10-K 1 ocr10-k2012.htm 10-K OCR 10-K 2012

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-K

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.

Commission File No. 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.)

OMNICARE, INC.
900 OMNICARE CENTER
201 E. FOURTH STREET
CINCINNATI, OHIO 45202
(Address of Principal Executive Offices)
513-719-2600
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

 
Title of Each Class
 
 
Name of Each Exchange on which Registered
 
 
 
Common Stock ($1.00 Par Value)
 
New York Stock Exchange
4.00% Trust Preferred Income Equity Redeemable
 
New York Stock Exchange
Securities issued by Omnicare Capital Trust I and
 
 
       guaranteed by Omnicare, Inc.
 
 
Series B 4.00% Trust Preferred Income Equity
 
New York Stock Exchange
Redeemable Securities issued by Omnicare Capital
 
 
Trust II and guaranteed by Omnicare, Inc.
 
 
 
 
 
 
 
 


 




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Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ý          No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨  No  ý

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  ý No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  ý No  ¨

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  ý No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.ý

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.  (Check one):

Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
                                                  
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes  ¨ No  ý

Aggregate market value of the registrant’s voting stock held by non-affiliates, based upon the closing price of said stock on the New York Stock Exchange Composite Transaction Listing on the last business day of the registrant’s most recently completed second fiscal quarter (i.e., June 30, 2012) ($31.34 per share): 3,470,086,963

As of January 31, 2013, the registrant had 104,638,271 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Omnicare, Inc.’s (“Omnicare”, the “Company” or the “Registrant”) definitive Proxy Statement for its 2013 Annual Meeting of Stockholders, to be held May 22, 2013, are incorporated by reference into Part III of this report.  Definitive copies of Omnicare’s 2013 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the Company’s fiscal year.



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OMNICARE, INC.

2012 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

PART I
 
 
PAGE
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.




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As used in this document, unless otherwise specified or the context otherwise requires, the terms “Omnicare,” “Company,” “its,” “we,” “our” and “us” refer to Omnicare, Inc. and its consolidated subsidiaries.

PART I

ITEM 1. – BUSINESS

Background

Omnicare, Inc. ("Omnicare" or the "Company"), a corporation formed in 1981, is a leading healthcare services company that specializes in the management of complex pharmaceutical care. The Company operates two primary businesses through two operating segments, Long-Term Care Group ("LTC") and Specialty Care Group ("SCG"), each serving a different customer population but sharing a common objective: advancing health outcomes at the lowest possible cost. Through LTC, Omnicare is the nation's largest provider of pharmaceuticals and related pharmacy and ancillary services to long-term care facilities as well as chronic care facilities and other settings. SCG provides specialty pharmacy, commercialization services for the biopharmaceutical industry and end-of-life pharmaceutical care management for hospice care agencies. Omnicare leverages its specialized clinical capabilities and innovative technology solutions across both primary businesses as key components of the value we believe we provide to our customers. Information regarding the Company's reportable segments is presented at the “Segment Information” note of the Notes to our 2012 Consolidated Financial Statements, included at Part II, Item 8, of this filing.
 
Long-Term Care Group

Omnicare operates the largest institutional pharmacy business in North America, as measured in both revenues and the number of beds served. Due to the size and scope of LTC, we believe we have unique cost advantages, especially pertaining to the sourcing of pharmaceuticals. The scale of our operations has also provided us the opportunity to make investments in proprietary automation technology to reduce our dispensing costs while improving the accuracy and consistency of our service delivery. LTC's customers consist of skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), independent living communities, hospitals, correctional facilities, and other healthcare service providers. In light of a customer mix that is heavily penetrated in the senior market, we have a high level of insight into geriatric pharmaceutical care. At December 31, 2012, LTC provided our pharmacy services in 47 states in the United States (“U.S.”) and the District of Columbia. LTC comprised approximately 79% of the Company’s total net sales during the year ended December 31, 2012, and dispensed approximately 114.3 million prescriptions.
 
In addition to pharmaceutical distribution, we believe we provide value to our customers through our extensive clinical services, our customer-facing technology offerings and the speed at which we convert residents of our customers' facilities to lower-cost generic pharmaceuticals. With respect to our clinical services, we provide pharmacy consulting, including monthly patient drug therapy evaluations, assist in compliance with state and federal regulations and provide proprietary clinical and health management programs (utilizing outcomes-based algorithm technology).  LTC also provides a suite of technology solutions based largely on our Omniview® web-based platform that is intended to improve the efficiency of our customers' operations through such tools as the electronic ordering of prescription refills, proof-of-delivery tracking, and real-time validation of Medicare Part D coverage, among others. LTC also provides a number of other products and services, including intravenous medications and nutrition products (infusion therapy products and services), respiratory therapy services, medical supplies and equipment (including billing the Medicare Part B program for eligible patients) and clinical care planning.  We also provide pharmaceutical case management services for retirees, employees and dependents who have drug benefits under corporate-sponsored healthcare programs.    

Operating Model

We purchase, repackage and dispense prescription and non-prescription medication in accordance with physician orders and deliver such prescriptions to long-term care facilities for administration to individual residents (by the facilities’ nursing staff for SNFs).  We service long-term care facilities typically within a radius of approximately 150 miles of our pharmacy locations and maintain a 24-hour, seven-day per week, on-call pharmacist service for emergency dispensing and delivery, and for consultation with the facility's staff or attending physician. Our pharmacy infrastructure is primarily based on a "hub-and-spoke" network composed of 120 spoke pharmacies intended to primarily handle new prescription orders and 32 hub pharmacies that use proprietary automation to support spoke pharmacies with refill prescriptions (in addition to filling new prescription orders in their respective local markets). The use of automation within our pharmacies leverages our size and, we believe, distinguishes us from our competitors, by reducing our dispensing costs while improving our dispensing accuracy.

Upon receipt of a prescription, the relevant resident information is entered into our computerized dispensing and billing systems.  At that time, the dispensing system checks the prescription for any potentially adverse drug interactions, duplicative therapy or resident sensitivity.  When required and/or specifically requested by the physician or patient, branded drugs are dispensed, and generic

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drugs are substituted in accordance with applicable state and federal laws as requested by the physician or patient.  Subject to physician approval and oversight, and in accordance with our pharmaceutical care guidelines, we also provide for patient-specific therapeutic interchange of more efficacious and/or safer drugs for those presently being prescribed.  See "The Omnicare Geriatric Pharmaceutical Care Guidelines®" below for further discussion.

We utilize a unit-of-use drug distribution system.  This means that our prescriptions are packaged for dispensing in individual doses.  This differs from prescriptions filled by retail pharmacies, which typically are dispensed in vials or other bulk packaging requiring measurement of each dose by or for the patient.  Our delivery system is intended to improve control over pharmaceutical distribution and patient compliance with drug therapy by increasing the accuracy and timeliness of drug administration.

In conjunction with our drug distribution system, our computerized record keeping/documentation system is designed to result in greater efficiency in nursing time, improved control and reduced waste in client facilities, and lower error rates in both dispensing and administration.  We believe we distinguish ourselves from many of our competitors by also providing proprietary clinical programs.  For example, we have developed a ranking of drugs based on their relative clinical effectiveness for the elderly and by cost to the payor.  We use these rankings, which we call the Omnicare Geriatric Pharmaceutical Care Guidelines®, or Omnicare Guidelines®, to more effectively manage patient care and costs.  In addition, we provide health and outcomes management programs for the large base of elderly residents of the long-term facilities we serve.

The Omnicare Geriatric Pharmaceutical Care Guidelines®

Supplementing the various clinical services Omnicare provides, we offer client facilities and their attending physicians a guide to pharmaceutical treatment of the elderly called the Omnicare Geriatric Pharmaceutical Care Guidelines® (“Omnicare Guidelines®”).  We believe the Omnicare Guidelines® is the first drug formulary ranking drugs by disease state according to their clinical effectiveness independent of their cost, specifically designed for the elderly.  The Omnicare Guidelines® ranks drugs used for specific diseases as preferred, acceptable or unacceptable based solely on their disease-specific clinical effectiveness.  The Omnicare Guidelines® takes into account such factors as pharmacology, safety and toxicity, efficacy, drug administration, quality of life and other considerations specific to the frail elderly population.  The clinical evaluations and rankings are developed exclusively for us by the University of the Sciences in Philadelphia, an academic institution recognized for its expertise in geriatric long-term care.  The Omnicare Guidelines® is extensively reviewed and updated at least annually by the University of Sciences in Philadelphia, taking into account, among other factors, the latest advances as documented in the medical literature.  In addition, the Omnicare Guidelines® provides relative cost information comparing the prices of the drugs to patients, their insurers or other payors of the pharmacy bill.

As the Omnicare Guidelines® focuses on health benefits, rather than solely on cost, we believe that use of the Omnicare Guidelines® assists physicians in making the best clinical choices of drug therapy for the patient in a manner that is cost efficient for the payor of the pharmacy bill.  Accordingly, we believe that the development of and compliance with the Omnicare Guidelines® is important in lowering costs for Omnicare’s payors. The Omnicare Guidelines® is also integrated into our primary customer-facing technology platform, Omniview®.

Omniview®

The primary component of our customer-facing technology suite, Omniview®, provides our facility customers with an innovative technological platform to improve efficiencies within their operations. Our broad range of advanced technologies allow web-based access to electronic medical records, automated pharmacy billing, on-line medication refills and returns processing, census tracking, pre-admission medication assessment and access to the Omnicare Guidelines®. Our MyOmniview web-portal is designed to address patients' and family member needs by allowing access to the patients' health records, billing information and pharmaceutical information. We also offer OmniviewDr as the physician-facing part of Omniview's technology portal, providing prescribers the ability to view patient health records, approve prescription refill requests, and view a comprehensive document library, among other time-saving and patient care-enhancing features. Additionally, OmniviewDr is the first and only electronic prescribing solution for controlled substances in institutional settings, enabling prescribers, nurse practitioners, and physician assistants to electronically transmit orders for controlled substances, as well as other medications, in real-time, directly to Omnicare pharmacies. This feature reduces the time it takes for patients to receive urgent medication while streamlining a cumbersome, manual, paper-based process.

Specialty Care Group

SCG touches a broad spectrum of the healthcare continuum, serving the needs of biopharmaceutical manufacturers, physicians, nurses, caregivers and patients. Our services are largely centered on the specialty pharmaceutical market and revolve around five platforms: brand support services, supply chain solutions, patient support services, specialty pharmacy and disease management

5

for end-of-life care. By integrating these services across SCG's platforms, we are able to provide our manufacturer clients one end to end solution for all of their needs. Our brand support services, supply chain solutions and patient support services are integrated, fee-for-service platforms which focus on helping the drug manufacturer to market, to distribute and obtain reimbursement for their products. In our specialty pharmacy platform, we provide dispensing of specialized pharmaceuticals that are high cost, have complex reimbursement and supply chain challenges, have limited patient populations and are not available through normal retail channels. These specialized drugs deal primarily with specific categories of drugs and disease states, such as rheumatoid arthritis, multiple sclerosis, oncology and growth hormones. In our end-of-life care platform, Omnicare provides hospice care pharmaceutical management. SCG accounted for approximately 21% of the Company’s total net sales during the year ended December 31, 2012.

Product and Market Development

Our LTC and SCG businesses engage in a continuing program for the development of new services and for marketing these services.  While new service and new market development are important factors for the growth of these businesses, we do not expect that any new service or marketing efforts, including those in the developmental stage, will require the investment of a significant portion of our assets.

Materials/Supply

Unlike others within the institutional pharmacy industry, we leverage our purchasing scale and direct sourcing infrastructure to source most of our generic pharmaceuticals directly from manufacturers; we believe that this creates a cost advantage over others within the industry. We also purchase some generic and branded pharmaceuticals through wholesale distributors with whom we have a prime vendor agreement at discounted prices based upon contracts negotiated by us directly with pharmaceutical manufacturers; and in some cases, based upon prices accessed through group purchasing organization contracts. We have not experienced any significant difficulty in obtaining pharmaceuticals or other products and supplies used in the conduct of our business.

Patents, Trademarks, and Licenses

Our business operations are not dependent upon any material patents, trademarks or licenses (see further discussion of licenses in the “Government Regulation” caption below).

Seasonality

Except for the periodic impacts of the flu season and/or number of billing days during any particular quarter, our business operations are generally not impacted significantly by seasonality.

Inventories

We seek to maintain adequate on-site inventories of pharmaceuticals and supplies to ensure prompt delivery service to our customers.  Our primary wholesale distributor also maintains local warehousing in most major geographic markets in which we operate.

Customers

At December 31, 2012, our LTC primarily serves long-term care institutions and other chronic care settings, comprising approximately 970 thousand beds in 47 states in the US and the District of Columbia.

Our SCG operates throughout the U.S., and serves a broad range of clients, including many of the major multi-national biopharmaceutical companies and hospice care agencies.

No single customer comprised more than 10% of consolidated revenues in 2012, 2011 or 2010.

Financial information with respect to geographic location is presented at the “Segment Information” note of the Notes to our 2012 Consolidated Financial Statements, included at Item 8 of this Filing.

Backlog

Backlog is not a relevant factor in our business as products and services are sold promptly on an as-ordered basis.

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Government Regulation

Our pharmacies and the long-term care institutions we serve are subject to extensive federal, state and local regulation.  These regulations cover required qualifications, day-to-day operations, reimbursement and the documentation of activities.  We continuously monitor the effects of regulatory activity on our operations.

Licensure, Certification and Regulation. States generally require that companies operating a pharmacy within the state be licensed by the state board of pharmacy.  At December 31, 2012, we had pharmacy licenses, or pending applications, for each pharmacy we operate.  In addition, many states regulate out-of-state pharmacies as a condition of the delivery of prescription products to patients in their states.  Our pharmacies hold the requisite licenses applicable in these states.  In addition, our pharmacies are registered with the appropriate state and federal authorities pursuant to statutes governing the regulation of controlled substances.

Federal and State Laws Affecting the Repackaging, Labeling and Interstate Shipping of Drugs. Federal and state laws impose certain registration, repackaging and labeling requirements on entities that repackage drugs for distribution, other than pharmacies that repackage in the regular practice of dispensing or selling drugs directly to patients.  A drug repackager must register with the FDA as a repackager, and with the relevant states as a drug wholesaler and/or repackager.  A drug repackager is subject to FDA inspection for compliance with relevant Current Good Manufacturing Practices ("CGMPs").  We hold all required registrations and licenses, and we believe our ongoing repackaging operations are in substantial compliance with applicable federal CGMP requirements and state wholesaler requirements.  In addition, we believe we comply with applicable laws regarding the transfer and shipment of pharmaceuticals.

Drug Pedigree Regulations.  Federal and state laws impose "drug pedigree" regulations on wholesale distributors.  These regulations generally require the wholesale drug distributor to maintain, and provide to pharmacies, a history of the transactions in the chain of distribution of a given drug lot from the manufacturer to the pharmacy.  Some states have adopted or are considering adopting electronic pedigree tracking laws. Effective July 2016, California will require pharmaceutical wholesalers and repackagers to implement electronic track-and-trace capabilities for pharmaceutical products. Supply chain laws and regulations such as these could increase the overall regulatory burden and costs associated with our distribution business.  We believe we are in compliance with federal and state regulations currently in effect.  These regulations, however, may be interpreted in the future in a manner inconsistent with our interpretation and application which could adversely affect our results of operations, cash flows and financial condition.

Medicare and Medicaid. Our business has long operated under regulatory and cost containment pressures from federal and state laws primarily affecting Medicare and Medicaid.  We have historically received reimbursement from Medicare (primarily under the Part A and D programs and to a lesser extent the Part B program) and Medicaid programs, directly from individual residents or their responsible parties (private pay), long-term care facilities and from other payors such as third-party insurers.

