commission (“SEC”) filings.  The Company has discontinued a component of its pharmacy services business (see “Discontinued Operations” note).  All amounts disclosed in these Consolidated Financial Statements and related notes are presented on a continuing operations basis unless otherwise stated.

Description of Business and Summary of Significant Accounting Policies

The Company’s description of business and significant accounting policies have been disclosed in Omnicare’s 2009 Annual Report.  As previously stated, these financial statements should be read in conjunction with the Consolidated Financial Statements and related notes included in Omnicare’s 2009 Annual Report and any applicable updates contained in the Company’s periodic quarterly SEC filings, including those presented below.

Concentration of Risk

The prescription drug benefit under Medicare Part D (“Part D”) became effective on January 1, 2006.  As a result, providers of long-term care pharmacy services, including Omnicare, experienced a significant shift in payor mix beginning in 2006.  Approximately 44% of the Company’s revenues in the six months ended June 30, 2010 were generated under the Part D program.  The Company estimates that approximately 26% of these Part D revenues during the six months ended June 30, 2010 relate to patients enrolled in Part D prescription drug plans sponsored by UnitedHealth Group, Inc. and its affiliates (“United”).  United and a small number of other Part D Plan sponsors and pharmaceutical benefit managers reimburse a significant portion of the Company’s Part D revenues.  Prior to the implementation of the Medicare Part D program, most of the Part D residents served by the Company were reimbursed under state Medicaid programs and, to a lesser extent, private pay sources.

 
6

 
 
Under the Part D benefit, payment is determined in accordance with the agreements Omnicare has negotiated with the Part D Plans.  The remainder of Omnicare’s billings are paid or reimbursed primarily by long-term care facilities (including revenues for residents funded under Medicare Part A) and other third party payors, including private insurers, state Medicaid programs, as well as individual residents.

The Medicaid and Medicare programs are highly regulated.  The failure, even if inadvertent, of Omnicare and/or client facilities to comply with applicable reimbursement regulations could adversely affect Omnicare’s reimbursement under these programs and Omnicare’s ability to continue to participate in these programs.  In addition, failure to comply with these regulations could subject the Company to other penalties.

As noted, the Company obtains reimbursement for drugs it provides to enrollees of a given Part D Plan pursuant to the agreement it negotiates with that Part D Plan.  The Company has entered into such agreements with nearly all Part D Plan sponsors under which it will provide drugs and associated services to their enrollees.  The Company continues to have ongoing discussions with Part D Plans and renegotiates these agreements in the ordinary course.  Further, the proportion of the Company’s Part D business serviced under specific agreements may change over time based upon beneficiary choice, reassignment of dual eligibles to different Part D Plans or Part D Plan consolidation.  As such, reimbursement under these agreements is subject to change.  Moreover, as expected in the transition to a program of this magnitude, certain administrative and payment issues have arisen, resulting in higher operating expenses, as well as outstanding gross accounts receivable (net of allowances for contractual adjustments, and prior to any allowance for doubtful accounts), particularly for copays.  As of June 30, 2010, copays outstanding from Part D Plans were approximately $15 million relating to 2006 and 2007.  The Company is pursuing solutions, including legal actions against certain Part D Plans, to collect outstanding copays, as well as certain rejected claims.

On July 11, 2007, the Company commenced legal action against a group of its customers for, among other things, the collection of past-due receivables that are owed to the Company.  Specifically, approximately $106 million (excluding interest) is owed to the Company by this group of customers as of June 30, 2010, of which approximately $99 million is past-due based on applicable payment terms (a significant portion of which is not reserved based on the relevant facts and circumstances).

Until these administrative and payment issues relating to the Part D Drug Benefit as well as the aforementioned legal action against a group of Omnicare’s customers are fully resolved, there can be no assurance that the impact of these matters on the Company’s results of operations, financial position or cash flows will not change based on the outcome of any unforeseen circumstances.


 
7

 

Inventories

The Company receives discounts, rebates and/or other price concessions (“Discounts”) relating to purchases from its suppliers and vendors.  When recognizing the related receivables associated with these Discounts, Omnicare accounts for these Discounts as a reduction of cost of goods sold and inventories.  The Company records its estimates of Discounts earned during the period on the accrual basis of accounting, giving proper consideration to whether those Discounts have been earned based on the terms of  applicable arrangements, and giving proper consideration to authoritative guidance relating to customer payments and incentives.  Receivables related to Discounts are regularly adjusted based on the best available information, and to actual amounts as cash is received and the applicable arrangements are settled.

Fair Value

The authoritative guidance for fair value measurements defines a hierarchy that prioritizes the inputs in fair value measurements.  “Level 1” measurements are measurements using quoted prices in active markets for identical assets or liabilities.  “Level 2” measurements use significant other observable inputs.  “Level 3” measurements are measurements using significant unobservable inputs which require a company to develop its own assumptions.  In recording the fair value of assets and liabilities, companies must use the most reliable measurement available.  The assets, as further described in detail at the “Fair Value” note of the Notes to the Consolidated Financial Statements in Omnicare’s 2009 Annual Report, measured at fair value as of June 30, 2010 and December 31, 2009 were as follows:

         
Based on
 
         
Quoted Prices
   
Other
       
   
Fair Value at
   
in Active
   
Observable
   
Unobservable
 
   
June 30,
   
Markets
   
Inputs
   
Inputs
 
   
2010
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Rabbi trust assets
  $ 142,275     $ 142,275     $     $  
7.75% Interest rate swap agreement - fair value hedge (1)
    8,698             8,698        
Derivatives
                       
Total
  $ 150,973     $ 142,275     $ 8,698     $  
                                 
           
Based on
 
           
Quoted Prices
   
Other
         
   
Fair Value at
   
in Active
   
Observable
   
Unobservable
 
   
December 31,
   
Markets
   
Inputs
   
Inputs
 
      2009    
(Level 1)
   
(Level 2)
   
(Level 3)
 
Rabbi trust assets
  $ 133,040     $ 133,040     $     $  
6.125% Interest rate swap agreement - fair value hedge (2)
    3,595             3,595        
Derivatives
                       
Total
  $ 136,635     $ 133,040     $ 3,595     $  


 
8

 

(1)  
In connection with its offering of $400 million aggregate principal amount of 7.75% Senior Subordinated Notes due 2020 (the “7.75% Senior Notes”), the Company entered into an interest rate swap agreement with respect to all $400 million of the aggregate principal amount of the 7.75% Senior Notes (the “7.75% Swap Agreement”).  The 7.75% Swap Agreement hedges against exposure to long-term U.S. dollar interest rates, and is designated and accounted for as a fair value hedge.  The Company is accounting for the 7.75% Swap Agreement in accordance with the authoritative guidance regarding accounting for derivative instruments and hedging activities, so changes in the fair value of the 7.75% Swap Agreement are offset by changes in the recorded carrying value of the related 7.75% Senior Notes.  The fair value of the 7.75% Swap Agreement is recorded in the “Other noncurrent assets” or “Other noncurrent liabilities” line of the Consolidated Balance Sheets, as applicable, and as an adjustment to the book carrying value of the related 7.75% Senior Notes.  The fair value of over-the-counter derivative instruments, such as the Company’s interest rate swap, can be modeled for valuation using a variety of techniques.  The Company’s interest rate swap is valued using market inputs with mid-market pricing as a practical expedient for the bid/ask spread as allowed by the authoritative guidance for fair value measurements.  As such, the swap is categorized within Level 2 of the hierarchy.
(2)  
In the second quarter of 2010, the counterparties to the interest rate swap agreement on the $250 million 6.125% Senior Subordinated Notes (the “6.125% Swap Agreement”) notified the Company that they were terminating the swap agreement effective June 1, 2010.

