COMMITMENTS AND CONTINGENCIES

Legal Proceedings

On June 30, 2009, Professional Home Care Services, Inc., or PHCS, one of the subsidiaries the Company acquired through its acquisition of CHS, was sued by Alexander Infusion, LLC, a New York-based home infusion company, in the Supreme Court of the State of New York. The complaint alleges principally breach of contract arising in connection with PHCS's failure to consummate an acquisition of Alexander Infusion after failing to satisfy the conditions to PHCS's obligation to close. Alexander Infusion has sued for $3.5 million in damages. The Company believes Alexander Infusion's claims to be without merit and intends to continue to defend against the allegations vigorously. Furthermore, under the merger agreement, subject to certain limits, the former CHS stockholders agreed to indemnify the Company in connection with any losses arising from claims made in respect of the acquisition agreement entered into between PHCS and Alexander Infusion. As of September 30, 2012, no liability or indemnification reimbursement has been accrued in the Unaudited Consolidated Financial Statements as a loss is not considered probable.

Government Regulation

Various Federal and state laws and regulations affecting the healthcare industry do or may impact the Company's current and planned operations, including, without limitation, Federal and state laws prohibiting kickbacks in government health programs, Federal and state antitrust and drug distribution laws, and a wide variety of consumer protection, insurance and other state laws and regulations. Management strives to maintain the Company in substantial compliance with all existing laws and regulations material to the operation of its business. However, such laws and regulations are subject to rapid change and often are uncertain in their application. As controversies continue to arise in the healthcare industry (for example, the efforts of Plan Sponsors and pharmacy benefit managers to limit formularies, alter drug choice and establish limited networks of participating pharmacies), Federal and state regulation and enforcement priorities in this area can be expected to increase, the impact of which on the Company cannot be predicted.

From time to time, the Company responds to subpoenas and requests for information from governmental agencies. The Company cannot predict with certainty what the outcome of any of the foregoing might be. There can be no assurance that the Company will not be subject to scrutiny or challenge under one or more existing laws or that any such challenge would not be successful. Any such challenge, whether or not successful, could have a material effect upon the Company's Consolidated Financial Statements. A violation of the Federal anti-kickback statute, for example, may result in substantial criminal penalties, as well as suspension or exclusion from the Medicare and Medicaid programs. Moreover, the costs and expenses associated with defending these actions, even where successful, can be significant. Further, there can be no assurance the Company will be able to maintain any of the regulatory approvals that may be required to operate its business, and the failure to do so could have a material effect on the Company's Unaudited Consolidated Financial Statements.

Legal Settlements

Following responses to government subpoenas and discussions with the government, in May 2011, the Company was advised of a qui tam lawsuit filed under seal in federal court in Minnesota in 2006 and naming the Company as defendant. The complaint alleged violations of healthcare statutes and regulations by the Company and predecessor companies dating back to 2000. The Company negotiated a settlement with the Minneapolis office of the United States Attorney, which is part of the US Department of Justice (“DOJ”) and relevant State governments, under which the Company paid the states $0.6 million and the federal government $4.4 million in September and October 2012, respectively, in exchange for releases, and denied wrongdoing and liability. Remaining to be resolved are the qui tam relator's employment termination claim and her lawyer's statutory legal fee claim. During the year ended December 31, 2011, the Company recorded a legal settlement expense of $4.8 million related to the proposed settlement with the DOJ and State governments. During the three months and nine months ended September 30, 2012, the Company recorded additional legal settlement expense of $(0.1) million and $0.2 million to account for the final settlement amount. The legal settlement expenses were included in income (loss) from discontinued operations, net of income taxes in the accompanying Unaudited Consolidated Statements of Operations. As of September 30, 2012 and December 31, 2011, there was a liability of $4.4 million and $4.8 million, respectively, included in accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets related to the settlement.

PBM Services Payment Delay

A large PBM Services customer has become approximately two months behind payment terms as of September 30, 2012. The total amount owed to the Company is $7.8 million, of which $0.3 million is due to the Company for PBM services rendered. The payments from the customer are the source from which the Company remits payments to participating network pharmacies. The Company is in discussions with the customer to address its disputes and this outstanding balance. As of September 30, 2012, no liability or reserve against the outstanding PBM service fees has been recorded in the Unaudited Consolidated Financial Statements as the probability of loss is not known.

Leases

The Company leases its facilities and certain equipment under various operating leases with third parties. The majority of these leases contain escalation clauses that increase base rent payments based upon either the Consumer Price Index or an agreed upon schedule.

In addition, the Company utilizes capital leases agreements with third parties to obtain certain assets such as vehicles. Interest rates on capital leases are both fixed and variable and range from 3% to 7%.

As of September 30, 2012, future minimum lease payments, including interest, under operating and capital leases are as follows (in thousands):



	Operating Leases		Capital Leases		Total
2012 (three months)	$	1,531	$	72	$	1,603
2013	4,620		1,018		5,638
2014	3,307		225		3,532
2015	2,686		192		2,878
2016	2,188		23		2,211
2017 and thereafter	3,770		—		3,770
Total	$	18,102	$	1,530	$	19,632

Rent expense for leased facilities and equipment was approximately $1.7 million and $1.4 million for the three months ended September 30, 2012 and 2011, respectively. Rent expense for leased facilities and equipment was approximately $4.6 million and $4.2 million for the nine months ended September 30, 2012 and 2011, respectively.

Purchase Commitments

As of September 30, 2012, the Company had commitments to purchase prescription drugs from drug manufacturers of approximately $6.3 million during the remainder of 2012. These purchase commitments are made at levels expected to be used in the normal course of business.