The Company’s payor mix (as a percentage of annual sales) for the last three years ended December 31 is presented at the “Description of Business and Summary of Significant Accounting Policies” note of the Notes to Consolidated Financial Statements at Part II, Item 8, of this Filing.

For those patients who are not covered by government-sponsored programs or private insurance, we generally directly bill the patient or the patient's responsible party on a monthly basis.  Depending upon local market practices, we may alternatively bill private patients through the nursing facility.  Pricing for private pay patients is based on prevailing regional market rates or "usual and customary" charges.

The Medicaid program is a cooperative federal-state program designed to enable states to provide medical assistance to aged, blind or disabled individuals or members of families with dependent children whose income and resources are insufficient to meet the costs of necessary medical services.  Our pharmacies participate in state Medicaid programs.

Federal law and regulations contain a variety of requirements relating to the furnishing of prescription drugs under Medicaid.  First, states are given authority, subject to certain standards, to limit or specify conditions for the coverage of particular drugs.  Second, federal Medicaid law establishes standards affecting pharmacy practice.  These standards include general requirements relating to patient counseling and drug utilization review and more specific standards for skilled nursing facilities (“SNFs”) and nursing facilities (“NFs”) relating to drug regimen reviews for Medicaid patients in such facilities.  Third, federal regulations impose certain requirements relating to reimbursement for prescription drugs furnished to Medicaid patients.  Among other things, regulations establish "upper limits" on payment levels; the calculation of these so-called upper limits have been subject to revision by Congress in recent years (see below).  In addition to requirements imposed by federal law, states have substantial discretion to determine administrative, coverage, eligibility and payment policies under their state Medicaid programs that may affect our operations.

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The Medicare program is a federally funded and administered health insurance program for individuals age 65 and over, or who are disabled.  While pharmacies are not subject to Medicare certification requirements, providers such as SNFs and suppliers of medical equipment and supplies, including our supplier operations, are subject to specified standards.  Failure to comply with these requirements and standards may adversely affect an entity's ability to participate in the Medicare program and receive reimbursement for services provided to Medicare beneficiaries.
 
Medicare and Medicaid providers and suppliers are subject to inquiries or audits to evaluate their compliance with requirements and standards set forth under these government-sponsored programs.  These audits and inquiries, as well as our own internal compliance program, from time-to-time have identified overpayments and other billing errors resulting in repayment or self-reporting to the applicable agency.  We believe that our billing practices materially comply with applicable state and federal requirements.  However, the requirements may be interpreted in the future in a manner inconsistent with our interpretation and application.

The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments (including freezes and funding reductions), administrative rulings and executive orders, all of which may adversely affect our business.  Payments for pharmaceutical supplies and services under the Medicare and Medicaid programs may not continue to be based on current methodologies or remain comparable to present levels.  In this regard, we may be subject to payment reductions as a result of federal budgetary or other legislation related to the Medicare and Medicaid programs.  In addition, numerous state governments are experiencing budgetary pressures that may result in Medicaid payment reductions and/or delays in payment to us or our customer nursing facilities.

In addition, if we or our client facilities fail to comply with applicable reimbursement regulations, even if inadvertently, our business could be adversely impacted.  Additionally, changes in reimbursement programs or applicable regulations, such as reductions in the allowable reimbursement levels, modifications in the timing or processing of payments and other changes intended to limit or decrease the growth of Medicaid and Medicare expenditures, could adversely affect our business.

Referral Restrictions. We have to comply with federal and state laws governing financial and other arrangements between healthcare providers.  These laws include the federal anti-kickback statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration directly or indirectly in return for or to induce the referral of an individual to a person for the furnishing of any item or service for which payment may be made in whole or in part under federal healthcare programs.  We are also subject to the federal physician self-referral statute, which prohibits physicians from referring Medicare and Medicaid patients for certain “designated health services,” including outpatient prescription drugs, durable medical equipment, and enteral supplies and equipment to an entity if the referring physician (or a member of the physician’s immediate family) has a “financial relationship,” through ownership or compensation, with the entity.  Many states have enacted similar statutes which are not necessarily limited to items and services for which payment is made by federal healthcare programs.  Violations of these laws may result in fines, imprisonment, denial of payment for services, and exclusion from the federal programs and/or other state-funded programs.

Other provisions in the Social Security Act and in other federal and state laws authorize the imposition of penalties, including criminal and civil fines and exclusions from participation in Medicare, Medicaid and other federal healthcare programs for false claims, improper billing and other offenses.

We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws.  These laws may, however, be interpreted in the future in a manner inconsistent with our interpretation and application.

Healthcare Reform and Federal Budget Legislation.  This information has been updated by the discussion in the “Federal and state healthcare legislation has significantly impacted our business, and future legislation and regulations are likely to affect us” section of Part I, Item 1A, “Risk Factors”, of this Filing, which section is incorporated by reference herein.

Health Information Privacy, Security and Transaction Practices.  This information has been updated by the discussion in the “Federal and state laws that protect patient health and other personal information may increase our costs and limit our ability to collect and use that information” section of Part I, Item 1A, “Risk Factors”, of this Filing, which section is incorporated by reference herein.

Compliance Program.  The Office of Inspector General (“OIG”) has issued guidance to the healthcare industry to help providers design effective voluntary compliance programs to prevent fraud, waste and abuse in healthcare programs, including Medicare and Medicaid.  In addition, the Company and its operating units are subject in the ordinary course of business to audits, inspections

8

and investigatory reviews by federal and state authorities covering various aspects of its business. In 2009, the Company entered into an amended and restated corporate integrity agreement which succeeds the Company’s prior corporate integrity agreement entered into in 2006 and which requires, among other things, that the Company maintain and augment its compliance program in accordance with the terms of the agreement.

Although we believe that we are in compliance in all material respects with federal, state and local laws, failure to comply could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions.

See “Risk Factors”, “Legal Proceedings” and the “Commitments and Contingencies” note to the Company’s consolidated financial statements at Items 1A, 3 and 8, respectively, of this Filing for further discussion of the impact of government regulation on our business.

Competition

LTC is highly regional or local in nature and, within a given geographic area of operations, highly competitive.  We are the nation's largest provider of pharmaceuticals and related pharmacy services to long-term care institutions.  Our largest competitor nationally is PharMerica Corporation ("PharMerica").  We also compete with numerous local and regional institutional pharmacies, pharmacies owned by long-term care facilities and local retail pharmacies.  We compete on the basis of quality, price, terms and overall cost-effectiveness, along with the clinical expertise, breadth of services, technology and professional support we offer.  Further, some states have enacted "freedom of choice" or "any willing provider" requirements as part of their state Medicaid programs or in separate legislation.  Limitations such as these may increase the competition which we face in providing services to nursing facility residents.

SCG offers a comprehensive portfolio of brand support and specialty pharmacy services tailored to the biotechnology and pharmaceutical industries. SCG competes throughout the United States with drug wholesalers and pharmaceutical benefit management companies. The SCG integrated solution addresses management and dispensing of specialty medications and medications for end-of-life patients, pharmaceutical reimbursement, pharmacy support services, third party logistics and pharmacy benefit management under a single management team which, we believe, differentiates us from our competitors.  We compete on the basis of quality and overall cost effectiveness, along with the breadth of services and professional support we offer.  

Environmental Matters

In operating our facilities, historically we have not encountered any major difficulties in effecting compliance with applicable pollution control laws.  No material capital expenditures for environmental control facilities are expected.  While we cannot predict the effect which any future legislation, regulations or interpretations may have upon our operations, we do not anticipate any changes regarding pollution control laws that would have a material adverse impact to Omnicare.

Employees

At December 31, 2012, we employed approximately 14,400 persons in our continuing operations, (including approximately 1,200 part-time employees), all of which are located within the U.S.

Executive Officers of the Company

Our executive officers of the Company at the time of this filing are as follows:
 
 
 
 
 
 
First Elected to
Name
 
Age
 
Office (1)
 
Present Office
John L. Workman
 
61
 
Chief Executive Officer (2)
 
September 11, 2012
Nitin Sahney
 
49
 
President and Chief Operating Officer (3)
 
September 11, 2012
Robert O. Kraft
 
42
 
Senior Vice President and Chief Financial Officer (4)
 
September 11, 2012
Alexander M. Kayne
 
40
 
Senior Vice President, General Counsel and Secretary (5)
 
April 4, 2011

(1)
Executive officers are elected for one-year terms at the annual organizational meeting of the Board of Directors, which follows the annual meeting of stockholders.
(2)
Mr. Workman was appointed Chief Executive Officer on September 11, 2012. Mr. Workman served as Interim Chief Executive Officer and Chief Financial Officer since June 2012, as President and Chief Financial Officer from February 2011 to June

9

2012 and as Executive Vice President and Chief Financial Officer from November 2009 to February 2011. From 2004 to 2009, he served as Executive Vice President and Chief Financial Officer of HealthSouth. Prior to joining HealthSouth, Mr. Workman served as Chief Executive Officer of U.S. Can Corporation where he also served as Chief Operating Officer and Chief Financial Officer during his six-year tenure. Before that, he spent more than 14 years with Montgomery Ward & Company, Inc., serving in various capacities, including Chief Financial Officer and Chief Restructuring Officer. Mr. Workman began his career with the public accounting firm KPMG, where he was a partner.
(3)
Mr. Sahney was appointed President and Chief Operating Officer on September 11, 2012.  Mr. Sahney served as Omnicare's Chief Operating Officer since June 2012 and as Executive Vice President and President - Specialty Care Group from November 2010 to June 2012. Prior to joining Omnicare, Mr. Sahney managed a healthcare investment fund since October 2007. Before that, Mr. Sahney served as President and CEO of RxCrossroads, a specialty pharmaceutical services company acquired by Omnicare in 2005, from 2001 until August 2007. Prior to his involvement with RxCrossroads, Mr. Sahney held a number of management positions with Cardinal Healthcare, beginning in September 1993.
(4)
Mr. Kraft was appointed Senior Vice President and Chief Financial Officer on September 11, 2012. Mr. Kraft served as Omnicare's Senior Vice President - Finance since November 2010. Prior to joining Omnicare, Mr. Kraft spent 18 years with PricewaterhouseCoopers, where he was a partner.
(5)
Mr. Kayne was appointed Senior Vice President, General Counsel and Secretary on April 11, 2011.  From November 2010 to April 2011, Mr. Kayne served as Interim General Counsel and Secretary of Omnicare. Prior to joining Omnicare, Mr. Kayne was a partner with Dewey and LeBoeuf LLP in its litigation department. In May 2012, Dewey & LeBoeuf LLP filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code.

Available Information

We make available, free of charge, on or through our Corporate Web site, at www.omnicare.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).  Additionally, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C., 20549.  Information regarding operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330.  Information that we file with the SEC is also available at the SEC’s Web site at www.sec.gov.

We also post on our Corporate Web site the following corporate governance documents and committee charters:

•
Corporate Governance Guidelines
•
Code of Business Conduct and Ethics
•
Audit Committee Charter
•
Compliance Committee Charter
•
Compensation Committee Charter
•
Nominating and Governance Committee Charter
•
Executive Committee Charter

Copies of these documents are also available in print to any stockholder who requests them by writing our Corporate Secretary at:

Omnicare, Inc.
900 Omnicare Center
201 East Fourth Street
Cincinnati, OH 45202


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ITEM 1A. – RISK FACTORS

Risks Relating to Our Business

If we or our client facilities fail to comply with Medicaid and Medicare regulations, our revenue could be reduced, we could be subject to penalties and we could lose our eligibility to participate in these programs.

Our business is dependent upon revenues from the Medicare and Medicaid programs, which are highly regulated.  The failure, even if inadvertent, of us and/or our client facilities to comply with applicable regulations could adversely affect our reimbursement under these programs and our ability to continue to participate in these programs, which could have a material adverse effect on our results of operations. In addition, our failure to comply with applicable Medicare and Medicaid regulations could subject us to other penalties.

A significant portion of our revenue is pursuant to agreements with payors, including Medicare Part D Plans, and with long term care facility clients, and could be reduced due to the termination of or changes to such agreements.

In 2012, approximately 49% of our revenue was derived from beneficiaries covered under the Medicare Part D program, and 21% was paid by SNFs for drugs covered under Medicare Part A.  Our reimbursement under the Part D Program, as well as our reimbursement from certain private third-party payors, is determined pursuant to agreements that we negotiate with those payors or their pharmacy benefit manager (“PBM”) representatives.  Likewise, our reimbursement from SNFs for drugs is determined pursuant to our agreements with them.  Certain of these contracts are terminable upon prior notice by the other party.  We cannot provide assurance that we will be able to replace terminated or expired contracts on terms as favorable as the existing contracts or at all.  The termination or modification of these agreements could adversely affect our reimbursement from these sources, which could have a material adverse effect on our results of operations.  Further, termination of our agreement with a long term care facility or similar customer generally terminates our provision of services to any of the residents of the given facility, resulting in the loss of revenue from any source for those residents.  If a SNF experiences financial difficulty, this could lead to payment disputes and ultimately to the termination of the contract. Additionally, the proportion of our Part D business serviced under specific agreements may change over time based upon beneficiary choice, reassignment of beneficiaries to different Part D Plans, Part D Plan consolidation or other factors, which could also adversely affect our revenue.    The Company’s payor mix (as a percentage of annual sales) for the last three years ended December 31 is presented at the “Description of Business and Summary of Significant Accounting Policies” note of the Notes to Consolidated Financial Statements at Part II, Item 8, of this Filing.

Continuing efforts to contain healthcare costs may reduce our future revenue.

Our sales and profitability are affected by the efforts of healthcare payors to contain or reduce the cost of healthcare by lowering reimbursement rates, limiting the scope of covered services, and negotiating reduced or capitated pricing arrangements.  Many states are facing budget pressures that could result in increased cost containment efforts impacting healthcare providers.  Any changes which lower reimbursement levels under Medicare, Medicaid or other programs could reduce our future revenue.  These changes may include modifications in the timing or processing of payments, Medicare competitive bidding for certain medical equipment and supplies, and other changes intended to limit or decrease the growth of Medicare, Medicaid or third party expenditures.  In addition, our profitability may be adversely affected by any efforts of our suppliers to shift healthcare costs by increasing the net prices on the products we obtain from them.

Federal and state healthcare legislation has significantly impacted our business, and future legislation and regulations are likely to affect us.

We derive a significant portion of our revenues directly or indirectly from government-sponsored programs, principally the federal Medicare program and to a lesser extent state Medicaid programs. As part of ongoing operations, the Company and its customers are subject to legislative and regulatory changes impacting operations and the level of reimbursement received from the Medicare and Medicaid programs. For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”), changed the requirements for CMS’s calculation of maximum prescription drug reimbursement amounts under state Medicaid programs, as discussed below under "Changes in industry pricing benchmarks could materially impact our financial performance." Further, effective for federal fiscal year 2012 which began October 1, 2011, CMS has reduced reimbursement rates paid to skilled nursing facilities for services provided under Medicare Part A by 11.1% compared to fiscal year 2011 levels. On August 2, 2012, CMS published a notice updating Medicare payment rates for skilled nursing facilities for fiscal year 2013, which began October 1, 2012. Under the notice, Medicare rates are increasing by 1.8%, compared to fiscal year 2012 amounts.


11

On August 2, 2011, President Obama signed into law the Budget Control Act of 2011, which increased the nation’s debt ceiling while taking steps to reduce the federal deficit. Under this law, a bipartisan Joint Select Committee on Deficit Reduction was charged with identifying $1.5 trillion in deficit reduction, which could include cuts in Medicare, Medicaid, and other federal spending and/or revenue increases. The Committee failed to produce a budget plan before its deadline, which under the terms of the Budget Control Act was scheduled to trigger an enforcement mechanism known as sequestration to make a total of $1.2 trillion in spending reductions in January 2013, divided between domestic and defense spending. Medicare provider payments would be subject to sequestration, although the reductions would be capped at 2%. Sequestration was delayed for two months, however, by the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013. During this time period, Congress and the President are expected to consider alternative deficit reduction options, which potentially could include provisions that reduce federal spending on the Medicare and Medicaid programs. If sequestration ultimately is imposed, or alternative legislation is adopted that reduces funding for Medicare and/or Medicaid, it could adversely affect the Company's business.