The fair value of the Company’s fixed-rate debt facilities is based on quoted market prices and is summarized as follows (in thousands):

Fair Value of Financial Instruments

   
June 30, 2010
   
December 31, 2009
 
Financial Instrument:
 
Book Value
   
Fair Value
   
Book Value
   
Fair Value
 
                         
6.125% senior subordinated notes, due 2013, gross
  $ 250,000     $ 250,500     $ 250,000     $ 248,000  
6.75% senior subordinated notes, due 2013
    7,934       8,100       225,000       219,500  
6.875% senior subordinated notes, due 2015
    525,000       529,500       525,000       528,500  
7.75% senior subordinated notes, due 2020
    400,000       407,500              
                                 
4.00% junior subordinated convertible debentures, due 2033
                               
Carrying value
    200,155             199,071        
Unamortized debt discount
    144,845             145,929        
Principal amount
    345,000       245,700       345,000       254,400  
                                 
3.25% convertible senior debentures, due 2035
                               
Carrying value
    786,840             773,120        
Unamortized debt discount
    190,660             204,380        
Principal amount
    977,500       813,800       977,500       801,600  

Accumulated Other Comprehensive Income (Loss)

The accumulated other comprehensive income (loss) balances at June 30, 2010 and December 31, 2009, net of aggregate applicable tax benefits of $16.3 million and $21.5 million, respectively, by component and in the aggregate, follow (in thousands):
 
 
9

 
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
Cumulative foreign currency translation adjustments
  $ 10,959     $ 19,046  
Unrealized gain on fair value of investments
    4,135       73  
Pension and postemployment benefits
    (31,698 )     (34,459 )
Total accumulated other comprehensive income (loss), net
  $ (16,604 )   $ (15,340 )

Income Taxes

The effective income tax rate was 39.3% and 38.0% for the three and six months ended June 30, 2010, respectively, as compared to the rate of 42.0% and 44.7%, respectively, for the same prior-year periods.  The year-over-year decrease in the effective tax rate is primarily attributable to certain nondeductible litigation costs recognized in the 2009 period.  The effective tax rates in 2010 and 2009 are higher than the federal statutory rate largely as a result of the impact of state and local income taxes and various nondeductible expenses (including a portion of the aforementioned litigation costs in 2009).

Common Stock Repurchase Program

On May 3, 2010, Omnicare announced that in conjunction with its second quarter 2010 refinancing (as described in the “Debt” note of these financial statements), the Company’s Board of Directors authorized a new 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, depending on market conditions and other factors.  In the three and six months ended June 30, 2010, the Company repurchased approximately 2.0 million shares at an aggregate cost of approximately $49 million.  Accordingly, the Company had approximately $151 million of share repurchase authority remaining as of June 30, 2010.  These second quarter 2010 repurchases were made in open market transactions in compliance with Securities and Exchange Commission Rule 10b-18 and other applicable legal requirements.  On June 30, 2010, Omnicare had approximately 118.2 million shares of common stock outstanding.

Recently Issued Accounting Standards

In March 2010, the Financial Accounting Standards Board (“FASB”) amended the authoritative guidance for derivatives and hedging – embedded derivatives to clarify the scope exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument for another.  These amendments address how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations, are considered to be embedded derivatives that should not be analyzed for potential bifurcation and separate accounting.  The Company does not anticipate the effect of this recently issued guidance to be material to its consolidated results of operations, financial position and cash flows.

 
10

 

Note 2 – Discontinued Operations

In mid-2009, the Company commenced activities to divest certain home healthcare and related ancillary businesses (“the disposal group”) that are non-strategic in nature.  The disposal group, historically part of Omnicare’s Pharmacy Services segment, primarily represents ancillary businesses which accompanied other more strategic assets obtained by Omnicare in connection with the Company’s institutional pharmacy acquisition program.  The results from continuing operations for all periods presented have been revised to reflect the results of the disposal group as discontinued operations, including certain expenses of the Company related to the divestiture.  The Company anticipates completing the divestiture in the near term.  Selected financial data related to the discontinued operations of this disposal group for the three and six months ended June 30, 2010 and 2009 follows:

   
Three months ended,
June 30,
   
Six months ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net sales
  $ 14,539     $ 19,818     $ 29,633     $ 41,273  
Loss from operations of disposal group, pretax
    (2,188 )     (2,008 )     (7,912 )     (4,222 )
Income tax benefit
    870       798       3,146       1,678  
Loss from operations of disposal group, aftertax
    (1,318 )     (1,210 )     (4,766 )     (2,544 )
                                 
Impairment charge, pretax
    (10,343 )     (14,492 )     (10,343 )     (14,492 )
Income tax benefit on impairment charge
    1,859       2,427       1,859       2,427  
Impairment charge, aftertax
    (8,484 )     (12,065 )     (8,484 )     (12,065 )
                                 
Loss from discontinued operations, aftertax
  $ (9,802 )   $ (13,275 )   $ (13,250 )   $ (14,609 )

For the three and six months ended June 30, 2010 and 2009, the disposal group recorded an impairment charge of approximately $10.3 million and $14.5 million pretax ($8.5 million and $12.1 million aftertax), respectively, to reduce the carrying value of the disposal group to fair value as of June 30, 2010 and 2009.  The net assets held for sale of the disposal group are required to be measured at fair value for periods subsequent to July 1, 2009.  The fair values were based on a market approach utilizing both selected guideline public companies and comparable industry transactions, which would be considered “Level 2” inputs within the fair value hierarchy.  The fair value amount is estimated, is reviewed quarterly and will be finalized once any disposition of the disposal group has been completed.  See the “Fair Value” note of the Notes to the Consolidated Financial Statements in Omnicare’s 2009 Annual Report for further discussion on the fair value hierarchy.

Note 3 – Acquisitions

Since 1989, the Company has been involved in a program to acquire providers of pharmaceutical products and related pharmacy services to long-term care facilities and their residents as well as patients in other care settings.  The Company’s strategy has included the acquisition of freestanding institutional pharmacy businesses as well as other assets, generally insignificant in size, which have been combined with existing pharmacy operations to augment their internal growth.  From time-to-time the Company may acquire other businesses, such as pharmacy consulting companies, specialty pharmacy companies, medical supply and service companies, hospice pharmacy companies and companies providing distribution and product support services for specialty pharmaceuticals, as well as contract research organizations, which complement the Company’s core businesses.

 
11

 
 
Effective January 1, 2009, the Company adopted the provisions of the revised authoritative guidance for business combinations, which requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction at fair value; and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, including earn-out provisions.  This implementation resulted in acquisition and other related (credits)/costs of approximately $(0.2) million and $0.1 million pretax ($(0.1) million and $0.0 million, aftertax) during the three and six months ended June 30, 2010, respectively, and approximately $2.0 million and $2.9 million pretax ($1.2 million and $1.8 million, aftertax) in the three and six months ended June 30, 2009, respectively, which were primarily related to professional fees and acquisition related restructuring costs for acquisitions completed during the 2010 and 2009 periods, which were offset by a reduction in the 2010 period of the Company’s original estimate of contingent consideration payable for certain acquisitions.