In order to rein in healthcare costs, the Company anticipates that federal and state governments will continue to review and assess alternate healthcare delivery systems, payment methodologies and operational requirements for healthcare providers, including long-term care facilities and pharmacies.  Given the debate regarding the cost of healthcare, managed care, universal healthcare coverage, and other healthcare issues, the Company cannot predict with any degree of certainty the impact of the ACA, or additional healthcare initiatives, if any, on its business.  Further, the Company receives discounts, rebates and other price concessions from pharmaceutical manufacturers pursuant to contracts for the purchase of their products.  There can be no assurance that any changes in legislation or regulations, or interpretations of current law, that would eliminate or significantly reduce the discounts, rebates and other price concessions that the Company receives from manufacturers or that otherwise impact payment available for drugs under federal or state healthcare programs, would not have a material adverse impact on the Company’s overall consolidated results of operations, financial position or cash flows.  Longer term, funding for federal and state healthcare programs must consider the aging of the population; the growth in enrollees as eligibility is potentially expanded; the escalation in drug costs owing to higher drug utilization among seniors; the impact of the Medicare Part D benefit for seniors; the introduction of new, more efficacious but also more expensive medications; and the long-term financing of the entire Medicare program.  Given competing national priorities, it remains difficult to predict the outcome and impact on us of any changes in healthcare policy relating to the future funding of the Medicare and Medicaid programs.  Further, Medicare, Medicaid and/or private payor rates for pharmaceutical supplies and services may not continue to be based on current methodologies or remain comparable to present levels.  Any future healthcare legislation or regulation impacting these rates may materially adversely affect the Company’s business.
 
Changes in industry pricing benchmarks could materially impact our financial performance.
 
Contracts and fee schedules in the prescription drug industry, including our contracts with various payors and fee schedules under state Medicaid programs, generally use certain published benchmarks to establish pricing for prescription drugs. These benchmarks include average wholesale price (“AWP”) and wholesale acquisition cost (“WAC”). Most of our contracts and fee schedules utilize the WAC or AWP standard. Recent events have raised uncertainties as to whether payors will continue to utilize AWP as it has previously been calculated or whether other pricing benchmarks will be adopted for establishing prices within the industry. Also, pursuant to the ACA, certain federal upper limit (“FUL”) prices for certain generic and multisource branded drugs under Medicaid which had been calculated using WAC will instead be calculated using average manufacturer price (“AMP”), which is a price reported by manufacturers to CMS. The ACA also changed certain definitions relating to AMP and other requirements for calculation of AMP and FULs. CMS has released, for review and comment only, draft FULs and related data, as well as its draft methodology for calculating such FULs. The Company has provided comments to CMS on various aspects of these draft FULs and methodology, including the Company's assessment that the draft weighted AMPs do not reflect the market prices at which these drugs can be acquired in the marketplace. The FUL methodology has not been finalized to date. CMS has also released proposed regulations relating to the calculation of AMP and FULs pursuant to the ACA changes, and in the same release has proposed that Medicaid reimbursement of drugs to which FULs do not apply be based upon an “actual acquisition cost” measure, with new requirements for Medicaid dispensing fees. The Company has submitted comments on these proposals. In addition, CMS has begun conducting a national survey of pharmacies to create a national average drug acquisition cost benchmark (“NADAC”), the results of which states may use to set pharmacy payment rates, and has released draft NADAC amounts for comment. The Company has submitted comments to CMS on various aspects of the proposed NADAC. CMS also has released for comment draft National Average Retail Price (NARP) data, which reflects prices paid for drugs to retail community pharmacies for individuals with Medicaid, cash paying customers, and those with certain third party insurance.

Due to these and other uncertainties, we can give no assurance that the short- or long-term impact of changes to industry pricing benchmarks will not have a material adverse effect on our business and financial results in future periods. Our various projections, including earnings guidance for 2013, contemplate what we have estimated to be the most probable impact resulting from the short- or long-term impact of changes to industry pricing benchmarks. Actual results may be materially less favorable than those estimated in formulating such projections.

12


If we fail to comply with licensure requirements, fraud and abuse laws, false claims provisions or other applicable laws, we may need to curtail operations, and could be subject to significant penalties.

Our pharmacy business is subject to extensive and often changing federal, state and local regulations, and our pharmacies are required to be licensed in the states in which they are located or do business.  While we continuously monitor the effects of regulatory activity on our operations and we currently have pharmacy licenses for each pharmacy we operate, the failure to obtain or renew any required regulatory approvals or licenses could adversely affect the continued operation of our business.  In addition, we are subject to federal and state laws imposing registration, repackaging and labeling requirements on certain entities that repackage drugs for distribution; state and federal laws regarding the transfer and shipment of pharmaceuticals; and “drug pedigree” provisions requiring wholesale drug distributors to document a history of the transactions in a drug lot’s chain of distribution.  We are also subject to federal and state laws that prohibit some types of direct and indirect payments between healthcare providers.  These laws, commonly known as the fraud and abuse laws, prohibit payments intended to induce or encourage the referral of patients to, or the recommendation of, a particular provider of items or services.  Violation of these laws can result in loss of licensure, civil and criminal penalties, and exclusion from the Medicaid, Medicare and other federal healthcare programs.

As part of our ongoing operations, we are 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 we are subject. Further, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the government. Some states have adopted similar state whistleblower and false claims provisions. From time to time we receive government inquiries from federal and state agencies regarding compliance with various healthcare laws. There can be no assurance that the ultimate resolution of any such claims, inquiries or investigations, individually or in the aggregate, will not have a material adverse effect on our consolidated results of operations, financial position or cash flows. Moreover, Congress has enacted health reform legislation that expands federal health care fraud enforcement authorities. We cannot predict at this time the costs associated with compliance with such law.

Our pharmacies are registered with the appropriate state and federal authorities pursuant to statutes governing the regulation of controlled substances.  The Drug Enforcement Administration (“DEA”) increased scrutiny and enforcement of long-term care pharmacy practices under the federal Controlled Substances Act.  We believe that this increased scrutiny and, in some cases, stringent interpretation of existing regulations, effectively changes longstanding practices for dispensing controlled substances in the long-term care facility setting.  We have been required to modify the controlled substances dispensing procedures at certain of our pharmacies to comply with the regulations as currently interpreted by the DEA.  Heightened enforcement of controlled substances regulations could increase the overall regulatory burden and costs associated with our pharmacy services.  There can be no assurance that this heightened level of enforcement and such investigations or any other investigations, or any fines or other penalties resulting therefrom, will not materially adversely affect our results of operations, financial condition or cash flows.

Federal and state laws that protect patient health and other personal information may increase our costs and limit our ability to collect and use that information.

Our Company and the healthcare industry generally are required to comply with the Health Insurance Portability and Accountability Act of 1996, or HIPAA, which mandates, among other things, the adoption of standards to enhance the efficiency and simplify the administration of the healthcare system.  Many states have similar laws applicable to the Company.  In many of our operations, we are a “covered entity” under HIPAA, and therefore required to comply in our operations with these standards and subject to significant civil and criminal penalties for failure to do so.  We also provide services to customers that are healthcare providers themselves and we are required to provide satisfactory written assurances to those customers through our contractual agreements that we will provide our services in accordance with the requirements of the HIPAA standards.  Failure to comply with these contractual agreements could lead to loss of customers, contractual liability to our customers and direct action by the federal government, including penalties.  On January 17, 2013, the Office for Civil Rights of the Department of Health and Human Services released a major final rule modifying the HIPAA Privacy, Security, Breach and Enforcement Rules, including revisions made by the Health Information Technology for Economic and Clinical Health Act (“HITECH”). While we are still reviewing the extensive provisions of the rule, it generally appears to expand privacy and security requirements for business associates of entities that receive protected health information, increase penalties for noncompliance, and strengthen requirements for reporting of breaches, among other changes. The rule is effective March 23, 2013, and covered entities and business associates must comply with the applicable requirements of this final rule by September 23, 2013. We cannot determine at this time the cost of compliance with the new requirements. In addition to HIPAA, the Company works to ensure that it adheres to state privacy laws and other state privacy or health information requirements not preempted by HIPAA, including those which furnish greater privacy protection for the individual than HIPAA.  We believe we fully comply with current HIPAA rules, including the associated changes to HIPAA pursuant to the HITECH Act, and similar state requirements; however, at this time we cannot estimate if future changes, if any,

13

to the cost of compliance of the HIPAA and similar state standards will result in an adverse effect on our operations or profitability, or that of our customers.

Like many health care providers, Omnicare maintains personal information concerning its patients.  Such information is subject to increasing regulation designed to prevent or mitigate the effects of financial and medical identity theft.  Our existing security measures may be insufficient to protect against attacks by hackers, cyber terrorism, computer viruses, telecommunications failures or other catastrophic events, any of which could result in a breach in the security of the confidential data that the Company maintains. The loss or improper exposure of personal data maintained by the Company could adversely impact the business and prospects of the Company, harm the Company's reputation and result in possible fines and sanctions and/or civil litigation by customers and affected individuals.

There are costs and administrative burdens associated with ongoing compliance with information privacy and security laws.  Failure to comply carries with it the risk of significant penalties and sanctions.  Omnicare cannot predict at this time the costs associated with compliance, or the impact of such laws and regulations on the Company’s results of operations, cash flows or financial condition.

We have substantial outstanding debt and could incur more debt in the future. Any failure to meet its debt obligations would adversely affect our business and financial condition.

At December 31, 2012, our total consolidated long-term debt accounted for approximately 37.0% of total capitalization.  In addition, we and our subsidiaries may be able to incur substantial additional debt in the future.  The instruments governing our current indebtedness contain restrictions on our incurrence of additional debt.  These restrictions, however, are subject to a number of qualifications and exceptions, and under certain circumstances, we could incur substantial additional indebtedness in compliance with these restrictions, including in connection with potential acquisition transactions.  Additionally, these restrictions do not prevent us from incurring obligations that do not constitute debt under the governing documents.

The degree to which we are leveraged could have important consequences, including:
•
a substantial portion of our cash flow from operations will be required to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions, dividends or general corporate or other purposes;
•
our ability to obtain additional financing in the future may be impaired;
•
we may be more highly leveraged than our competitors, which may place us at a competitive disadvantage;
•
our flexibility in planning for, or reacting to, changes in our business and industry may be limited; and
•
our degree of leverage may make us more vulnerable in the event of a downturn in our business or in our industry or the economy in general.

Our ability to make payments on and to refinance our debt will depend on our ability to generate cash in the future.  This, to a certain extent, is subject to general economic, business, financial, competitive, legislative, regulatory and other factors that are beyond our control.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available under our credit facilities in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs.  We may need to refinance all or a portion of our debt on or before maturity.  We cannot assure you that we would be able to refinance any of our debt, including any credit facilities, on commercially reasonable terms or at all.

We are subject to risks relating to our acquisition strategy.

One component of our strategy contemplates our making selected acquisitions. Acquisitions involve inherent uncertainties. These uncertainties include our ability to consummate proposed acquisitions on favorable terms or at all, the effect on acquired businesses of integration into a larger organization, and the availability of management resources to oversee the operations of these businesses.
Even though an acquired business may have experienced positive financial performance as an independent company prior to an acquisition, we cannot be sure that the business will continue to perform positively after an acquisition.
 
We also may acquire businesses with unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, and tax contingencies. We have policies and procedures to conduct reviews of potential acquisition candidates for compliance with healthcare laws and to adapt the acquired businesses to our standards and applicable laws. We also generally seek indemnification from sellers covering these matters. We may, however, incur material liabilities for past activities of acquired businesses.

14

 
We cannot be sure of the successful completion or integration of any acquisition, or that an acquisition will not have an adverse impact on our results of operations, cash flows or financial condition. We also may not realize any or all of the anticipated benefits of any acquisition.

If we fail to comply with our Corporate Integrity Agreement, we could incur penalties or suffer other adverse consequences; there are costs associated with compliance.

In 2009, the Company entered into an amended and restated Corporate Integrity Agreement (“CIA”), which requires, among other things, that the Company maintain and augment its compliance program in accordance with the terms of the agreement.  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 the Office of Inspector General regarding that compliance; and (iii) provide training for certain Company employees as to the Company’s obligations under the CIA.  The CIA continues the requirements of the Company’s prior corporate integrity agreement 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, including beneficiaries in hospice programs.  The requirements of the CIA have resulted in increased costs to maintain the Company’s compliance program and greater scrutiny by federal regulatory authorities.  Violations of the CIA could subject the Company to significant monetary penalties or other adverse consequences.  Consistent with the CIA, the Company reviews its contracts for compliance with applicable laws and regulations.  

We operate in highly competitive businesses.

LTC is highly regionalized and, within a given geographic region of operations, highly competitive.  Our largest competitor is PharMerica.  In the geographic regions we serve, we also compete with numerous local and regional institutional pharmacies, pharmacies owned by long-term care facilities and local retail pharmacies.  While we compete on the basis of quality, price, terms and overall cost-effectiveness, along with the clinical expertise, breadth of services, pharmaceutical technology and professional support we offer, competitive pressures may adversely affect our profitability and results of operations.

SCG competes throughout the United States with drug wholesalers and pharmaceutical benefit management companies.  While we compete on the basis of quality and overall cost effectiveness, along with the breadth of services and professional support we offer, competitive pressures may adversely affect our profitability and results of operations.

Factors outside the Company's control could require us to record an asset impairment of goodwill.

We are required to analyze goodwill and other intangible assets for impairment. Factors out of the Company's control, including, but not limited to the economic environment, Omnicare's market capitalization, and anticipated cash flows of the Company could require us to record an impairment charge for goodwill. The accounting guidance establishes a method of testing goodwill for impairment on an annual basis, or on an interim basis if an event occurs that would reduce the fair value of a reporting unit or an indefinite-lived intangible asset below its carrying value. As of December 31, 2012, we had approximately $4.3 billion of goodwill which represented 60.9% of our total assets. If an impairment is found to exist, we will be required to record a non-cash asset impairment charge which could be significant. For additional information regarding our goodwill see the "Goodwill and Other Intangible Assets" note of the Notes to Consolidated Financial Statements and the Goodwill caption of our "Critical Accounting Policies" at Part II, Item 7 of this Filing.

Implementation of our new enterprise resource planning information technology system may result in unexpected costs and business interruptions.

We are currently designing and implementing, a new company-wide enterprise resource planning (ERP) software system with the objective of gradually migrating to the new system. Upon completion, this new system will replace our existing operating and accounting systems. Capital expenditures for our new ERP software system for fiscal 2013 and beyond will depend upon the pace of conversion of our legacy systems. The new ERP system is being implemented in phases spanning the next several years. The Company is beginning the implementation of the first phase at pilot locations beginning in early 2013 with rollouts to other locations beginning in the second half of 2013. If the implementation is not executed successfully, this could result in business interruptions. If we do not complete the implementation of the project timely and successfully, we may experience, among other

15

things, additional costs associated with completing this project and a delay in our ability to improve existing operations, support future growth and enable us to take advantage of new applications and technologies. All of this may also result in a distraction of management's time, diverting their attention from our operations and strategy.