During the first six months of 2010, Omnicare completed two acquisitions of businesses in the Pharmacy Services segment, neither of which were significant to the Company.  Acquisitions of businesses required outlays of $11.9 million (including amounts payable pursuant to acquisition agreements relating to pre-2010 acquisitions) in the six months ended June 30, 2010.  The impact of these aggregate acquisitions on the Company’s overall goodwill balance has been reflected in the disclosures at the “Goodwill and Other Intangible Assets” note.  The Company continues to evaluate the tax effects, identifiable intangible assets and other pre-acquisition contingencies relating to certain acquisitions.  Omnicare is in the process of completing its allocation of the purchase price for certain acquisitions and, accordingly, the goodwill and other identifiable intangible assets balances are preliminary and subject to change.  The net assets and operating results of acquisitions have been included in the Company’s consolidated financial statements from their respective dates of acquisition.

Note 4 - Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the six months ended June 30, 2010, by business segment, are as follows (in thousands):

   
Pharmacy Services
   
CRO
Services
   
Total
 
Balance as of December 31, 2009
  $ 4,181,492     $ 92,203     $ 4,273,695  
Goodwill acquired in the six months
                       
   ended June 30, 2010
    6,154             6,154  
Other
    2,876       (2,465 )     411  
Balance as of June 30, 2010
  $ 4,190,522     $ 89,738     $ 4,280,260  

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 primarily to the Contract Research Organization (“CRO”) Services segment, as well as one pharmacy located in Canada which is included in the Pharmacy Services segment.

 
12

 
 
The decrease in the June 30, 2010 net carrying amount of the Company’s other identifiable intangible assets of approximately $17 million from December 31, 2009 primarily relates to amortization expense recorded during the six-month period, partially offset by increases due primarily to customer relationship assets and non-compete agreements associated with recent acquisitions, which have a weighted-average life of approximately 13 years.

Note 5 - Debt

A summary of debt follows (in thousands):

   
June 30,
   
December 31,
 
   
2010
   
2009
 
Revolving loans (see below)
  $ -     $ -  
Senior term A loan, due 2010
    -       125,000  
6.125% senior subordinated notes, due 2013 (see below)
    250,000       250,000  
6.75% senior subordinated notes, due 2013 (see below)
    7,934       225,000  
6.875% senior subordinated notes, due 2015
    525,000       525,000  
7.75% senior subordinated notes, due 2020 (see below)
    400,000       -  
4.00% junior subordinated convertible debentures, due 2033
    345,000       345,000  
3.25% convertible senior debentures, due 2035
    977,500       977,500  
Capitalized lease and other debt obligations
    11,236       6,524  
Subtotal
    2,516,670       2,454,024  
Add interest rate swap agreements (see below)
    8,698       3,595  
(Subtract) unamortized debt discount
    (335,505 )     (350,309 )
(Subtract) current portion of debt
    (2,485 )     (127,071 )
Total long-term debt, net
  $ 2,187,378     $ 1,980,239  

Revolving Loans
On May 18, 2010, the Company entered into a $400 million senior secured revolving credit facility, maturing on May 18, 2015 (the “Revolving Credit Facility”).  The Revolving Credit Facility includes letter of credit and swingline sublimits and is available up to the lesser of $400 million and a borrowing base of 50% of the Company’s accounts receivable, subject to certain eligibility criteria.  There are approximately $0.6 million of letters of credit currently outstanding which have been deemed to be letters of credit issued under the Revolving Credit Facility.  The interest rate applicable to the Revolving Credit Facility will be, at the Company’s option, a floating base rate, plus an applicable margin, or the London interbank offered rate (or LIBOR), plus an applicable margin.  Initially, the applicable margins will be set at 2.00% with respect to floating base rate loans and 3.00% with respect to LIBOR loans. The applicable margins for the Revolving Credit Facility may increase or decrease based on the Company’s consolidated total leverage ratio as specified in the Revolving Credit Facility.  The Revolving Credit Facility is guaranteed by the Company’s subsidiaries, subject to certain exceptions, and secured by substantially all of the Company’s and the guarantors’ accounts receivable.  The Revolving Credit Facility contains certain financial covenants requiring maintenance of certain fixed charge coverage and leverage ratios, and customary affirmative and negative covenants.  The Company was in compliance with these covenants as of June 30, 2010.  In connection with entering the Revolving Credit Facility, the Company deferred $8.9 million in debt issuance costs, of which approximately $0.2 million was amortized to expense in the three and six months ended June 30, 2010.

 
13

 
 
On May 18, 2010, in connection with entering into the new Revolving Credit Facility, the Company’s existing credit agreement, dated as of July 28, 2005, (the “2005 Credit Facility”), was terminated.  All amounts outstanding under the senior term A loan component of the 2005 Credit Facility were paid off on May 18, 2010, and the $800 million revolving credit facility component of the 2005 Credit Facility was terminated.  In connection with the termination of the 2005 Credit Facility, the Company wrote off the remaining debt issuance costs of approximately $0.1 million, which was recorded in interest expense for the three and six months ended June 30, 2010.  The 2005 Credit Facility was scheduled to mature on July 28, 2010.
 
6.125% Senior Subordinated Notes Due 2013
In the second quarter of 2010, the counterparties to the interest rate swap agreement on the 6.125% Senior Subordinated Notes due 2013 notified the Company that they were terminating the swap agreement effective June 1, 2010.  As such, the Company began paying interest at the 6.125% stated rate effective June 1, 2010.

6.75% Senior Subordinated Notes Due 2013
On May 3, 2010, Omnicare commenced a tender offer (the “Tender Offer”) for cash to purchase any and all of the $225 million outstanding principal amount of its 6.75% Senior Subordinated Notes due 2013 (the “6.75% Senior Notes") and solicited consents to effect certain proposed amendments to the indenture governing the 6.75% Senior Notes.  On May 20, 2010, Omnicare purchased approximately $217 million aggregate principal amount of its outstanding 6.75% Senior Notes (approximately 96% of the total outstanding principal amount) pursuant to the tender offer.  Total consideration, excluding accrued and unpaid interest, for each $1,000 principal amount of the 6.75% Senior Notes was $1,033.75, which included a $30 early tender payment. On June 1, 2010, Omnicare called for redemption the 6.75% Senior Notes that remained outstanding following the tender offer at a redemption price of 103.375% per $1,000 principal amount, plus accrued and unpaid interest to but not including the redemption date.  The redemption was completed on July 1, 2010.

In connection with the purchase of the 6.75% Senior Notes, the Company incurred early redemption fees of $7.3 million and the write-off of debt issuance costs of $1.9 million, both of which were recorded in interest expense for the three and six months ended June 30, 2010.  Additionally, the Company incurred approximately $0.4 million of professional fees associated with the purchase of the 6.75% Senior Notes, which were recorded in selling, general and administrative expenses for the three and six months ended June 30, 2010.

 
14

 
 
7.75% Senior Subordinated Notes Due 2020
On May 18, 2010, Omnicare, Inc. completed its offering of the 7.75% Senior Notes.  In connection with the issuance of the 7.75% Senior Notes, the Company deferred $10.8 million in debt issuance costs, of which approximately $0.1 million was amortized to expense in the three and six months ended June 30, 2010.  The 7.75% Senior Notes contain certain restrictive covenants and events of default customary for such instruments.  The 7.75% Senior Notes are guaranteed by the Company’s subsidiaries, subject to certain exceptions.