ITEM 1B. – UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. – PROPERTIES

Our facilities include offices, distribution centers, warehouses and other key operating facilities (such as institutional pharmacies) in various locations within the United States. At December 31, 2012, the Company operated a total of 202 facilities. LTC has 189 facilities, 8 of which were owned, in 44 states within the U.S. (excluding Alaska, Hawaii, North Dakota, Wyoming, Vermont and Delaware) representing approximately 2.7 million square feet. SCG operates 9 leased facilities in South Carolina, Florida, Kentucky, Pennsylvania, Tennessee and Ohio, representing 0.6 million square feet. Our Corporate/Other segment has 4 leased facilities which includes the Company's headquarters in Cincinnati, Ohio and locations in Ohio, Kentucky, Pennsylvania and the District of Columbia, representing approximately 0.2 million square feet. We consider all of these facilities to be in good operating condition and generally to be adequate for present and anticipated needs.

ITEM 3. - LEGAL PROCEEDINGS
 
Information relating to certain legal proceedings in which Omnicare is involved is included in the “Commitments and Contingencies” note of the Notes to our Consolidated Financial Statements, included at Part II, Item 8, of this Filing and is incorporated herein by reference.

ITEM 4. –MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock; Holders of Record

Our Common Stock is listed on the New York Stock Exchange, and the following table sets forth the ranges of high and low sales prices during each of the calendar quarters of 2012 and 2011.
 
 
2012
 
2011
 
High
 
Low
 
High
 
Low
First Quarter
$36.26
 
$32.12
 
$30.89
 
$24.41
Second Quarter
$36.48
 
$29.24
 
$33.01
 
$30.24
Third Quarter
$36.28
 
$29.76
 
$32.99
 
$25.02
Fourth Quarter
$36.81
 
$32.53
 
$35.27
 
$20.36

The number of holders of record of our Common Stock on January 31, 2013 was 2,057.  This amount does not include stockholders with shares held under beneficial ownership in nominee name or within clearinghouse positions of brokerage firms and banks.


16

Stock Performance Graph
 
The following graph compares the cumulative total return for the last five years on a $100 investment (assuming dividend reinvestment) on December 31, 2007 in each of the Common Stock of the Company, the Standard & Poor’s 500 Stock Index and the S&P 500 Health Care index.
 
December 31,
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
Omnicare, Inc.
$
100.00

 
$
122.14

 
$
106.77

 
$
112.65

 
$
153.64

 
$
162.99

S&P 500
100.00

 
63.01

 
79.68

 
91.68

 
93.62

 
108.59

S&P 500 Health Care Index
100.00

 
77.21

 
92.42

 
95.10

 
107.21

 
126.39


Dividends

On February 13, 2013, the Board of Directors approved a quarterly cash dividend of 14 cents, for an indicated annual rate of 56 cents per common share for 2013, which is greater than the total annual dividend amount paid per common share for the 2012 and 2011 years (the quarterly dividends are presented in the "Summary of Quarterly Results " note of the Notes to Consolidated Financial Statements).  It is presently intended that cash dividends on common shares will continue to be paid on a quarterly basis; however, there can be no assurances as future dividends are necessarily dependent upon our future earnings and financial condition and other factors not currently determinable.  In addition, our senior credit facility and other agreements governing our indebtedness impose restrictions on our ability to pay dividends.


17

Stock Repurchases

A summary of Omnicare’s repurchases of the Company’s common stock during the quarter ended December 31, 2012 is as follows (in thousands, except per share data):

Period
 
Total Number of Shares Purchased (a)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares that Are Eligible To Be Purchased Under the Plans or Programs (b)
October 1 - 31, 2012
 
—

 
$
—

 
—

 
$
498,011

November 1 - 30, 2012 (c)
 
6,776

 
34.28

 
6,642

 
219,963

December 1 - 31, 2012
 
1

 
36.40

 
—

 
219,963

Total
 
6,777

 
$
34.28

 
6,642

 
$
219,963


(a) During the fourth quarter of 2012, the Company purchased 135 shares of Omnicare common stock in connection with its employee benefit plans, including purchases associated with the vesting of restricted stock awards.  These purchases were not made pursuant to a publicly announced repurchase plan or program.

(b) The following chart summarizes the Company's stock repurchase programs as approved by the Board of Directors in effect for the periods ended December 31, 2010 through December 31, 2012 (in thousands):
Date Approved
 
Amount Approved
 
Term Date
 
Remaining Repurchase Authority
May 3, 2010
 
$
200,000

 
May 3, 2012
 
—

May 26, 2011
 
$
100,000

 
December 31, 2012
 
—

February 21, 2012
 
$
200,000

 
February 28, 2014
 
—

September 12, 2012
 
$
350,000

 
December 31, 2014
 
$
219,963


(c) On November 29, 2012 the Company entered into an accelerated share repurchase ("ASR") agreement with Goldman, Sachs & Co. ("Goldman") pursuant to which the Company will repurchase $250 million of its outstanding common stock, and received an initial delivery of approximately 5.8 million shares of its common stock from Goldman. The specific number of shares that the Company ultimately will repurchase under the ASR Agreement will be based generally on the average of the daily volume-weighted average price per share of the Company's common stock during a repurchase period, subject to adjustments pursuant to the terms and conditions of the ASR Agreement. At settlement, under certain circumstances, Goldman may be required to deliver additional shares of common stock to the Company, or, under certain circumstances, the Company may be required to deliver shares of its common stock or may elect to make a cash payment to Goldman. The ASR Agreement is part of the stock repurchase program authorized on September 12, 2012. For further description of the Company’s ASR Agreement, see the “Common Stock Repurchase” note of the Notes to Consolidated Financial Statements at Part II, Item 8, of this Filing.

In the year ended December 31, 2012, the Company repurchased approximately 10 million shares at an aggregate cost of approximately $339 million, for a cumulative amount of approximately 19.2 million shares and approximately $580 million through December 31, 2012.  Accordingly, the Company had approximately $220 million of share repurchase authority remaining as of December 31, 2012 after factoring the remaining $50 million equity forward contract from the ASR program. 

Additional information regarding our equity compensation plans is included at Items 8 and 12 of this Filing.


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ITEM 6. - SELECTED FINANCIAL DATA

The following table summarizes certain selected financial data and should be read in conjunction with our consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included at Items 8 and 7, respectively, of this Filing.  All amounts disclosed herein relate to the Company’s continuing operations unless otherwise stated.

Five-Year Summary of Selected Financial Data
Omnicare, Inc. and Subsidiary Companies
(in thousands, except per share data)
 
For the years ended or at December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
INCOME STATEMENT DATA:
 
 
 
 
 
 
 
 
 
Net sales
$
6,160,388

 
$
6,182,922

 
$
6,030,670

 
$
6,001,053

 
$
5,992,450

Income from continuing operations
194,874

 
161,532

 
14,464

 
234,695

 
129,699

Diluted earnings per common share - continuing operations
1.73

 
1.41

 
0.13

 
2.00

 
1.10

Dividends per common share
0.42

 
0.1525

 
0.11

 
0.09

 
0.09

Diluted weighted average number of common shares outstanding
112,988

 
114,781

 
116,927

 
117,777

 
118,313

 
 
 
 
 
 
 
 
 
 
BALANCE SHEET DATA (at end of period):
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
454,213

 
$
580,262

 
$
494,484

 
$
275,707

 
$
214,666

Total assets
6,989,264

 
7,193,110

 
7,311,520

 
7,272,211

 
7,398,352

Long-term debt (excluding current portion), net of swap
2,030,030

 
1,968,274

 
2,106,758

 
1,980,239

 
2,352,822

Stockholders' equity
3,505,712

 
3,795,436

 
3,818,761

 
3,878,810

 
3,657,686

 
 
 
 
 
 
 
 
 
 
OTHER FINANCIAL DATA:
 

 
 

 
 

 
 
 
 
Net cash flows from operating activities of continuing operations
$
544,484

 
$
549,399

 
$
368,903

 
$
480,715

 
$
433,589

Capital expenditures
(99,920
)
 
(62,806
)
 
(23,517
)
 
(29,231
)
 
(57,041
)

ITEM 7. – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)

The following discussion should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information appearing elsewhere in this report.  In addition, see the “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information” caption below, as well as the “Risk Factors” previously discussed at Item 1A of this Filing.  All amounts disclosed herein relate to the Company’s continuing operations unless otherwise stated.

Executive Overview
Omnicare, Inc. ("Omnicare" or the "Company") is a leading healthcare services company that specializes in the management of complex pharmaceutical care. The Company operates two primary businesses, Long-Term Care Group ("LTC") and Specialty Care Group ("SCG"), each serving a different customer population but sharing a common objective: advancing health outcomes at the lowest possible cost. Through LTC, Omnicare is the nation's largest provider of pharmaceuticals and related pharmacy and ancillary services to long-term care facilities as well as chronic care facilities and other settings. SCG provides specialty pharmacy, commercialization services for the biopharmaceutical industry and end-of-life pharmaceutical care management for hospice care agencies. Omnicare leverages its specialized clinical capabilities and innovative technology solutions across both primary businesses as key components of the value we believe we provide to our customers. Omnicare services customers across the United States.
 
Through LTC, Omnicare operates the largest institutional pharmacy business in North America, as measured in both revenues and the number of beds served. Due to the size and scope of LTC, we believe we have unique cost advantages, especially pertaining to the sourcing of pharmaceuticals. The scale of our operations has also provided us the opportunity to make investments in proprietary automation technology to reduce our dispensing costs while improving the accuracy and consistency of our service delivery. LTC's customers consist of skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), independent living

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communities, hospitals, correctional facilities, and other healthcare service providers. In light of a customer mix that is heavily penetrated in the senior market, we have a high level of insight into geriatric pharmaceutical care. At December 31, 2012, LTC provided our pharmacy services in 47 states in the United States (“U.S.”) as well as the District of Columbia and also served approximately 970 thousand beds. LTC comprised approximately 79% of the Company’s total net sales during the year ended December 31, 2012, and dispensed approximately 114.3 million prescriptions.

SCG touches a broad spectrum of the healthcare continuum, serving the needs of biopharmaceutical manufacturers, physicians, nurses, caregivers and patients. Our services are largely centered on the specialty pharmaceutical market. These services are based on five platforms: brand support services, supply chain solutions, patient support services, specialty pharmacy and disease management for end-of-life care. Our brand support services, supply chain solutions and patient support services are integrated, fee-for-service platforms which focus on helping the drug manufacturer market, distribute and obtain reimbursement for their products. In our specialty pharmacy platform, we provide dispensing of specialized pharmaceuticals that are high cost, have complex reimbursement and supply chain challenges, have limited patient populations and are not available through normal retail channels. These specialized drugs deal primarily with specific categories of drugs and disease states, such as rheumatoid arthritis, multiple sclerosis, oncology and growth hormones. In our end-of-life care platform, Omnicare provides hospice care pharmaceutical management. SCG accounted for approximately 21% of the Company’s total net sales during the year ended December 31, 2012.

Omnicare believes it has an attractive business model, with a market leadership position in the long-term care market, and its relative position in the growing specialty care market supported by strong cash flows. Omnicare believes its business model is appropriately aligned with its customers, payors and patients; many of the factors that benefit the Company, such as new low-cost generic introductions and more accurate and efficient automation technologies, also have a favorable effect on the Company's key constituencies. Because of this factor, Omnicare believes it can play a role in solving our country's healthcare cost dilemma while striving for positive patient outcomes.

Effective September 11, 2012 the Company's Board of Directors ("BOD") appointed John L. Workman as the Chief Executive Officer of the Company. Mr. Workman was also appointed to serve on the BOD as of such date. Mr. Workman's appointment follows the Board's previous acceptance of John Figueroa's resignation as CEO and a Director of the Company. The Company's BOD also appointed Nitin Sahney, Chief Operating Officer, to the additional position of President, and appointed Robert O. Kraft, Senior Vice President of Finance, to the position of Senior Vice President and Chief Financial Officer, in each case effective September 11, 2012.

In 2012, SCG continued it's rapid growth, driven by strong performance across all platforms. Further, recently launched generic drugs generated savings to Omnicare's LTC customers and Omnicare, serving to more than offset the infrastructure and human capital investments as well as payor driven reimbursement reductions within LTC. The Company did experience a decrease in beds served in 2012 due primarily to the loss of a large, low margin correctional facility customer as well as the termination of several legacy accounts for collections and related issues.

During 2012, the Company's BOD authorized an additional aggregate $550 million in share repurchases and also increased the quarterly cash dividend to $0.14 per share on the Company's common stock, a 100% increase over the previous quarterly dividend rate of $0.07 per share. Also, on November 29, 2012, the Company entered into an accelerated share repurchase ("ASR") program with Goldman, Sachs & Co. ("Goldman") pursuant to which the Company will repurchase $250 million of its outstanding common stock. The ASR program is part of the Company's previously disclosed share repurchase program and is expected to be completed in the first half of 2013.

Also during 2012, the Company completed an amendment and extension of its senior unsecured credit agreement (as amended and restated, the "Credit Facility") with more favorable overall pricing. The Credit Facility consists of a $300 million five-year senior unsecured revolving credit facility (the "Revolving Credit Facility") and a $425 million, five-year senior unsecured term loan facility (the "Term Loan"). Further, during 2012, Omnicare entered into separate, privately negotiated exchange agreements under which, effective April 3, 2012, the Company retired $256.9 million in aggregate principal amount of outstanding 3.75% Convertible Senior Subordinated Notes due 2025 (the "2025 Notes") in exchange for its issuance of $390 million in aggregate principal amount of new 3.75% Convertible Senior Subordinated Notes due 2042 (the "2042 Notes"). In connection with the issuance of the 2042 Notes, the Company also entered into capped call transactions with a counterparty, which are intended to reduce potential dilution upon conversion of the 2042 Notes.

In the year ended December 31, 2012 the Company completed the disposition of its Canadian pharmacy and the Company's pharmacy operational software business which were not considered, individually or in the aggregate, significant to the operations of Omnicare. The Company recorded a net gain on the disposition of these businesses of $1.8 million, which is reflected in the "Other charges" caption of the Consolidated Statements of Comprehensive Income.


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For further description of the Company’s business activities, see the “Business” caption of Part I, Item 1, of this Filing.

Outlook

Historically, Omnicare's growth was driven largely by acquisitions. The Company has shifted its focus to become more operationally driven and customer-focused in an effort to make the organization more efficient and establish consistent organic growth. The Company's strategy has three key priorities:

•
Establish consistent net organic growth in LTC
•
Continue growth momentum in SCG
•
Efficient allocation of capital/return of capital to shareholders

Beginning in 2010, Omnicare instituted a number of structural and organizational changes that began to impact the customer experience with the initial focus on retention. The Company has seen results from this focus on retention levels, but believes much more can be done in this area by creating a foundation from which the Company can achieve operational excellence. Starting in June 2012, the Company began the implementation of a multi-phase plan with the additional goal of achieving consistent organic growth. This plan involves improving operations at under performing locations and the application of a sales transformation model. The Company began implementing and executing on this sales transformation model in late 2012 and also began to add new sales talent to the organizational structure, while also launching a sales training program across the organization. The final phase is strategic and long-term and consists of analyzing the results of the other phases and optimizing a strategy to align the Company to longer-term industry trends. The Company has made operating progress in the last half of 2012 and believes it will be in a better position to leverage its operational structure and further enhance its value proposition to potential and existing customers by the second half of 2013.

Just as Omnicare has invested in the underlying operations within LTC, it has similarly repositioned its SCG to better capitalize on the attractive growth characteristics within the specialty pharmaceutical market. Until late 2010, the businesses that now encompass Omnicare's SCG operated nearly independently, realizing few synergies from our other businesses. Since creating SCG, however, these businesses have reported into a single management team that is focused on better leveraging the assets of these specialty care businesses. Beginning in 2011, the Company made a number of organizational investments in SCG to further advance capabilities while improving sales results, especially in the fee-for-service operating platforms (third party logistics, brand support services, patient assistance programs). Through these efforts, Omnicare built a manufacturer-focused sales organization, and the Company is encouraged by the results of this group which has seen significant growth in sales and operating profit since the realignment. The specialty care industry is out pacing the broader pharmaceutical industry, and the Company believes its recent investments in SCG will position us well to maximize our opportunities within this rapidly growing market.