In connection with its offering of the 7.75% Senior Notes, the Company entered into the 7.75% Swap Agreement.  Under the 7.75% Swap Agreement, which hedges 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 spread of 3.87%.  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 7.75% Senior Notes at the floating rate.  The estimated LIBOR-based floating rate (including the 3.87% spread) was 4.61% as of June 30, 2010.  The 7.75% Swap Agreement, which matches the terms of the 7.75% Senior Notes, is designated and accounted for as a fair value hedge.  The Company is accounting for the 7.75% Swap Agreement in accordance with the authoritative guidance for accounting for derivative instruments and hedging activities, so changes in the fair value of the 7.75% Swap Agreement are offset by changes in the recorded carrying value of the related 7.75% Senior Notes.  The fair value of the 7.75% Swap Agreement, approximately $8.7 million at June 30, 2010, is recorded in the “Other noncurrent assets” or “Other noncurrent liabilities” line of the Consolidated Balance Sheets, as applicable, and as an adjustment to the book carrying value of the related 7.75% Senior Notes.

The Company’s debt instruments, including related terms and certain financial covenants as well as a description of Omnicare’s Credit Agreement, have been disclosed in further detail at the “Debt” note of the Notes to Consolidated Financial Statements in Omnicare’s 2009 Annual Report, except where modified above.

At June 30, 2010, there was no outstanding balance under the Company’s Revolving Credit Facility.  The Company repaid the remaining $125 million on the Company’s senior term A loan facility, maturing on July 28, 2010 (the “Term Loans”) during the six months ended June 30, 2010.  As of June 30, 2010, the Company had approximately $22 million outstanding relating to standby letters of credit, substantially all of which are subject to automatic annual renewals.  The Company amortized to expense approximately $4.7 million and $2.9 million of deferred debt issuance costs during the six months ended June 30, 2010 and 2009, respectively, including the amounts disclosed separately above for the 2010 period.

The Company has two convertible debentures, 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) (“3.25% Convertible Debentures”).  For further description of the Company’s convertible debt see the “Debt” note of the “Notes to Consolidated Financial Statements” in Omnicare’s 2009 Annual Report.  The authoritative guidance regarding the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), specifies that issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should 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):

 
15

 
 
   
June 30,
2010
   
December 31,
2009
 
Carrying value of equity component
  $ 441,318     $ 441,318  
                 
Principal amount of convertible debt
  $ 1,322,500     $ 1,322,500  
Unamortized debt discount
    (335,505 )     (350,309 )
Net carrying value of convertible debt
  $ 986,995     $ 972,191  

As of June 30, 2010, the remaining amortization period for the debt discount was approximately 23.0 and 5.5 years for the 4.00% Convertible Debentures and 3.25% Convertible Debentures, respectively.

The effective interest rates for the liability components of the 4.00% Convertible Debentures and the 3.25% Convertible Debentures were 8.01% and 7.625%, respectively.  The impact of this accounting guidance was an increase in pretax interest expense of approximately $7.5 million and $14.8 million ($4.7 million and $9.3 million aftertax) for the three and six months ended June 30, 2010, respectively, and $6.9 million and $13.7 million ($4.3 million and $8.5 million aftertax) for the three and six months ended June 30, 2009, respectively.

Note 6 - Stock-Based Compensation

At June 30, 2010, the Company had four stock-based employee compensation plans under which incentive awards were outstanding, which are described in further detail at the “Stock-Based Compensation” note of the Notes to Consolidated Financial Statements in Omnicare’s 2009 Annual Report.  Omnicare believes that the incentive awards issued under these plans serve to better align the interests of its employees with those of its stockholders.  As further described in Omnicare’s 2009 Annual Report, non-vested stock awards are granted to key employees at the discretion of the Compensation and Incentive Committee of the Board of Directors.

Total pretax stock-based compensation expense recognized in the Consolidated Statement of Income as part of S,G&A expense for stock options and stock awards for the three and six months ended June 30, 2010 and 2009 is as follows (in thousands):

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Stock awards
  $ 3,313     $ 5,136     $ 9,215     $ 10,651  
Stock options
    1,293       1,334       2,576       2,651  
Total stock-based compensation
                               
expense
  $ 4,606     $ 6,470     $ 11,791     $ 13,302  

 
16

 
 
The assumptions used to value stock options granted during the periods ended June 30, 2010 and 2009 are as follows:

 
2010
 
2009
Expected volatility
35.0%
 
36.3%
Risk-free interest rate
2.2%
 
2.4%
Expected dividend yield
0.3%
 
0.3%
Expected term of options (in years)
4.8
 
4.8


   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Weighted average fair value per option
  $ 7.80     $ 9.10     $ 7.90     $ 9.14  

A summary of stock option activity under the plans for the six months ended June 30, 2010, is presented below (in thousands, except exercise price and term data):
 
   
Shares
   
Weighted- Average Exercise Price
   
Weighted- Average Remaining Contractual Term
   
Aggregate Intrinsic Value
 
Options outstanding, beginning of period
    6,323     $ 32.50              
Options granted
    65       26.46              
Options exercised
    (349 )     16.76              
Options forfeited
    (558 )     33.85              
Options outstanding, end of period
    5,481     $ 33.30       4.6     $ 2,611  
Options exercisable, end of period
    4,609     $ 34.18       4.0     $ 2,351  

The total exercise date intrinsic value of options exercised during the six months ended June 30, 2010 was $3.5 million.

A summary of non-vested restricted stock awards for the six months ended June 30, 2010 is presented below (in thousands, except grant price data):
 
   
Shares
   
Weighted- Average Grant Date Price
 
Non-vested shares, beginning of period
    2,595     $ 29.52  
Shares awarded
    56       25.54  
Shares vested
    (372 )     34.02  
Shares forfeited
    (166 )     29.28  
Non-vested shares, end of period
    2,113     $ 28.63  

 
17

 
 
As of June 30, 2010, there was approximately $54 million of total unrecognized compensation cost related to non-vested stock awards and stock options granted to Omnicare employees, which is expected to be recognized as expense prospectively over a remaining weighted-average period of approximately six years.  The total grant date fair value of shares vested during the six months ended June 30, 2010 related to stock awards and stock options was approximately $13.2 million.

See additional information at the “Subsequent Events” note.

Note 7 - Employee Benefit Plans

The Company has various defined contribution savings plans under which eligible employees can participate by contributing a portion of their salary for investment, at the direction of each employee, in one or more investment funds, as further described in Omnicare’s 2009 Annual Report.  Expense relating primarily to the Company’s matching contributions for these defined contribution plans was $1.5 million and $2.9 million for the three and six months ended June 30, 2010, respectively,  and $1.8 million and $3.6 million for the three and six months ended June 30, 2009, respectively.

The Company has various defined benefit plans, as further described in Omnicare’s 2009 Annual Report.  The following table presents the components of net periodic pension cost for all pension plans for the three and six months ended June 30, 2010 and 2009 (pretax, in thousands):
 
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Service cost
  $ 924     $ 374     $ 1,847     $ 749  
Interest cost
    1,339       1,499       2,679       2,998  
Amortization of deferred amounts
                               
(primarily prior actuarial losses)
    1,968       250       3,936       500  
Return on assets
    (56 )     (60 )     (112 )     (120 )
Net periodic pension cost
  $ 4,175     $ 2,063     $ 8,350     $ 4,127  

As of June 30, 2010, the aggregate defined benefit plans’ liabilities totaled approximately $158 million.  During the first six months of 2010, the Company made $0.2 million in payments related to funding the rabbi trusts for the settlement of the Company’s pension obligations.  The fair value of these assets was approximately $142 million at June 30, 2010.  The aggregate defined benefit plans’ liabilities are the projected benefit obligation to be paid based upon services through retirement.  The aggregate assets in the rabbi trusts are the amounts required to fund the lump sum benefits of the Excess Benefit Plan.  These benefits were fully funded as of June 30, 2010.

See additional information at the “Subsequent Events” note.

 
18

 
 
Note 8 - Earnings Per Share Data

Basic earnings per share are computed based on the weighted-average number of shares of common stock outstanding during the period.  Diluted earnings per share include the dilutive effect of stock options, warrants and restricted stock awards, as well as convertible debentures.  The following is a reconciliation of the basic and diluted earnings per share (“EPS”) computations for both the numerator and denominator (in thousands, except per share data):
 
   
Three months ended June 30,
 
   
Income
   
Common
Shares
   
Per
Common Share
 
2010:
 
(Numerator)
   
(Denominator)
   
Amounts
 
Basic EPS
                 
Income from continuing operations
  $ 21,401           $ 0.18  
Loss from discontinued operations
    (9,802 )           (0.08 )
Net income
    11,599       117,434     $ 0.10  
Effect of Dilutive Securities
                       
4.00% junior subordinated convertible
                       
debentures
    72       275          
Stock options, warrants and awards
          407          
Diluted EPS
                       
Income from continuing operations plus assumed conversions
    21,473             $ 0.18  
Loss from discontinued operations
    (9,802 )             (0.08 )
Net income plus assumed conversions
  $ 11,671       118,116     $ 0.10  
                         
2009:
                       
Basic EPS
                       
Income from continuing operations
  $ 41,994             $ 0.36  
Loss from discontinued operations
    (13,275 )             (0.11 )
Net income
    28,719       116,852     $ 0.25  
Effect of Dilutive Securities
                       
4.00% junior subordinated convertible
                       
debentures
    71       275          
Stock options, warrants and awards
          513          
Diluted EPS
                       
Income from continuing operations plus assumed conversions
    42,065             $ 0.36  
Loss from discontinued operations
    (13,275 )             (0.11 )
Net income plus assumed conversions
  $ 28,790       117,640     $ 0.24  
 
 
19

 
 
   
Six months ended June 30,
 
   
Income
   
Common Shares
   
Per Common Share
 
2010:
 
(Numerator)
   
(Denominator)
   
Amounts
 
Basic EPS
                 
Income from continuing operations
  $ 75,701           $ 0.64  
Loss from discontinued operations
    (13,250 )           (0.11 )
Net income
    62,451       117,598     $ 0.53  
Effect of Dilutive Securities
                       
4.00% junior subordinated convertible
                       
debentures
    144       275          
Stock options, warrants and awards
          412          
Diluted EPS
                       
Income from continuing operations plus assumed conversions
    75,845             $ 0.64  
Loss from discontinued operations
    (13,250 )             (0.11 )
Net income plus assumed conversions
  $ 62,595       118,285     $ 0.53  
                         
2009:
                       
Basic EPS
                       
Income from continuing operations
  $ 74,222             $ 0.64  
Loss from discontinued operations
    (14,609 )             (0.13 )
Net income
    59,613       116,652     $ 0.51  
Effect of Dilutive Securities
                       
4.00% junior subordinated convertible
                       
debentures
    142       275          
Stock options, warrants and awards
          563          
Diluted EPS
                       
Income from continuing operations plus assumed conversions
    74,364             $ 0.63  
Loss from discontinued operations
    (14,609 )             (0.12 )
Net income plus assumed conversions
  $ 59,755       117,490     $ 0.51  

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.

During the three and six months ended June 30, 2010 and 2009, 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 and six months ended June 30, 2010 and 2009 totaled 4.8 million and 6.2 million, respectively.


 
20

 

Note 9 - Restructuring and Other Related Charges

Omnicare Full Potential Program

In 2006, the Company commenced the implementation of the “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.  The Omnicare Full Potential Plan is expected to optimize resources across the entire organization by implementing best practices, including the realignment and right-sizing of functions, and a “hub-and-spoke” model, whereby certain key administrative and production functions will be transferred to regional support centers (“hubs”) specifically designed and managed to perform these tasks, with local pharmacies (“spokes”) focusing on time-sensitive services and customer-facing processes.  Additionally, in connection with this productivity enhancement initiative, the Company is also right-sizing and consolidating certain CRO operations.

This program is estimated to result in total pretax restructuring and other related charges of approximately $133 million.  As presented in further detail below, the Company recorded restructuring and other related charges for the Omnicare Full Potential Plan of approximately $5 million and $13 million pretax (approximately $3 million and $8 million aftertax) during the three and six months ended June 30, 2010, respectively, and approximately $6 million and $13 million pretax (approximately $4 million and $8 million aftertax) during the three and six months ended June 30, 2009, respectively, or cumulative aggregate restructuring and other related charges of approximately $124 million before taxes through the second quarter of 2010.  The remainder of the overall restructuring and other related charges will be recognized and disclosed prospectively, as the remaining portions of the project are finalized and implemented.  The Company eliminated approximately 1,200 positions in completing its initial phase of the program.  The completion of the program is estimated to result in an additional net reduction of approximately 1,400 positions (2,100 positions eliminated, net of 700 new positions filled in different geographic locations as well as to perform new functions required by the hub-and-spoke model of operations), of which approximately 1,300 positions had been eliminated as of June 30, 2010.  The foregoing reductions do not include additional savings expected from lower levels of overtime and reduced temporary labor.  The Company estimates reductions in overtime, excess hours and temporary help, as well as productivity gains, to equal an additional 820 full-time equivalents.  In addition, in July 2009, the Company implemented a temporary payroll containment and reduction program across the organization designed to facilitate the achievement of the productivity and efficiency goals associated with the Full Potential Plan.

The restructuring charges associated with the overall program primarily include severance pay, the buy-out of employment agreements, lease terminations, and other exit-related asset disposals, professional fees and facility exit costs.  The other related charges are primarily comprised of professional fees.  Details of the Omnicare Full Potential Plan restructuring and other related charges follow (pretax, in thousands):

 
21

 
 
   
Balance at
   
2010
   
Utilized
   
Balance at
 
   
December 31,
   
Provision/
   
during
   
June 30,
 
Restructuring charges:
 
2009
   
Accrual
   
2010
   
2010
 
Employee severance
  $ 3,843     $ 5,888     $ (8,775 )   $ 956  
Lease terminations
    9,003       2,839       (3,723 )     8,119  
Other assets, fees and facility exit costs
    459       2,317       (2,376 )     400  
Total restructuring charges
  $ 13,305       11,044     $ (14,874 )   $ 9,475  
                                 
Other related charges
            1,475                  
                                 
Total restructuring and other related charges
          $ 12,519                  

As of June 30, 2010, the Company has made cumulative payments of approximately $34 million of severance and other employee-related costs for the Omnicare Full Potential Plan.  The remaining liabilities at June 30, 2010, represent amounts not yet paid relating to actions taken in connection with the program (primarily lease payments, severance and professional fees) and will be settled as these matters are finalized.  The provision/accrual and corresponding payment amounts relating to employee severance are being accounted for primarily in accordance with the authoritative guidance for employers’ accounting for postemployment benefits; and the provision/accrual and corresponding payment amounts relating to employment agreement buy-outs are being accounted for primarily in accordance with the authoritative guidance regarding accounting for costs associated with exit or disposal activities.

Note 10 - 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 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, Kenton Circuit, against the 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 June 21, 2010, defendants filed a motion to dismiss the action in its entirety on the grounds that plaintiff failed to make a pre-suit demand on Omnicare's board prior to filing the case, or to adequately allege that such a demand would have been futile, and that the complaint fails to state a claim upon which relief can be granted.  Plaintiff's response to that motion is due August 13, 2010.  The Company believes that the action is without merit and intends to continue to defend itself vigorously.