In addition to repositioning its two primary businesses for organic growth, Omnicare has made a number of recent investments to improve the efficiency of its operations while improving dispensing and thereby enhancing patient care. Specifically, the Company is in the process of transitioning from two primary billing-and-dispensing systems to one new technology platform. While this is a multi-year integration, the Company currently expects to benefit from this initiative beginning in 2013. Separately, Omnicare is also piloting several new automation capabilities within its pharmacies and on site at its customer facilities. If the pilots are successful, these initiatives are expected to have a broader launch in mid-2013 and would then be expected to positively impact profitability beginning in 2014. Omnicare believes a continued focus on standardizing its operations, both within LTC and SCG, will be a source of earnings growth while also adding to the cost advantage the Company possesses over most of its competitors.

In addition to the Company's internally driven growth objectives, there are certain pharmaceutical market dynamics and demographic developments that may continue to alter the landscape of the industries in which Omnicare competes. Specifically, both generic drugs and specialty pharmaceuticals have steadily increased their respective shares of the overall market, and Omnicare believes it is positioned well to capitalize on the continued developments in both areas. With respect to generic drugs, Omnicare uses its direct sourcing infrastructure to maintain a purchasing advantage while rapidly converting residents to newly available generic alternatives. Because Omnicare generally makes a higher profit on generic drugs than branded alternatives, the Company believes its interests are fully aligned with its customers and payors; as Omnicare benefits from these lower cost alternatives, so do its customers, payors and the residents it serves. Numerous branded drugs the Company dispenses in high volumes are expected to lose patent exclusivity over the next few years, creating an attractive growth opportunity for Omnicare while also enabling its customers to better manage through any industry cost pressures.

With respect to specialty pharmaceuticals, a number of new treatment alternatives have become available for such complicated therapeutic categories as multiple sclerosis and rheumatoid arthritis. Omnicare believes that, through SCG, it is well-positioned to benefit from the continued introduction of new large-molecule compounds and other specialty pharmaceutical therapies. As

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more of these products enter the market, the Company believes the demand for commercialization services, such as reimbursement support and third party logistics, will continue to increase.
 
Demographic trends indicate that demand for long-term care will increase well into the middle of this century as the elderly population grows significantly.  Moreover, those over 65 years old consume a disproportionately high level of healthcare services, including prescription drugs, when compared with the under-65 population.  There is widespread consensus that appropriate pharmaceutical care is generally considered the most cost-effective form of treatment for the chronic ailments afflicting the elderly while also improving the quality of life.  These factors are expected to result in a meaningful increase in demand for the geriatric pharmaceutical industry as a potential means to permit our country to maintain the level of services provided under its government-sponsored healthcare programs while ensuring healthcare costs are contained.

In order to fund this growing demand, the Company believes that the government and the private sector will continue to review, assess and possibly alter healthcare delivery systems and payment methodologies.  While it cannot at this time predict the ultimate effect of any of these initiatives on Omnicare’s business, management believes that the Company’s expertise in geriatric pharmaceutical care and pharmaceutical cost management position Omnicare to help meet the challenges of today’s healthcare environment, although changes in government reimbursement regulations could significantly adversely impact our operating results. In addition to any potential impacts associated with these regulatory and other matters, factors that could negatively impact the Company's future operating results include the impact of pricing adjustments, increasing competitive pressures, bed losses which may result from ongoing competition, and an increase in its payroll cost resulting from our operational initiatives.

Consolidated Results of Operations
The following summary table presents consolidated financial information and results of operations of Omnicare as well as Adjusted operating income and Adjusted income from continuing operations (in thousands).  
 
For the years ended December 31,
 
2012
 
2011
 
2010
Net sales
$
6,160,388

 
$
6,182,922

 
$
6,030,670

Operating income
447,178

 
432,943

 
189,154

Adjusted operating income (a)
564,356

 
504,710

 
498,594

Income from continuing operations
194,874

 
161,532

 
14,464

Adjusted income from continuing operations (a)
287,870

 
244,108

 
247,315


(a)
Adjusted operating income and Adjusted income from continuing operations exclude certain items not considered part of the core operating results of the Company and certain non-cash charges. Management believes that presenting these non-GAAP financial measures enhances investors' understanding of how management assesses the performance of the Company's businesses. Management uses non-GAAP measures for budgeting purposes, measuring actual results, allocating resources and in determining employee incentive compensation. Omnicare's method of calculating non-GAAP financial results may differ from those used by other companies and, therefore, comparability may be limited. See the “Special Items” caption of this MD&A for a description of the excluded items and a reconciliation of Adjusted operating income and Adjusted income from continuing operations to the most comparable GAAP financial measures.

2012 vs. 2011

Net sales for the year were positively impacted by drug price inflation and growth in SCG. Offsetting these factors was the unfavorable sales impact of the increased availability and utilization of generic drugs, reductions in reimbursement coupled with competitive pricing issues, and a lower average number of beds served. See discussion of sales and operating income results in more detail at the “Long-Term Care Group Segment” and “Specialty Care Group Segment” captions below.

Gross profit as a percentage of total net sales was 24.1% for the year ended December 31, 2012, as compared with 22.3% in 2011.  Gross profit was favorably affected by the increased availability and utilization of higher margin generic drugs, cost reduction and productivity improvement initiatives, the favorable dollar effect of drug price inflation, as well as growth in the SCG segment. Partially offsetting these factors was certain of the aforementioned items that, individually, served to reduce net sales, primarily the reductions in reimbursement coupled with competitive pricing issues, increased payroll and employee benefit costs in connection with the Company’s initiatives to improve its organizational structure and a lower average number of beds served.  
 

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Leveraging of fixed and variable overhead costs primarily relates to generating higher sales volumes from pharmacy facilities with no or limited increases in fixed costs (e.g., rent, depreciation, etc.) and negligible to moderate increases in variable costs (e.g., utilities, labor, etc.), as well as the elimination of pharmacies through the Company’s productivity and consolidation initiatives, further discussed below.  The Company believes it will be able to continue to leverage fixed and variable overhead costs through both internal and acquired growth.

Government and other reimbursement formulas generally adjust to take into account drug price inflation or deflation.  In order to enhance its gross profit margins, the Company strategically allocates its resources to those activities that will increase internal sales growth and favorably impact sales mix, or will lower costs.  In addition, through the ongoing development of its pharmaceutical purchasing programs, the Company is able to obtain discounts, rebates and other price concessions (“Discounts”) and thereby manage its pharmaceutical costs.

Increased leverage in purchasing favorably impacts gross profit and is primarily derived through timing of brand to generic conversions and Discounts relating to purchases from the Company’s 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 to the levels of inventories remaining on-hand.  Receivables related to Discounts are regularly adjusted based on the best available information, and to actual amounts as the applicable arrangements are settled and cash is received.  The aggregate amount of these adjustments has not been significant to the Company’s operations.

Omnicare’s consolidated selling, general and administrative (“operating”) expenses as a percentage of net sales amounted to 13.3% in 2012, versus the 12.5% experienced in the prior-year period.  Operating expenses for the year ended December 31, 2012 were unfavorably impacted by increased payroll and employee benefit costs as well as other costs associated with Omnicare's initiatives to improve its organizational structure and customer service. Partially offsetting these factors was the continued progress in the Company’s non-drug purchasing program. Also, negatively impacting the rate is the reduction in net sales due to the impact of the increased availability and utilization of generic drugs.

Interest expense, net of investment income, was lower in 2012 than the prior-year period primarily due to the refinancing activities completed in 2012 and 2011 and certain debt redemption costs recorded in 2011 which were higher than similar costs recorded in 2012. See additional information at the "Debt" note of the Notes to Consolidated Financial Statements.

The effective tax rates are different than the federal statutory rates largely as a result of the impact of state and local income taxes and certain non-deductible litigation costs. The year over year change in the effective tax rate is primarily due to certain non-deductible charges relating to litigation settlements in 2011. See further discussion at the “Income Taxes” note of the Notes to Consolidated Financial Statements.

2011 vs. 2010

Net sales for the year were positively impacted by drug price inflation and growth in SCG. Partially offsetting these factors was the unfavorable sales impact of reductions in reimbursement coupled with competitive pricing issues and the increased availability and utilization of generic drugs. See discussion of sales and operating income results in more detail at the “Long-Term Care Group Segment” and “Specialty Care Group Segment” captions below.

Gross profit as a percentage of total net sales was 22.3% for the year ended December 31, 2011, as compared with 22.2% in 2010. Gross profit was favorably impacted by the increased availability and utilization of higher margin generic drugs, cost reduction and productivity improvement initiatives, as well as the favorable dollar effect of drug price inflation. Partially offsetting these factors were the unfavorable impact of certain of the aforementioned items that, individually, served to reduce net sales, primarily the reductions in reimbursement coupled with competitive pricing issues and a lower average number of net beds served year-over-year as well as by increased payroll and employee benefit costs in connection with the Company's initiatives to improve its organizational structure.  

Omnicare’s consolidated selling, general and administrative (“operating”) expenses as a percentage of net sales amounted to 12.5% in 2011, versus the 12.4% experienced in the prior-year period. Operating expenses for the year ended December 31, 2011 were favorably impacted by continued progress in the Company’s non-drug purchasing program which were offset primarily by increased payroll and employee benefit costs as well as other costs associated with Omnicare's initiatives to improve its organizational structure and customer service.


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The decrease in the provision for doubtful accounts in 2011 over 2010 was primarily due to the unfavorable impact in 2010 of the fourth quarter 2010 implementation of a different strategic approach for the resolution of past due accounts being disputed and/or in litigation, resulting in the Company recording an incremental charge of $48.5 million in 2010, which was partially offset by increased provisioning in 2011 under the new approach.  

Investment income for the year ended December 31, 2011 was lower than the amount earned in the comparable prior-year period due primarily to lower invested balances in the 2011 period, related largely to the liquidation of rabbi trust assets in the second half of 2010 and 2011 to fund payments to former participants in the Company's excess benefit plan, and lower rates earned on the Company's cash and cash equivalents.

Interest expense was higher in 2011 than the prior-year period due primarily to certain debt redemption costs recorded in 2011, including tender premiums and the write-off of debt issuance costs, related to the Company's redemption of approximately $525 million of its outstanding 6.875% Senior Subordinated Notes, due 2015 (the "6.875% Notes"), and $250 million of its 6.125% Senior Subordinated Notes (the "6.125% Notes"). See additional information at the “Debt” note of the Notes to Consolidated Financial Statements.

The effective tax rates are different than the federal statutory rates largely as a result of the impact of state and local income taxes and certain non-deductible litigation costs. The year-over-year change in the effective tax rate is primarily due to a larger reduction of income tax expense in 2010 compared to 2011 relating to the reversal of certain unrecognized tax benefits for tax positions settled through the expiration of statute of limitations. See further discussion at the “Income Taxes” note of the Notes to Consolidated Financial Statements.

Long-Term Care Group Segment
 
For the years ended December 31,
 
2012
 
2011
 
2010
Net sales
$
4,848,341

 
$
5,123,477

 
$
5,175,730

Operating income
$
562,675

 
$
476,800

 
$
374,110

Beds served
970

 
1,010

 
1,023

Scripts dispensed
114,319

 
115,074

 
114,573


2012 vs. 2011

LTC sales were favorably impacted by drug price inflation, which was more than offset by reductions in reimbursement primarily relating to maximum allowable costs ("MAC") coupled with competitive pricing issues related to our facilities contracts and a lower average number of beds served. Also unfavorably impacting sales was the increased availability and utilization of generic drugs. When a drug converts from brand to generic, the Company's cost goes down, and a portion of that savings is passed on to our customers, which also serves to reduce sales. While the Company is focused on reducing its costs to mitigate the impact of drug pricing and reimbursement issues, there can be no assurance that such issues or other pricing and reimbursement pressures will not adversely impact LTC.

Operating income in 2012 was favorably impacted largely by the increased availability and utilization of higher margin generic drugs, cost reduction and productivity improvement initiatives, the favorable dollar effect of drug price inflation, as well as the year-over-year impact of various "special items" further discussed at the "Special Items" section of this MD&A. Operating income was unfavorably affected primarily by the operating income effect of certain of the aforementioned items that, individually, served to reduce net sales, primarily the reductions in reimbursement and pricing.  

2011 vs. 2010
 
LTC sales were unfavorably impacted by reductions in reimbursement primarily relating to maximum allowable costs ("MAC") and federal upper limit changes ("FUL") coupled with competitive pricing issues related to our facilities contracts. Also unfavorably impacting sales was the increased availability and utilization of generic drugs.

Operating income in 2011 was favorably impacted largely by the increased availability and utilization of higher margin generic drugs, cost reduction and productivity improvement initiatives as well as the favorable dollar effect of drug price inflation and the year over year impact of various "special items" further discussed at the "Special Items" section of this MD&A.  Operating income

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in 2011 was unfavorably affected primarily by the operating income effect of certain of the aforementioned items that, individually, served to reduce net sales, primarily the reductions in reimbursement and pricing. 

Specialty Care Group Segment
 
For the years ended December 31,
 
2012
 
2011
 
2010
Net sales
$
1,301,761

 
$
1,044,191

 
$
838,790

Operating income
$
129,218

 
$
98,938

 
$
75,039


2012 vs. 2011

SCG sales were positively impacted primarily by higher drug utilization, higher prescription volumes and drug price inflation coupled with increased volume in programs with drug manufacturers.  Favorable drug utilization was driven primarily from growth in the company's Multiple Sclerosis and Oncology therapies.

Operating income was favorably affected primarily by the same factors as those impacting the net sales increase.  Partially offsetting these factors was the unfavorable impact of mix within the SCG segment toward business with lower margins, competitive pricing pressures and investments in facilities and personnel in order to position the segment for future growth.  

2011 vs. 2010

SCG sales were positively impacted primarily by higher drug utilization, higher prescription volumes and drug price inflation coupled with increased volume in programs with drug manufacturers. 

Operating income in 2011 was favorably affected primarily by the same factors as those impacting the net sales increase and the year-over-year impact of a $13.3 million asset impairment charge taken in the prior year related to the Company's hospice business.  Partially offsetting these factors was the unfavorable impact of mix within the SCG segment toward business with lower margins and other competitive pricing pressures.  
 
Restructuring and Other Related Charges
See discussion at the “Restructuring and Other Related Charges” note of the Notes to Consolidated Financial Statements at Part II, Item 8, of this Filing.