 
22

 
 
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, the Company and certain unnamed defendants asserting violations of federal antitrust law and California unfair competition law arising out of certain arrangements between Johnson & Johnson 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 June 28, 2010, Johnson & Johnson and the Company filed motions to dismiss the complaint claiming that plaintiffs failed to state a claim.  In response, plaintiffs agreed to withdraw their complaint and filed an amended complaint on July 21, 2010.  The Company's response to the amended complaint is due on September 7, 2010.  The Company intends to mount a vigorous defense to the claims, which it believes are entirely without merit.

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 relators subsequently amended their complaint and served the Company on July 8, 2010.  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.  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.

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.  The Company believes that the allegations are without merit and intends to vigorously defend itself in this action if pursued.

 
23

 
 
As previously disclosed, the U.S. Attorney’s Office, District of Massachusetts had been investigating allegations under the False Claims Act, 31 U.S.C. (§) 3729, et seq. and various state false claims statutes in five qui tam complaints (Maguire, Kammerer, Lisitza and two sealed complaints) concerning the Company’s relationships with certain manufacturers and distributors of pharmaceutical products and certain customers, as well as with respect to contracts with certain companies acquired by the Company.

The complaints in these cases, which have been dismissed with prejudice by the relators pursuant to the settlement described below (including the two sealed complaints, which have now been unsealed as part of the settlement), alleged that the Company violated the False Claims Act when it submitted claims for name brand drugs when actually providing generic versions of the same drug to nursing homes; provided consultant pharmacist services to its customers at below-market rates to induce the referral of pharmaceutical business; accepted discounts from drug manufacturers in return for recommending that certain pharmaceuticals be prescribed to nursing home residents; accepted rebates, post-purchase discounts, grants and other forms of remuneration from drug manufacturers in return for purchasing pharmaceuticals from those manufacturers and taking steps to increase the purchase of those manufacturers’ drugs; made false statements and omissions to physicians in connection with its recommendations of those pharmaceuticals; substituted certain pharmaceuticals without physician authorization; accepted payments from certain generic drug manufacturers in return for entering into purchase arrangements with them; acquired certain institutional pharmacies at above-market rates to obtain contracts between those pharmacies and nursing homes; and made a payment to certain nursing home chains in return for the referral of pharmaceutical business.

On November 2, 2009, the Company entered into a civil settlement agreement, without any finding of wrongdoing or any admission of liability, finalizing a previously disclosed agreement in principle, under which the Company paid the federal government and participating state governments $98 million plus interest from June 24, 2009 (the date of the agreement in principle referenced above) and related expenses to settle various alleged civil violations of federal and state laws.  The settlement agreements release the Company from claims that the Company allegedly violated various federal and state laws due to the Company having allegedly made a payment to certain nursing home chains in return for the referral of pharmaceutical business; allegedly provided consultant pharmacist services to its customers at rates below the Company's cost of providing the services and below fair market value to induce the referral of pharmaceutical business; allegedly accepted a payment from a generic drug manufacturer allegedly in exchange for purchasing that manufacturer’s products and recommending that physicians prescribe such products to nursing home patients; and allegedly accepted rebates, grants and other forms of remuneration from a drug manufacturer to induce the Company to recommend that physicians prescribe one of the manufacturer’s drugs, and the rebate agreements conditioned payment of the rebates upon the Company engaging in an “active intervention program” to convince physicians to prescribe the drug and requiring that all competitive products be prior authorized for the drug’s failure, where the Company failed to disclose to physicians that such intervention activities were a condition of it receiving such rebate payments.

 
24

 
 
The Company denies the contentions of the qui tam relators and the federal government as set forth in the settlement agreement and the complaints.  All 50 states and the District of Columbia have participated in the settlement.  In addition, the Department of Justice has advised the Company that it has no present intention of pursuing an investigation and/or filing suit under the False Claims Act against the Company with respect to allegations in the qui tam complaints that, during 1999-2003, pharmaceutical manufacturers named as defendants in the complaints made payments to the Company in return for the Company recommending and/or purchasing such manufacturers' drugs.

Pursuant to stipulations of dismissal executed in connection with the settlement agreement, the five complaints were dismissed.  As part of the settlement agreement, 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 are expected to result 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 will need to be increased, and there can be no assurance that such pricing will not result in the loss of certain contracts.

As previously disclosed, on November 14, 2006, the Company entered into a voluntary civil settlement of all federal and state civil claims arising from allegations relating to three generic pharmaceuticals provided by the Company in connection with the substitution of capsules for tablets (Ranitidine), tablets for capsules (Fluoxetine) and two 7.5 mg tablets for one 15 mg tablet (Buspirone).  Another issue alleged by one qui tam relator remains under seal and was not resolved by the settlement.  The settlement agreement did not include any finding of wrongdoing or any admission of liability.  As part of the settlement agreement, on November 9, 2006, the Company entered into a Corporate Integrity Agreement with the Department of Health and Human Services Office of the Inspector General with a term of five years from November 9, 2006.  This Corporate Integrity Agreement has been amended and restated as described above.

 
25

 
 
On February 2 and February 13, 2006, respectively, two substantially similar putative class action lawsuits, entitled Indiana State Dist. Council of Laborers & HOD Carriers Pension & Welfare Fund v. Omnicare, Inc., et al., No. 2:06cv26 (“HOD Carriers”), and Chi v. Omnicare, Inc., et al., No. 2:06cv31 (“Chi”), were filed against Omnicare and two of its officers in the United States District Court for the Eastern District of Kentucky purporting to assert claims for violation of §§10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeking, among other things, compensatory damages and injunctive relief.  The complaints, which purported to be brought on behalf of all open-market purchasers of Omnicare common stock from August 3, 2005 through January 27, 2006, alleged that Omnicare had artificially inflated its earnings by engaging in improper generic drug substitution and that defendants had made false and misleading statements regarding the Company’s business and prospects.  On April 3, 2006, plaintiffs in the HOD Carriers case formally moved for consolidation and the appointment of lead plaintiff and lead counsel pursuant to the Private Securities Litigation Reform Act of 1995.  On May 22, 2006, that motion was granted, the cases were consolidated, and a lead plaintiff and lead counsel were appointed.  On July 20, 2006, plaintiffs filed a consolidated amended complaint, adding a third officer as a defendant and new factual allegations primarily relating to revenue recognition, the valuation of receivables and the valuation of inventories.  On October 31, 2006, plaintiffs moved for leave to file a second amended complaint, which was granted on January 26, 2007, on the condition that no further amendments would be permitted absent extraordinary circumstances.  Plaintiffs thereafter filed their second amended complaint on January 29, 2007.  The second amended complaint (i) expands the putative class to include all purchasers of Omnicare common stock from August 3, 2005 through July 27, 2006, (ii) names two members of the Company’s board of directors as additional defendants, (iii) adds a new plaintiff and a new claim for violation of Section 11 of the Securities Act of 1933 based on alleged false and misleading statements in the registration statement filed in connection with the Company’s December 2005 public offering, (iv) alleges that the Company failed to timely disclose its contractual dispute with UnitedHealth Group, Inc. and its affiliates (“United”), and (v) alleges that the Company failed to timely record certain special litigation reserves.  The defendants filed a motion to dismiss the second amended complaint on March 12, 2007, claiming that plaintiffs had failed adequately to plead loss causation, scienter or any actionable misstatement or omission.  That motion was fully briefed as of May 1, 2007.  In response to certain arguments relating to the individual claims of the named plaintiffs that were raised in defendants’ pending motion to dismiss, plaintiffs filed a motion to add, or in the alternative, to intervene an additional named plaintiff, Alaska Electrical Pension Fund, on July 27, 2007.  On October 12, 2007, the court issued an opinion and order dismissing the case and denying plaintiffs’ motion to add an additional named plaintiff.  On November 9, 2007, plaintiffs filed a notice of appeal with the United States Court of Appeals for the Sixth Circuit with respect to the dismissal of their case.  Oral argument was held on September 18, 2008.  On October 21, 2009, the Sixth Circuit Court of Appeals generally affirmed the district court’s dismissal, dismissing plaintiff’s claims for violation of §§10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, as well as affirming the denial of Alaskan Electrical Pension Fund’s motion to intervene.  However, the appellate court reversed the dismissal of the claim brought for violation of Section 11 of the Securities Act of 1933, remanding the case to the district court for further proceedings, including application of the rule requiring plaintiffs to allege fraud with particularity to their Section 11 claim.  On November 3, 2009, plaintiffs filed a motion in the Court of Appeals seeking a rehearing or a rehearing en banc with respect to a single aspect of the Court's decision, namely, whether the federal rule requiring pleading with particularity should apply to their claim under Section 11 of the Securities Act.  On December 16, 2009, that petition was denied, and on January 13, 2010, that Court issued its mandate by which the Section 11 claim was remanded to the district court for further proceedings consistent with the decision and order of October 21, 2009.  At a conference on March 4, 2010, the district court stayed further proceedings pending the resolution of plaintiffs’ anticipated petition to the U. S. Supreme Court for a writ of certiorari.  Plaintiffs filed their petition for a writ of certiorari on May 14, 2010.  The petition is now fully briefed and awaiting determination.