Special Items
Omnicare management believes that presenting certain non-GAAP financial measures, which exclude items not considered part of the core operating results of the Company and certain non-cash charges ("Special Items"), enhances investors' understanding of how Omnicare management assesses the performance of the Company's businesses. Omnicare management uses non-GAAP measures for budgeting purposes, measuring actual operating results, allocating resources and in determining employee incentive compensation. Omnicare's method of calculating non-GAAP financial results may differ from those used by other companies and, therefore, comparability may be limited. Financial results for the three years ended December 31, 2012 from continuing operations included the Special Items presented in the table below, which also contains a reconciliation of our non-GAAP amounts to their most directly comparable GAAP financial measure (in thousands, except per share amounts):

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For the years ended December 31,
 
2012
 
2011
 
2010
Settlement, litigation and other related charges (i)
$
49,375

 
$
55,674

 
$
113,709

Other charges (ii)
67,803

 
16,093

 
147,231

Provision for doubtful accounts (iii)
—

 
—

 
48,500

Subtotal - operating expense Special Items
117,178

 
71,767

 
309,440

Amortization of discount on convertible notes (iv)
24,073

 
24,195

 
29,536

Debt redemption costs - interest expense (iv)
12,363

 
25,491

 
14,297

Gain on sales of rabbi trust assets (v)
—

 
—

 
(3,606
)
Total Special Items
$
153,614

 
$
121,453

 
$
349,667

Total Special Items - aftertax (vi)
$
92,996

 
$
82,576

 
$
232,851

 
 
 
 
 
 
Operating income
$
447,178

 
$
432,943

 
$
189,154

Operating expense Special Items
117,178

 
71,767

 
309,440

Adjusted operating income
$
564,356

 
$
504,710

 
$
498,594

 
 
 
 
 
 
Income from continuing operations
$
194,874

 
$
161,532

 
$
14,464

Total Special Items - aftertax
92,996

 
82,576

 
232,851

Adjusted income from continuing operations
$
287,870

 
$
244,108

 
$
247,315


(i)
See further discussion at the “Commitments and Contingencies” note of the Notes to Consolidated Financial Statements at Part II, Item 8, of this Filing ("Notes to Consolidated Financial Statements").
(ii)
See further discussion at the “Other Charges” caption of the “Description of Business and Summary of Significant Accounting Policies” note of the Notes to Consolidated Financial Statements.
(iii)
See further discussion at the “Accounts Receivable” caption of the “Description of Business and Summary of Significant Accounting Policies” note of the Notes to Consolidated Financial Statements.
(iv)
See further discussion at the “Debt” note of the Notes to Consolidated Financial Statements.
(v)
See further discussion at the “Employee Benefit Plans” note of the Notes to Consolidated Financial Statements.
(vi)
The tax effect was calculated by multiplying the tax-deductible pretax amounts by the appropriate effective tax rate.

Discontinued Operations
Net income for the year ended December 31, 2011 was negatively impacted by losses from the divestiture of discontinued operations. The loss from operations of the home healthcare and related ancillary businesses (the “Disposal Group”) and Tidewater (collectively the “Non-Core Disposal Group”) for the year ended December 31, 2011 in comparison to the same prior year period, primarily reflects the divestiture of the home infusion portion of the Disposal Group in November 2010 and the divestiture of Tidewater in April 2011. Additionally, during the year ended December 31, 2011 the Non-Core Disposal Group recorded an impairment loss of $23 million to reduce the carrying value of DME (the remaining portion of the Disposal Group) and Tidewater to fair value based on the final terms of the divestitures. For the year ended December 31, 2010, the Non-Core Disposal Group recorded an impairment loss of $10.3 million to reduce the carrying value of the Disposal Group to fair value as of December 31, 2010.

The operating loss in the CRO Services portion of Discontinued Operations, in comparison to the same prior year period, was primarily due to the divestiture of the operations in early 2011. For the year ended December 31, 2011, CRO Services recorded an impairment loss of $50 million to reduce the carrying value of the CRO Services operations to fair value based on the final terms of the divestiture. The 2010 period includes a previously disclosed goodwill impairment loss of approximately $91 million. The operating loss in 2010 was attributable to lower levels of new business added, as well as early project terminations by clients and client-driven delays in the commencement of certain projects.

See further discussion at the “Discontinued Operations” note of the Notes to Consolidated Financial Statements at Part II, Item 8, of this Filing.


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Impact of Inflation
The Company estimates that the impact of drug price inflation on its cost of sales for its highest dollar products during the three years ended December 31, 2012 ranged between approximately 5% to 8%. However, the impact on Omnicare's net income is significantly lower, inasmuch as government and other reimbursement formulas, which impact sales, generally adjust to take into account drug price inflation or deflation.

Financial Condition, Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2012 were $455.3 million compared with $582.6 million at December 31, 2011 (including restricted cash amounts).

The Company generated net cash flows from operating activities of continuing operations of $544.5 million during the year ended December 31, 2012, compared with $549.4 million and $368.9 million during the years ended December 31, 2011 and 2010, respectively.  Operating cash flows in 2012 were used primarily for debt payments, acquisition-related payments, capital expenditures, stock repurchases and dividend payments.   Net cash flows from operating activities during the year ended December 31, 2012 were unfavorably impacted primarily by the year-over-year change in accounts payable and a litigation settlement payment of $50 million in 2012 relating to the Company's settlement with the Drug Enforcement Agency, see further discussion at the “Commitments and Contingencies” note of the Notes to Consolidated Financial Statements. Net cash flows from operating activities were also impacted by a deposit made with our drug wholesaler in the fourth quarter of $45 million; the Company made an additional $19.8 million payment in the first quarter of 2013.  Net cash flows from operating activities during the year ended December 31, 2011 were favorably impacted by the year-over-year change in net income, inventories, accounts payable and non-trade receivables, which was partially offset by the reduced favorable impact of trade accounts receivable in comparison to the prior year, as well as tender premiums relating to the Company's debt restructuring activities (see further information in the cash flows used in financing activities discussion below). Net cash flows from operating activities during the year ended December 31, 2010 were unfavorably impacted by the decrease in net income as well as the year-over-year change in inventories due to large inventory reductions in 2009. These unfavorable impacts were partially offset by a year-over-year reduction in accounts receivable as well as in the cash requirements relating to accounts payable activity.

Favorably impacting operating cash flow was the excess of tax deductible interest expense over book interest expense related to the Company’s 4.00% Junior Subordinated Convertible Debentures, 3.25% Convertible Debentures and 3.75% Convertible Notes due 2025 and 2042.  This resulted in an increase in the Company’s deferred tax liabilities during the year ended December 31, 2012 and 2011 of $15.0 million and $10.4 million, respectively ($173 million cumulative as of December 31, 2012).  The recorded deferred tax liability could, under certain circumstances, be realized in the future upon conversion or redemption of the debt, which would serve to reduce operating cash flows.

Net cash used in investing activities of continuing operations was $139.3 million, $154.8 million and $125.5 million during the years ended December 31, 2012, 2011 and 2010, respectively.  Acquisitions of businesses required outlays of $34.9 million (including amounts payable relating to pre-2012 acquisitions) in 2012 relating to one acquisition.  Acquisitions of businesses during 2011 and 2010 required cash payments of $101.9 million and $111.8 million, respectively.  The 2012, 2011 and 2010 acquisition related outlays were funded primarily by operating cash flows.  In the year ended December 31, 2012 the Company received $19.2 million for the divestiture of its Canadian pharmacy and the Company's pharmacy operational software business. In the year ended December 31, 2011, the Company had net cash flows of approximately $13.1 million primarily relating to the divestiture of its CRO Services, Medical Equipment and Tidewater group purchasing businesses. Omnicare’s capital requirements, in addition to the payment of debt and dividends, are primarily comprised of its acquisition program and capital expenditures. The Company's capital expenditures were $99.9 million, $62.8 million and $23.5 million for the years ended December 31, 2012, 2011 and 2010, respectively. The increase relates to investment in information technology systems, primarily related to the Company's ongoing investment in the business to improve operations and customer service.

Net cash used in financing activities was $531.2 million, $308.8 million and $24.6 million during the years ended December 31, 2012, 2011 and 2010, respectively.  In 2012, the Company amended and restated its credit facility providing for more favorable overall pricing and an extension of the maturity date. The new facility consists of a $300 million, five-year senior unsecured revolving credit facility and a $425 million, five-year senior unsecured term loan facility. The credit agreement also provides for an uncommitted incremental facility that permits the Company, subject to certain conditions, to increase the commitments under the credit agreement by up to $300 million in the aggregate. The Company's obligations under the credit agreement are unsecured and are guaranteed by the subsidiaries of the Company, subject to certain exemptions. The credit agreement will mature on September 28, 2017. The interest rate applicable to the credit agreement is, at the Company's option, a floating base rate plus an applicable margin or the London interbank offered rate (LIBOR) plus an applicable margin. At December 31, 2012, the interest

27

rate on the term loan was 1.97%. The applicable margins for the credit agreement may increase or decrease based on the Company's consolidated total leverage ratio as specified in the credit agreement.
  
Also, during 2012, the Company entered into separate, privately negotiated exchange agreements under which, effective April 3, 2012, the Company retired $ 256.9 million in aggregate principal amount of outstanding 2025 Notes in exchange for its issuance of $390 million in aggregate principal amount of new 2042 Notes. The Company also redeemed $25 million of its 3.25% convertible senior debentures, due 2035. During 2011, the Company completed the issuance of an additional $150 million aggregate principal amount of its 7.75% Senior Subordinated Notes due 2020, redeemed $525 million of the 6.875% Senior Subordinated Notes due 2015 and redeemed $250 million of its 6.125% senior subordinated notes, due 2013. In 2010, the Company completed the issuance of $400 million aggregate principal amount of 7.75% Senior Subordinated Notes, due 2020, using the proceeds to purchase all $225 million of the Company’s 6.75% senior subordinated notes, due 2013. Also in 2010, the Company completed the issuance of $575 million of 3.75% Convertible Senior Subordinated Notes, due 2025, using a portion of the proceeds to purchase $525 million of the Company’s 3.25% Convertible Debentures, which resulted in an economic gain (calculated as the difference between the $525 million face value of the extinguished debt and the actual amount paid by the Company to repurchase the debt of approximately $499 million) of approximately $26 million (even though the Company was required to recognize an accounting loss of $25.6 million due to its application of the authoritative guidance for convertible debt).  Further during 2010, the Company paid off the remaining $125 million on the senior term A loan component of the 2005 Credit Facility.  

At December 31, 2012, there were no outstanding borrowings on the 2012 Revolving Credit Facility and $420 million outstanding on the Term Loan.  As of December 31, 2012, the Company had approximately $11 million outstanding relating to standby letters of credit, substantially all of which are subject to automatic annual renewals.

The following chart summarizes the Company's stock repurchase programs as approved by the Board of Directors in effect for the periods ended December 31, 2010 through December 31, 2012 (in thousands):

Date Approved
 
Amount Approved
 
Term Date
 
Remaining Repurchase Authority
May 3, 2010
 
$
200,000

 
May 3, 2012
 
—

May 26, 2011
 
$
100,000

 
December 31, 2012
 
—

February 21, 2012
 
$
200,000

 
February 28, 2014
 
—

September 12, 2012
 
$
350,000

 
December 31, 2014
 
$
219,963


As part of the share repurchase program, on November 29, 2012, the Company entered into an accelerated share repurchase ("ASR") agreement with Goldman, Sachs & Co. ("Goldman") pursuant to which the Company will repurchase $250 million of outstanding common stock.

Pursuant to the ASR Agreement, the Company made a $250 million payment to Goldman on November 30, 2012 and received an initial number of approximately 5.8 million shares of its outstanding common stock from Goldman on the same day. The specific number of shares that the Company ultimately will repurchase under the ASR Agreement will be based generally on the average of the daily volume-weighted average price per share of the Company's common stock during a repurchase period, subject to adjustments pursuant to the terms and conditions of the ASR Agreement. At settlement, under certain circumstances, Goldman may be required to deliver additional shares of common stock to the Company, or, under certain circumstances, the Company may be required to deliver shares of its common stock or may elect to make a cash payment to Goldman. The transaction is expected to be completed during the first half of 2013.

The Company had approximately $220 million of share repurchase authority remaining as of December 31, 2012, considering the remaining $50 million equity forward contract related to the ASR . In the year ended December 31, 2012, the Company repurchased approximately 10 million shares (including shares pursuant to the ASR agreement) at an aggregate cost of approximately $339 million, for a cumulative amount of approximately 19.2 million shares and approximately $580 million through December 31, 2012.   In the year ended December 31, 2011 the Company repurchased approximately 4.8 million shares at an aggregate cost of approximately $140 million. In the year ended December 31, 2010 the Company repurchased approximately 4.4 million share at an aggregate cost of approximately $101 million.

On February 13, 2013, the Company’s Board of Directors declared a quarterly cash dividend of 14 cents per share for an indicated annual rate of 56 cents per common share for 2013, which is greater than the annual dividends paid per common share for the 2012 and 2011 years.  Aggregate dividends of $45.2 million paid during 2012 were higher than the $17.2 million paid in 2011 and

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the $12.8 million paid in 2010, due primarily to an increase in dividends paid per common share to 42 cents in 2012 as compared to 15 cents and 11 cents per common share paid in 2011 and 2010, respectively.

There were no known material commitments and contingencies outstanding at December 31, 2012, other than the contractual obligations summarized in the “Disclosures About Aggregate Contractual Obligations and Off-Balance Sheet Arrangements” caption below, certain acquisition-related payments potentially due in the future, including deferred payments, indemnification payments and payments originating from earnout and other provisions that may become payable, as well as the matters discussed in the “Commitments and Contingencies” note of the Notes to Consolidated Financial Statements, and the “Legal Proceedings” section at Part I, Item 3 of this Filing.

The Company believes that net cash flows from operating activities, credit facilities and existing cash balances will be sufficient to satisfy its future working capital needs, acquisition contingency commitments, debt servicing, capital expenditures and other financing requirements for at least the next year, although no such assurances can be given in that regard.  Additionally, the Company believes that external sources of financing, including short- and long-term debt financings, are available.  Omnicare may not be able to refinance maturing debt at terms that are as favorable as those from which the Company previously benefited or at terms that are acceptable to Omnicare.  In addition, no assurances can be given regarding the Company’s ability to obtain additional financing in the future.

Disclosures About Aggregate Contractual Obligations and Off-Balance Sheet Arrangements
Aggregate Contractual Obligations:

The following summarizes the Company’s aggregate contractual obligations as of December 31, 2012, and the effect such obligations are expected to have on the Company’s liquidity and cash flows in future periods (in thousands):
 
 
Total
 
Less Than 1 Year
 
1-3 Years
 
4-5 Years
 
After 5 Years
Debt obligations
$
2,450,242

 
$
21,250

 
$
42,500

 
$
355,938

 
$
2,030,554

Capital lease obligations
23,685

 
6,463

 
11,683

 
5,539

 
—

Operating lease obligations
119,044

 
28,367

 
47,487

 
27,795

 
15,395

Purchase obligations
29,876

 
21,149

 
4,802

 
3,925

 
—

Other current obligations
207,574

 
207,574

 
—

 
—

 
—

Other long-term obligations
51,315

 
2,448

 
34,573

 
3,739

 
10,555

Subtotal
2,881,736

 
287,251

 
141,045

 
396,936

 
2,056,504

Future interest relating to debt and
 

 
 

 
 

 
 

 
 

   capital lease obligations(a)
1,423,548

 
89,950

 
179,562

 
176,387

 
977,649

Total contractual cash obligations
$
4,305,284

 
$
377,201

 
$
320,607

 
$
573,323

 
$
3,034,153


(a)
Represents estimated future interest costs based on the stated fixed interest rate of the debt, or the variable interest rate in effect at period end for variable interest rate debt.  The estimated future interest costs presented in this table do not include any amounts potentially payable associated with the contingent interest and interest reset provisions of the Company’s convertible debentures and notes, as applicable.  To the extent that any debt would be paid off by Omnicare prior to the stated due date or refinanced, the estimated future interest costs would change accordingly.  Further, these analyses do not consider the effects of potential changes in the Company’s credit rating on future interest costs, changes in variable interest rates, as well as any tax effects associated with the Company’s interest costs.

As of December 31, 2012, the Company had approximately $11 million outstanding relating to standby letters of credit, substantially all of which are subject to automatic annual renewals.