 
26

 
 
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.  On January 12, 2007, the defendants filed a motion to dismiss the consolidated action on the grounds that the dismissal of the substantially identical shareholder derivative action, Irwin v. Gemunder, et al., 2:06cv62, by the United States District Court for the Eastern District of Kentucky on November 20, 2006 should be given preclusive effect and thus bars re-litigation of the issues already decided in Irwin.  Instead of opposing that motion, on March 16, 2007, the plaintiffs filed an amended consolidated complaint, which continues to name all of the directors as defendants and asserts the same claims, but attempts to bolster those claims by adding nearly all of the substantive allegations from the most recent complaint in the federal securities class action (see discussion of HOD Carriers above) and an amended complaint in Irwin that added the same factual allegations that were added to the consolidated amended complaint in the HOD Carriers action.  On April 16, 2007, defendants filed a supplemental memorandum of law in further support of their pending motion to dismiss contending that the amended complaint should be dismissed on the same grounds previously articulated for dismissal, namely, the preclusive effect of the dismissal of the Irwin action.  That motion has been fully briefed, oral argument was held on August 21, 2007, and the court reserved decision.

The Company believes the above-described purported class and derivative actions are without merit and will be vigorously defended.

The three and six months ended June 30, 2010 included charges of $29.4 million and $34.9 million pretax ($19.9 million and $23.4 million after taxes), respectively, and approximately $28.4 million and $70.0 million pretax ($22.0 millon and $54.5 million after taxes) for the three and six months ended June 30, 2009, respectively, reflected in the “Litigation and other related charges” line of the Consolidated Statements of Income, primarily for estimated litigation-related settlements and professional expenses for resolution of certain regulatory matters with various states, as further discussed later in this note, as well as costs associated with the settlement of the investigation by the United States Attorney’s Office, District of Massachusetts; the Company’s lawsuit against United; certain large customer disputes; 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 the pretax special item reflected above.

 
27

 
 
During 2006, the Company experienced certain quality control and product recall issues, as well as fire damage, at one of its repackaging facilities.  As a precautionary measure, the Company voluntarily and temporarily suspended operations at this facility.  During the time that this facility was closed, the Company conducted certain environmental tests at the facility.  Based on the results of these tests, which showed very low levels of beta lactam residue, and the time and expense associated with completing the necessary remediation procedures, as well as the short remaining term on the lease for the current facility, 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 (as defined below) and certain billing issues.  The Company continues to work to address and resolve certain remaining issues, and fully restore centralized repackaging to its original levels.  In order to replace the capacity of this facility, the Company ramped-up production in its other repackaging facility, as well as onsite in its individual pharmacies.  Further, in order to replace the repackaging capacity of the closed facility, on February 27, 2007, Omnicare entered into an agreement for the Repackaging Services division of Cardinal Health to serve as the contract repackager for pharmaceutical volumes previously repackaged at the closed facility.  The agreement initially extends through October 2010.  As a result, the Company has been and continues to be able to meet the needs of all of its client facilities and their residents.  Addressing these issues served to increase costs and, as a result, the three months ended June 30, 2010 included special charges of approximately $0.7 million pretax (approximately $0.5 million and approximately $0.2 million was recorded in the cost of sales and operating expenses sections of the Consolidated Statements of Income, respectively) ($0.4 million after taxes) for additional costs precipitated by the quality control, product recall and fire damage issues at this facility (“Repack Matters”).  The associated costs for the six months ended June 30, 2010 totaled $1.9 million pretax ($0.9 million and $1.0 million was recorded in the cost of sales and operating expenses sections of the Consolidated Statements of Income, respectively) ($1.2 million after taxes).  The three months ended June 30, 2009 included special charges of approximately $1.2 million (approximately $0.8 million and approximately $0.4 million was recorded in the cost of sales and operating expenses sections of the Consolidated Statements of Income, respectively) ($0.7 million after taxes) for additional costs precipitated by the Repack Matters.  The associated costs for the six months ended June 30, 2009 totaled $3.2 million pretax ($1.9 million and $1.3 million was recorded in the cost of sales and operating expenses sections of the Consolidated Statements of Income, respectively) ($2.0 million after taxes).  The Company maintains product recall, property and casualty and business interruption insurance, and the extent of insurance recovery for these expenses continues to be reviewed by its insurers and outside advisors.  As of June 30, 2010, the Company has received approximately $10 million in insurance recoveries.

 
28

 
 
The Company is in various stages of discussions with governmental/regulatory authorities responsible for enforcing the laws and regulations to which Omnicare is subject.  In light of discussions Omnicare is currently having regarding resolution of certain regulatory matters with various states, as referenced above, a provision of $24.2 million pretax has been recorded in the second quarter of 2010 for the Company’s aggregate estimate for anticipated payments to resolve such matters.  It is expected that any such resolutions will not include an admission of liability or wrongdoing by the Company.

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, in the case of the investigations regarding certain drug substitutions and the Repack Matters and other billing matters, that these matters will be resolved in an amount that would not exceed the amount of the pretax charges recorded by the Company.

As part of its ongoing operations, the Company is 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.  The Company is also 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 possible loss or 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.

 
29

 
 
Note 11 - Segment Information

Based on the “management approach,” as defined by the authoritative guidance for disclosures about segments of an enterprise and related information, Omnicare has two reportable segments.  The Company’s larger reportable segment is Pharmacy Services.  Pharmacy Services primarily provides distribution of pharmaceuticals, related pharmacy consulting and other ancillary services, data management services, medical supplies, and distribution and patient assistance services for specialty pharmaceuticals.  The Company’s customers are primarily skilled nursing, assisted living, hospice and other providers of healthcare services in 47 states in the United States, the District of Columbia and in Canada at June 30, 2010.  The Company’s other reportable segment is CRO Services, which provides comprehensive product development and research services to client companies in pharmaceutical, biotechnology, nutraceutical, medical devices and diagnostics industries in 32 countries around the world at June 30, 2010, including the United States.  Where applicable, operating segments have been aggregated giving consideration to the management approach.