Off-Balance Sheet Arrangements:
As of December 31, 2012, the Company had two unconsolidated entities, Omnicare Capital Trust I (the “Old Trust”) and Omnicare Capital Trust II (the “New Trust”), which were established for the purpose of facilitating the offerings of the 4.00% Trust Preferred Income Equity Redeemable Securities due 2033 (the “Old Trust PIERS”) and the Series B 4.00% Trust Preferred Income Equity Redeemable Securities (the “New Trust PIERS”), respectively.  For financial reporting purposes, the Old Trust and New Trust are treated as equity method investments of the Company.  The Old Trust and New Trust are 100%-owned finance subsidiaries of the Company.  The Company has fully and unconditionally guaranteed the securities of the Old Trust and New Trust.  The Old 4.00%

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Debentures issued by the Company to the Old Trust and the 4.00% Convertible Debentures issued by the Company to the New Trust in connection with the issuance of the Old Trust PIERS and the New Trust PIERS, respectively, are presented as a single line item in Omnicare’s consolidated balance sheets and debt footnote disclosures.  Additionally, the related disclosures concerning the Old Trust PIERS and the New Trust PIERS, the guarantees, and the Old 4.00% Debentures and 4.00% Convertible Debentures are included in the “Debt” note of the Notes to Consolidated Financial Statements.  Omnicare records interest payable to the Old Trust and New Trust as interest expense in its consolidated statement of income.

As of December 31, 2012, the Company had no other unconsolidated entities, or any financial partnerships, such as entities often referred to as structured finance or special purpose entities, which might have been established for the purpose of facilitating off-balance sheet arrangements.

Quantitative and Qualitative Disclosures about Market Risk
Omnicare’s primary market risk exposure relates to variable interest rate risk through its variable interest debt and swap agreements related to certain of the Company’s borrowings. Accordingly, market risk loss is primarily defined as the potential loss in earnings due to higher interest rates for certain debt of the Company. The modeling technique used by Omnicare for evaluating interest rate risk exposure involves performing sensitivity analysis on the variable-rate debt, assuming a change in interest rates of 100 basis-points. Among the Company’s debt obligations is $420 million outstanding under the variable-rate Senior Term Loan, due 2017, at an interest rate of 1.97% at December 31, 2012 (a 100 basis point change in the interest rate would increase or decrease interest expense by approximately $4.2 million per year). In connection with its offering of $400 million of 7.75% Senior Notes during 2010 and the additional $150 million in 2011, the Company entered into Swap Agreements on all $550.0 million of its aggregate principal amount of the 7.75% Senior Notes (the “7.75% Swap Agreements”). Under the 7.75% Swap Agreements, which are designed to effectively lower the Company's cost, but subject the Company to variable interest rate risk, the Company receives a fixed rate of 7.75% and pays a floating rate based on LIBOR with a maturity of six months, plus a weighted average spread of 4.27%. The weighted average estimated LIBOR-based floating rate (including the 4.27% spread) was 4.77% at December 31, 2012 (a 100 basis-point change in the interest rate would increase or decrease interest expense by approximately $5.5 million per year).

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The fair value of the Company’s fixed-rate debt facilities is based on quoted market prices in an active market (Level 1) and is summarized as follows (in thousands):

Fair Value of Financial Instruments
 
 
December 31, 2012
 
December 31, 2011
Financial Instrument:
 
Book Value
 
Market Value
 
Book Value
 
Market Value
7.75% senior subordinated notes, due 2020, gross
 
$
550,000

 
$
614,600

 
$
550,000

 
$
591,300

3.75% convertible senior subordinated notes, due 2025
 
 

 
 

 
 

 
 

Carrying value
 
204,608

 
—

 
361,345

 
—

Unamortized debt discount
 
113,446

 
—

 
213,655

 
—

Principal amount
 
318,054

 
459,600

 
575,000

 
816,500

4.00% junior subordinated convertible debentures, due 2033
 
 

 
 

 
 

 
 

Carrying value
 
206,266

 
—

 
203,675

 
—

Unamortized debt discount
 
138,734

 
—

 
141,325

 
—

Principal amount
 
345,000

 
331,600

 
345,000

 
318,800

3.25% convertible senior debentures, due 2035
 
 

 
 

 
 

 
 

Carrying value
 
377,782

 
—

 
384,799

 
—

Unamortized debt discount
 
49,718

 
—

 
67,701

 
—

Principal amount
 
427,500

 
425,400

 
452,500

 
404,600

3.75% convertible senior debentures, due 2042
 
 

 
 

 
 

 
 

Carrying value
 
229,624

 
—

 
—

 
—

Unamortized debt discount
 
160,376

 
—

 
—

 
—

Principal amount
 
390,000

 
397,100

 
—

 
—

 
 
 
 
 
 
 
 
 
See further discussion of the Company’s debt, swap agreements and derivative instruments at the “Debt” and “Fair Value” notes of the Notes to Consolidated Financial Statements at Part II, Item 8, of this Filing.

The Company does not have any financial instruments held for trading purposes.

Critical Accounting Policies
 
 
 
 
 

The Company’s consolidated financial statements are prepared in accordance with U.S. GAAP.  In connection with the preparation of these financial statements, Omnicare management is required to make assumptions, judgments, and estimates that affect the reported amounts of assets, liabilities, stockholders' equity, revenues and expenses and the related disclosure of commitments and contingencies.  On a regular basis, the Company evaluates its critical estimates giving consideration to a combination of factors, including historical experience, current conditions, feedback from outside advisors where feasible, and on various other assumptions that are believed to be reasonable at the time and under the current circumstances.  The Company's significant accounting policies are summarized in the “Description of Business and Summary of Significant Accounting Policies” note of the Notes to Consolidated Financial Statements at Part II, Item 8, of this Filing.

In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require significant management judgment in its application.  There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result.  An accounting policy is considered to be critical if it is important to the determination of the registrant’s financial position and operating results, and requires significant judgment and estimates on the part of management in its application.  If actual results were to differ materially from the judgments and estimates made, the Company’s reported financial position and/or operating results could be materially affected.  The Company believes the following critical accounting policies and estimates involve more significant judgments and estimates used in the preparation of the consolidated financial statements.

Revenue Recognition
In general, Omnicare recognizes revenue when products are delivered or services are rendered or provided to the customer, prices are fixed and determinable and collection is reasonably assured.


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A significant portion of the Company’s revenues from sales of pharmaceutical and medical products are reimbursed by the federal Medicare Part D plan and, to a lesser extent, state Medicaid programs.  Payments for services rendered to patients covered by these programs are generally less than billed charges.  The Company monitors its revenues and receivables from these reimbursement sources, as well as other third-party insurance payors, and records an estimated contractual allowance for sales and receivable balances at the revenue recognition date, to properly account for anticipated differences between billed and reimbursed amounts.  Accordingly, the total net sales and receivables reported in the Company’s financial statements are recorded at the amount ultimately expected to be received from these payors.  Since billing functions for a portion of the Company’s revenue systems are largely computerized, enabling on-line adjudication (i.e., submitting charges to Medicare, Medicaid or other third-party payors electronically, with simultaneous feedback of the amount to be paid) at the time of sale to record net revenues, exposure to estimating contractual allowance adjustments is limited primarily to unbilled and/or initially rejected Medicare, Medicaid and third-party claims (typically approved for reimbursement once additional information is provided to the payor).  For the remaining portion of the Company’s revenue systems, the contractual allowance is estimated for all billed, unbilled and/or initially rejected Medicare, Medicaid and third-party claims.  The Company evaluates several criteria in developing the estimated contractual allowances on a monthly basis, including historical trends based on actual claims paid, current contract and reimbursement terms, and changes in customer base and payor/product mix.  Contractual allowance estimates are adjusted to actual amounts as cash is received and claims are settled, and the aggregate impact of these resulting adjustments were not significant to the Company’s operations for any of the periods presented.  Further, Omnicare does not expect the effects of a change in estimate related to unsettled December 31, 2012 contractual allowance amounts from Medicare, Medicaid and third-party payors to be significant to its future consolidated results of operations, financial position and cash flows.

Patient co-payments are associated with Medicare Part D, certain state Medicaid programs, Medicare Part B and certain third-party payors and are typically not collected at the time products are delivered or services are rendered, but are billed to the individual as part of the Company’s normal billing procedures.  These co-payments are subject to the Company’s normal accounts receivable collections procedures.

Under certain circumstances, the Company accepts returns of medications and issues a credit memo to the applicable payor.  The Company estimates and accrues for sales returns based on historical return experience, giving consideration to the Company’s return policies.  Product returns are processed in the period received and are not significant when compared to the overall sales and gross profit of the Company.

Allowance for Doubtful Accounts
Collection of accounts receivable from customers is the Company’s primary source of operating cash flow and is critical to Omnicare’s operating performance, cash flows and financial condition.  Omnicare’s primary collection risk relates to facility and private pay customers, as billings to these customers can be complex and may lead to disputes and/or delays in payments.  The Company provides a reserve for accounts receivable considered to be at increased risk of becoming uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value.  Omnicare establishes this allowance for doubtful accounts and considers such factors as historical collection experience (i.e., payment history and credit losses) and creditworthiness, specifically identified credit risks, aging of accounts receivable by payor category, current and expected economic conditions and other relevant factors.  Management reviews this allowance for doubtful accounts on an ongoing basis for appropriateness.  Judgment is used to assess the collectability of account balances and the economic ability of customers to pay.

The allowance for doubtful accounts as of December 31, 2012 was $269.4 million, compared with $358.7 million at December 31, 2011.  The allowance for doubtful accounts represented 23.9% and 27.8% of gross receivables (net of contractual allowance adjustments) as of December 31, 2012 and December 31, 2011, respectively.  The decrease in the allowance for doubtful accounts is related to an increase in write-offs of accounts receivable balances prior to the implementation of the Company's new ERP system. Unforeseen future developments could lead to changes in the Company’s provision for doubtful accounts levels and future allowance for doubtful accounts percentages, which could materially impact the overall financial results, financial position or cash flows of the Company.  For example, a one percentage point increase in the allowance for doubtful accounts as a percentage of gross receivables as of December 31, 2012 would result in an increase to the provision for doubtful accounts and related allowance for doubtful accounts of approximately $11.3 million.
 
Patient charges pending approval from Medicare, Medicaid and third-party payors are primarily billed as private pay and, where applicable, are recorded net of an estimated contractual allowance at period end.  Once an approval to bill Medicare, Medicaid and/or third-party payors has been obtained, the private pay balance is reversed and a corresponding Medicare, Medicaid or third-party receivable amount is recorded.  The Company’s policy is to resolve accounts receivable with pending status as soon as practicable.  Pending accounts receivable balances were not a significant component of the overall accounts receivable balance at December 31, 2012.


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Omnicare has standard policies and procedures for collection of its accounts receivable.  The Company’s collection efforts generally include the mailing of statements, followed up when necessary with delinquency notices, personal and other contacts, the use of an in-house national collections department or outside collection agencies, and potentially mediation/arbitration or litigation when accounts are considered unresponsive.  

Omnicare’s collection efforts primarily relate to its facility and private pay customers, as well as efforts to collect/rework Medicare Part D copays and rejected claims.  When Omnicare becomes aware that a specific customer is potentially unable to meet part or all of its financial obligations, for example, as a result of bankruptcy or deterioration in the customer’s operating results or financial position, the national credit and collections department includes the exposed balance in its allowance for doubtful accounts requirements.  At such time that a balance is definitively deemed to be uncollectible, the balance is written off against the allowance for doubtful accounts.  At December 31, 2012, the Company does not have a significant portion of its overall accounts receivable balance placed in mediation/arbitration, litigation or with outside collection agencies.

Given the Company's experience, management believes that the aggregate reserves for potential losses are adequate, but if any of the Company's larger customers were to unexpectedly default on their obligations to Omnicare, the Company’s overall allowances for doubtful accounts may prove to be inadequate.  In particular, if economic conditions worsen, the payor mix shifts significantly or the Company's customers' reimbursement rates are adversely affected, impacting Omnicare’s customers' ability to pay their bills, management may adjust the allowance for doubtful accounts accordingly, and the Company’s accounts receivable collections, cash flows, financial position and results of operations would be adversely affected.

See further discussion at the “Accounts Receivable” caption of the “Description of Business and Summary of Significant Accounting Policies” note of the Notes to Consolidated Financial Statements at Part II, Item 8, of this Filing.

Goodwill
The Company has adopted the revised authoritative guidance regarding the testing for goodwill impairment which allows an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that the fair value of a reporting unit is less than the carrying amount then the Company would perform the two step goodwill impairment test. The first step, used to identify potential impairment, is a comparison of the reporting unit's estimated fair value to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of the impairment, if any. The second step requires the Company to calculate an implied fair value of goodwill at the reporting unit level. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess.

The Company's 2012 annual goodwill impairment analysis included an assessment of certain qualitative factors including, but not limited to, macroeconomic, industry and market conditions; cost factors that have a negative effect on earnings; overall financial performance; the movement of the Company's share price; and other relevant entity and reporting unit specific events. The Company considered the qualitative factors and weighted the evidence obtained and determined that it is not more likely than not that the fair value of any reporting unit is less than its carrying amount. In 2011, the Company performed its annual goodwill impairment analysis under the same guidance and, except for the CRO goodwill impairment charge discussed at the "Discontinued Operations" note of the Notes to Consolidated Financial Statements, concluded that goodwill had not been impaired. Although the Company believes the factors considered in the impairment analysis are reasonable, significant changes in any one of our assumptions could produce a significantly different result.

Taxes
The Company estimates its current and deferred tax assets and liabilities, including those relating to acquired subsidiaries, based on current tax laws in the statutory jurisdictions in which it operates.  These estimates include judgments about deferred tax assets and liabilities resulting from temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities, as well as the realization of deferred tax assets (including those relating to net operating losses).  The deferred tax assets and liabilities are determined based on the enacted tax rates expected to apply in the periods in which the deferred tax assets or liabilities are expected to be settled or realized.

Omnicare periodically reviews its deferred tax assets for recoverability and establishes a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized.  The determination as to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based on the evaluation of positive and negative evidence.  This evidence includes historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies.  Projected future taxable income is based on the Company’s expected results and assumptions as to the jurisdiction in which the income will be earned.  The expected timing of the reversals of existing

33

temporary differences is based on current tax law and Omnicare’s tax methods of accounting.  If the Company is unable to generate sufficient future taxable income by jurisdiction, or if there is a material change in the actual effective tax rates or the time period within which the underlying temporary differences become taxable or deductible, or if the tax laws change unfavorably, then the Company could be required to increase its valuation allowance against its deferred tax assets, resulting in an increase in the effective tax rate and related tax expense.

The Company also reviews its tax liabilities, including those relating to acquired subsidiaries, giving consideration to the relevant authoritative guidance, including accounting for uncertainty in income taxes, which provides guidance for the financial statement recognition and measurement of income tax positions taken or expected to be taken in a tax return. Under this authoritative guidance, recognition and measurement are considered discrete events.  The recognition threshold is met when it is determined a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination by the relevant taxing authority.  If a tax position does not meet the more likely than not recognition threshold, the benefit of that position is not recognized in the financial statements.  A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is 50 percent likely of being realized upon ultimate resolution with a taxing authority.

Omnicare operates in a significant number of states and tax jurisdictions with varying tax laws.  The Company is subject to both federal and state audits of tax returns in the normal course of business.  While the Company believes it has provided adequately for tax liabilities in its consolidated financial statements, adverse determinations by applicable taxing authorities could have a material adverse effect on Omnicare’s consolidated financial position, results of operations or cash flows.  If the provisions for current or deferred taxes is not adequate, if the Company is unable to realize certain deferred tax assets or if the tax laws change unfavorably, the Company could potentially experience tax losses.  Likewise, if provisions for current and deferred taxes are in excess of those eventually needed, if the Company is able to realize additional deferred tax assets or if tax laws change favorably, the Company could experience potential tax gains.  A one percentage point change in the Company's overall 2012, 2011 and 2010 effective tax rates would impact tax expense and net income by $3.1 million, $2.7 million and $0.3 million, respectively.