The table below presents information about the segments as of and for the three and six months ended June 30, 2010 and 2009, and should be read in conjunction with the paragraph that follows (in thousands):

 
30

 
 
   
Three months ended June 30,
 
   
Pharmacy
   
CRO
   
Corporate and
   
Consolidated
 
2010:
 
Services
   
Services
   
Consolidating
   
Totals
 
Net sales
  $ 1,491,771     $ 27,350     $     $ 1,519,121  
Depreciation and amortization expense
    (18,773 )     (457 )     (13,696 )     (32,926 )
Restructuring and other related charges
    (2,632 )     (1,991 )     (857 )     (5,480 )
Litigation and other related charges
    (29,361 )                 (29,361 )
Repack matters
    (687 )                 (687 )
Acquisition and other related costs
    164                   164  
Operating income (expense) from continuing operations
    110,318       (3,716 )     (25,242 )     81,360  
Total assets
    6,634,134       163,164       608,050       7,405,348  
Capital expenditures
    (5,848 )     (63 )     (252 )     (6,163 )
                                 
2009:
                               
Net sales
  $ 1,499,704     $ 40,803     $     $ 1,540,507  
Depreciation and amortization expense
    (21,385 )     (469 )     (13,983 )     (35,837 )
Restructuring and other related charges
    (4,761 )     (653 )     (469 )     (5,883 )
Litigation and other related charges
    (28,357 )                 (28,357 )
Repack matters
    (1,196 )                 (1,196 )
Acquisition and other related costs
    (2,011 )                 (2,011 )
Operating income (expense) from continuing operations
    129,557       967       (22,443 )     108,081  
Total assets
    6,724,776       162,785       438,465       7,326,026  
Capital expenditures
    (6,252 )     (222 )     (244 )     (6,718 )
                                 
   
Six months ended June 30,
 
   
Pharmacy
   
CRO
   
Corporate and
   
Consolidated
 
2010:
 
Services
   
Services
   
Consolidating
   
Totals
 
Net sales
  $ 2,986,262     $ 57,093     $     $ 3,043,355  
Depreciation and amortization expense
    (38,230 )     (927 )     (29,677 )     (68,834 )
Restructuring and other related charges
    (4,559 )     (5,525 )     (2,435 )     (12,519 )
Litigation and other related charges
    (34,867 )                 (34,867 )
Repack matters
    (1,880 )                 (1,880 )
Acquisition and other related costs
    (63 )                 (63 )
Operating income (expense) from continuing operations
    261,559       (8,978 )     (50,054 )     202,527  
Total assets
    6,634,134       163,164       608,050       7,405,348  
Capital expenditures
    (11,170 )     (176 )     (332 )     (11,678 )
                                 
2009:
                               
Net sales
  $ 2,997,066     $ 85,546     $     $ 3,082,612  
Depreciation and amortization expense
    (42,227 )     (943 )     (28,183 )     (71,353 )
Restructuring and other related charges
    (10,759 )     (705 )     (1,336 )     (12,800 )
Litigation and other related charges
    (70,022 )                 (70,022 )
Repack matters
    (3,189 )                 (3,189 )
Acquisition and other related costs
    (2,850 )                 (2,850 )
Operating income (expense) from continuing operations
    250,739       3,959       (49,098 )     205,600  
Total assets
    6,724,776       162,785       438,465       7,326,026  
Capital expenditures
    (13,775 )     (742 )     (798 )     (15,315 )

In accordance with the authoritative guidance for income statement characterization of reimbursements received for “out-of-pocket” expenses incurred, Omnicare included in its reported CRO segment net sales amount, for the three and six month periods ended June 30, 2010, reimbursable out-of-pockets totaling $3.3 million and $7.2 million, respectively and $5.2 million and $10.9 million for the three and six months ended June 30, 2009, respectively.
 
 
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Note 12 – Subsequent Event

On August 2, 2010, the Company announced that Joel F. Gemunder (“JFG”) retired from his positions 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.  The Company, Omnicare Management Company and Mr. Gemunder entered into a Separation Agreement, dated as of July 31, 2010.  The JFG Separation Agreement provides that, in accordance with Mr. Gemunder’s employment agreement, Mr. Gemunder will receive an aggregate cash severance amount of approximately $16.2 million pretax, payable in installments through July 1, 2011.

Additionally, pursuant to Mr. Gemunder’s stock option and restricted stock agreements, on the retirement date, the unvested portion of 2,670,019 stock options and the 705,176 shares of restricted common stock held by Mr. Gemunder became fully vested.  The Company anticipates this will result in a non-cash pretax charge ranging from approximately $14 million to $16 million in the third quarter of 2010.  Mr. Gemunder will also be paid for unused and accrued vacation time.  

On August 2, 2010, the Company also announced that Cheryl D. Hodges (“CDH”), Senior Vice President and Secretary of the Company, resigned from the Company effective as of July 31, 2010.  The Company, Omnicare Management Company and Ms. Hodges entered into a Separation Agreement, dated as of July 31, 2010.  The CDH Separation Agreement provides that, in accordance with Ms. Hodges’ employment agreement, Ms. Hodges will receive an aggregate cash severance amount of approximately $2.1 million pretax, payable in installments through July 1, 2011.

Further, pursuant to Ms. Hodges’ stock option and restricted stock agreements, on the resignation date, the unvested portion of 446,859 stock options and the 111,573 shares of restricted common stock held by Ms. Hodges became fully vested.  The Company anticipates this will result in a non-cash pretax charge ranging from approximately $3 million to $4 million in the third quarter of 2010.  Ms. Hodges will also be paid for unused and accrued vacation time.  

In addition, it is anticipated that Omnicare will incur additional termination and settlement related expenses in the near term relating to the Company’s welfare and pension benefit plans ranging from approximately $32 million to $36 million pretax, primarily comprised of benefits and amounts due to Mr. Gemunder and Ms. Hodges pursuant to the terms of such plans, as well as benefits and amounts due to Patrick E. Keefe, retired Executive Vice President and Chief Operating Officer of Omnicare, Inc., pursuant to the terms of such plans.  It is anticipated that the impact of the welfare and benefit plan related payments will not be significant to the Company’s operating cash flows as these obligations were funded with rabbi trust assets, as separately reflected on the consolidated balance sheet.
 
 
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Note 13 - Guarantor Subsidiaries

The Company’s 6.125% Senior Subordinated Notes due 2013, the 6.875% Senior Subordinated Notes due 2015 and the 7.75% Senior Subordinated Notes due 2020 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 June 30, 2010 and December 31, 2009 for the balance sheets as well as the three and six months ended June 30, 2010 and 2009 for the statements of income, and the statements of cash flows for the six months ended June 30, 2010 and 2009.  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.

 
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Note 13 - Guarantor Subsidiaries (Continued)

Summary Consolidating Statements of Income – Unaudited
(in thousands)

   
Three months ended June 30,
 
2010:
 
Parent
   
Guarantor Subsidiaries
   
Non-Guarantor Subsidiaries
   
Consolidating/ Eliminating Adjustments
   
Omnicare, Inc. and Subsidiaries
 
 Net sales
  $     $ 1,475,339     $ 43,782     $     $ 1,519,121  
 Cost of sales
          1,150,221       32,643             1,182,864  
 Repack matters
          466                   466  
 Gross profit
          324,652       11,139             335,791  
 Selling, general and administrative expenses
    1,118       191,598       5,805             198,521  
 Provision for doubtful accounts
          20,448       564             21,012  
 Restructuring and other related charges
          5,446       34