Legal Contingencies
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 (and including reviews of individual Omnicare pharmacies' reimbursement documentation and administrative practices). Oftentimes, these inspections, audits, investigations and inquiries relate to prior periods, including periods predating Omnicare’s actual ownership of a particular acquired unit. Further, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the government. Some states have adopted similar state whistleblower and false claims provisions. The Company from time to time receives government inquiries from federal and state agencies regarding compliance with various healthcare laws. In addition, the Company is involved with 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. Each quarter, the Company reviews, including consultation with its outside legal advisors where applicable, the status of inspections, audits, inquiries, investigations, legal claims and legal proceedings and assesses its potential financial exposure.

Omnicare records accruals for such contingencies to the extent that the Company concludes that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. To the extent the amount of a probable loss is estimable only by reference to a range of equally probable outcomes, and no amount within the range appears to be a better estimate than any other amount, the low end of the range is accrued. These matters are continuously being evaluated and, in many cases, are being contested by the Company and the outcome is not predictable. The inherently unpredictable nature of legal proceedings may be exacerbated by various factors from time to time, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes.

Because of inherent uncertainties related to these matters, the use of estimates, assumptions, judgments and external factors beyond the Company's control, accruals are based on the best information available at the time. As additional information becomes available, Omnicare reassesses the potential liability related to any pending inspections, audits, inquiries, investigation, claims and litigation and may revise its estimated exposure upward or downward accordingly, including any related disclosure. Such revision in the estimates of the potential liabilities could have a material impact on the Company's consolidated financial statements.

Information pertaining to legal proceedings is further discussed at the “Commitments and Contingencies” note of the Notes to Consolidated Financial Statements at Part II, Item 8, of this Filing.


34

Recently Issued Accounting Standards
Information pertaining to recently issued accounting standards is further discussed at the “Recently Issued Accounting Standards” caption of the “Description of Business and Summary of Significant Accounting Policies” note of the Notes to Consolidated Financial Statements at Part II, Item 8, of this Filing.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information
In addition to historical information, this report contains certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, all statements regarding the intent, belief or current expectations regarding the matters discussed or incorporated by reference in this document (including statements as to “beliefs,” “expectations,” “anticipations,” “intentions” or similar words) and all statements which are not statements of historical fact. Such forward-looking statements, together with other statements that are not historical, are based on management’s current expectations and involve known and unknown risks, uncertainties, contingencies and other factors that could cause results, performance or achievements to differ materially from those stated. The most significant of these risks and uncertainties are described in the Company’s Form 10-K, Form 10-Q and Form 8-K reports filed with the Securities and Exchange Commission and include, but are not limited to: overall economic, financial, political and business conditions; trends in the long-term healthcare and pharmaceutical industries; the ability to attract new clients and service contracts and retain existing clients and service contracts; the ability to consummate pending acquisitions on favorable terms or at all; trends for the continued growth of the Company’s businesses; trends in drug pricing; delays and reductions in reimbursement by the government and other payors to customers and to the Company; the overall financial condition of the Company’s customers and the ability of the Company to assess and react to such financial condition of its customers; the ability of vendors and business partners to continue to provide products and services to the Company; the successful integration of acquired companies and realization of contemplated synergies; the continued availability of suitable acquisition candidates; the ability to attract and retain needed management; competition for qualified staff in the healthcare industry; variations in demand for the Company’s products and services; variations in costs or expenses; the ability to implement productivity, consolidation and cost reduction efforts and to realize anticipated benefits; the potential impact of legislation, government regulations, and other government action and/or executive orders, including those relating to Medicare Part D, including its implementing regulations and any subregulatory guidance; reimbursement and drug pricing policies and changes in the interpretation and application of such policies, including changes in calculation of average wholesale price; discontinuation of reporting average wholesale price, and/or implementation of new pricing benchmarks; legislative and regulatory changes impacting long term care pharmacies; government budgetary pressures and shifting priorities; federal and state budget shortfalls; efforts by payors to control costs; changes to or termination of the Company’s contracts with pharmaceutical benefit managers, Medicare Part D Plan sponsors and/or commercial health insurers or to the proportion of the Company’s business covered by specific contracts; the outcome of disputes and litigation; potential liability for losses not covered by, or in excess of, insurance; the impact of executive separations; the impact of benefit plan terminations; the impact of differences in actuarial assumptions and estimates as compared to eventual outcomes; events or circumstances which result in an impairment of assets, including but not limited to, goodwill and identifiable intangible assets; the final outcome of divestiture activities; market conditions; the outcome of audit, compliance, administrative, regulatory, or investigatory reviews; volatility in the market for the Company’s stock and in the financial markets generally; access to adequate capital and financing; tax laws and regulations; changes in accounting rules and standards; the impacts of potential cybersecurity risks and/or incidents; costs to comply with the Company’s Corporate Integrity Agreements; and unexpected costs and interruptions from the implementation of our new information technology system. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, the Company’s actual results, performance or achievements could differ materially from those expressed in, or implied by, such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as otherwise required by law, the Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

ITEM 7A. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information required under this Item is set forth in the “Quantitative and Qualitative Disclosures about Market Risk” caption at Part II, Item 7, of this Filing.



35

ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements and Financial Statement Schedule

 
 
PAGE
Financial Statements:
 
 
 
 
Report of Independent Registered Public Accounting Firm                                                                                                                    
 
Consolidated Statements of Comprehensive Income (Loss)                                                                                                               
 
Consolidated Balance Sheets                                                                                                                    
 
Consolidated Statements of Cash Flows                                                                                                                    
 
Consolidated Statements of Stockholders' Equity                                                                                                                    
 
Notes to Consolidated Financial Statements                                                                                                                    
 
 
 
Financial Statement Schedule
 

All other financial statement schedules are omitted because they are not applicable or because the required information is shown elsewhere in the Consolidated Financial Statements or Notes thereto.


36

Report of Independent Registered Public Accounting Firm

To the Stockholders and
Board of Directors of Omnicare, Inc.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Omnicare, Inc. and its subsidiaries at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A.  Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
Cincinnati, Ohio
February 19, 2013



37

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
OMNICARE,  INC.  AND  SUBSIDIARY  COMPANIES

(in thousands, except per share data)

 
For the years ended December 31,
 
2012
 
2011
 
2010
Net sales
$
6,160,388

 
$
6,182,922

 
$
6,030,670

Cost of sales
4,676,983

 
4,805,825

 
4,694,440

Gross profit
1,483,405

 
1,377,097

 
1,336,230

Selling, general and administrative expenses
819,642

 
773,835

 
747,608

Provision for doubtful accounts
99,407

 
98,552

 
136,630

Settlement, litigation and other related charges
49,375

 
55,674

 
113,709

Other charges
67,803

 
16,093

 
149,129

Operating income
447,178

 
432,943

 
189,154

Interest expense, net of investment income
(135,103
)
 
(160,118
)
 
(155,646
)
Income from continuing operations before income taxes
312,075

 
272,825

 
33,508

Income tax provision
117,201

 
111,293

 
19,044

Income from continuing operations
194,874

 
161,532

 
14,464

Loss from discontinued operations
—

 
(74,608
)
 
(120,573
)
Net income (loss)
$
194,874

 
$
86,924

 
$
(106,109
)
Earnings (loss) per common share - Basic:
 

 
 

 
 

Continuing operations
$
1.78

 
$
1.43

 
$
0.12

Discontinued operations
—

 
(0.66
)
 
(1.04
)
Net income (loss)
$
1.78

 
$
0.77

 
$
(0.91
)
Earnings (loss) per common share - Diluted:
 

 
 

 
 

Continuing operations
$
1.73

 
$
1.41

 
$
0.13

Discontinued operations
—

 
(0.65
)
 
(1.03
)
Net income (loss)
$
1.73

 
$
0.76

 
$
(0.91
)
Weighted average number of common shares outstanding:
 

 
 

 
 

Basic
109,531

 
113,000

 
116,348

Diluted
112,988

 
114,781

 
116,927

Other comprehensive income (loss), net of tax
 
 
 
 
 
   Cumulative translation adjustment
1,384

 
(4,691
)
 
(3,807
)
   Unrealized appreciation (depreciation) in fair value of investments
(151
)
 
(1,274
)
 
924

   Amortization of pension benefit gain and actuarial loss
(1,363
)
 
(7
)
 
33,437

Total other comprehensive income (loss), net of tax
(130
)
 
(5,972
)
 
30,554

Comprehensive income (loss)
194,744

 
80,952

 
(75,555
)
 
 
 
 
 
 
The Notes to Consolidated Financial Statements are an integral part of these statements.


38

CONSOLIDATED BALANCE SHEETS
OMNICARE,  INC.  AND  SUBSIDIARY  COMPANIES

(in thousands, except share data)
 
December 31,
 
2012
 
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
454,213

 
$
580,262

Restricted cash
1,066

 
2,336

Accounts receivable, less allowances of $269,416 (2011-$358,713)
857,052

 
931,314

Inventories
385,698

 
419,378

Deferred income tax benefits
136,186

 
153,444

Other current assets
254,644

 
210,637

Total current assets
2,088,859

 
2,297,371

Properties and equipment, at cost less accumulated depreciation
     of $228,890 (2011-$299,900)
282,660

 
225,257

Goodwill
4,256,959

 
4,250,579

Identifiable intangible assets, less accumulated amortization of
     $236,116 (2011-$246,200)
196,873

 
235,270

Other noncurrent assets
163,913

 
184,633

Total noncurrent assets
4,900,405

 
4,895,739

Total assets
$
6,989,264

 
$
7,193,110

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
200,125

 
$
273,768

Accrued employee compensation
73,791

 
61,019

Current debt
27,713

 
26,447

Other current liabilities
180,385

 
178,833

Total current liabilities
482,014

 
540,067

Long-term debt, notes and convertible debentures
2,030,030

 
1,968,274

Deferred income tax liabilities
914,660

 
838,857

Other noncurrent liabilities
56,848

 
50,476

Total noncurrent liabilities
3,001,538

 
2,857,607

Total liabilities
3,483,552

 
3,397,674

Commitments and contingencies (Note 17)
 

 
 

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, 133,503,156
    shares issued (2011-131,756,500 shares issued)
133,503

 
131,757

Paid-in capital
2,419,970

 
2,488,941

Retained earnings
1,801,075

 
1,651,829

Treasury stock, at cost- 28,851,671 shares (2011-18,132,600 shares)
(846,016
)
 
(484,123
)
Accumulated other comprehensive (loss) income
(2,820
)
 
7,032

Total stockholders' equity
3,505,712

 
3,795,436

Total liabilities and stockholders' equity
$
6,989,264

 
$
7,193,110

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

39

CONSOLIDATED STATEMENTS OF CASH FLOWS
OMNICARE, INC. AND SUBSIDIARY COMPANIES
 (in thousands)
For the years ended December 31,
 
2012
 
2011
 
2010
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
194,874

 
$
86,924

 
$
(106,109
)
Loss from discontinued operations
—

 
74,608

 
120,573

Adjustments to reconcile net income (loss) to net cash flows from operating activities:
 

 
 
 
 

Depreciation
51,932

 
47,053

 
46,096

Amortization
84,009

 
86,079

 
104,450

Write-off of debt issuance costs
12,466

 
6,012

 
6,636

Debt redemption tender offer premium
—

 
(19,582
)
 
(7,591
)
Asset impairment charges
—

 
—

 
22,884

Benefit plan termination and related costs
—

 
—

 
25,187

Loss on debt extinguishment
35,092

 
—

 
25,552

Deferred tax provision
95,742

 
62,909

 
22,952

Changes in assets and liabilities, net of effects from acquisition and divestiture of businesses:
 

 
 

 
 

Accounts receivable, net of provision for doubtful accounts
80,080

 
100,584

 
198,863

Inventories
37,736

 
4,994

 
(34,676
)
Current and noncurrent assets
17,110

 
120,360

 
38,966

Accounts payable
(69,423
)
 
26,351

 
(44,638
)
Accrued employee compensation
12,476

 
1,595

 
21,451

Current and noncurrent liabilities
(7,610
)
 
(48,488
)
 
(71,693
)
Net cash flows from operating activities of continuing operations
544,484

 
549,399

 
368,903

Net cash flows from (used in) operating activities of discontinued operations
—

 
623

 
(288
)
Net cash flows from operating activities
544,484

 
550,022

 
368,615

Cash flows from investing activities:
 

 
 

 
 

Acquisition of businesses, net of cash received
(34,873
)
 
(101,933
)
 
(111,812
)
Divestiture of businesses, net
19,207

 
13,099

 
—

Capital expenditures
(99,920
)
 
(62,806
)
 
(23,517
)
Marketable securities
(25,018
)
 
—

 
—

Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust
1,326

 
(275
)
 
11,082

Other
(56
)
 
(2,874
)
 
(1,259
)
Net cash flows used in investing activities of continuing operations
(139,334
)
 
(154,789
)
 
(125,506
)
Net cash flows used in investing activities of discontinued operations
—

 
(622
)
 
(546
)
Net cash flows used in investing activities
(139,334
)
 
(155,411
)
 
(126,052
)
Cash flows from financing activities:
 

 
 

 
 

Payments on term loans
(24,688
)
 
(5,625
)
 
(125,000
)
Proceeds from long-term borrowings and obligations
425,000

 
600,000

 
975,000

Payments on long-term borrowings and obligations
(453,573
)
 
(777,609
)
 
(726,533
)
Capped call transaction
(48,126
)
 
—

 
—

Fees paid for financing activities
(7,566
)
 
(13,780
)
 
(33,249
)
Increase (decrease) in cash overdraft balance
(14,927
)
 
11,674

 
18,221

Payments for Omnicare common stock repurchases
(388,968
)
 
(140,127
)
 
(100,942
)
Proceeds (payments) for stock awards and exercise of stock options, net of stock tendered in payment
24,951

 
30,712

 
(13,989
)
Dividends paid
(45,214
)
 
(17,217
)
 
(12,839
)
Other
1,912

 
3,140

 
(5,289
)
Net cash flows used in financing activities
(531,199
)
 
(308,832
)
 
(24,620
)
Net (decrease) increase in cash and cash equivalents
(126,049
)
 
85,779

 
217,943

Less increase (decrease) in cash and cash equivalents of discontinued operations
—

 
1

 
(834
)
(Decrease) increase in cash and cash equivalents of continuing operations
(126,049
)
 
85,778

 
218,777

Cash and cash equivalents at beginning of year
580,262

 
494,484

 
275,707

Cash and cash equivalents at end of year
$
454,213

 
$
580,262

 
$
494,484

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

40

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
OMNICARE, INC. AND SUBSIDIARY COMPANIES(in thousands, except per share data)
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders'
Equity
Balance at January 1, 2010
$
127,825

 
$
2,269,905

 
$
1,701,437

 
$
(205,017
)
 
$
(15,340
)
 
$
3,878,810

Dividends paid ($0.11 per share)
—

 
—

 
(12,839
)
 
—

 
—

 
(12,839
)
Stock acquired/issued for benefit plans
—

 
—

 
—

 
68

 
—

 
68

Stock option exercises and amortization/forfeitures
386

 
12,153

 
—

 
—

 
—

 
12,539

Common stock repurchase
—

 
—

 
—

 
(100,942
)
 
—

 
(100,942
)
Stock awards/issuance, net of amortization/forfeitures
1,423

 
36,837

 
—

 
(27,663
)
 
—

 
10,597

Adjustment to deferred tax convertible debt adjustment
—

 
106,083

 
—

 
—

 
—

 
106,083

Net (loss)
—

 
—

 
(106,109
)
 
—

 
—

 
(106,109
)
Other comprehensive income (loss), net of tax
0

 
0

 
0

 
0

 
30,554

 
30,554

Balance at December 31, 2010
129,634

 
2,424,978

 
1,582,489

 
(333,554
)
 
15,214

 
3,818,761

Dividends paid ($0.1525 per share)
—

 
—

 
(17,217
)
 
—

 
—

 
(17,217
)
Stock acquired/issued for benefit plans
—

 
—

 
—

 
(14
)
 
—

 
(14
)
Stock option exercises and amortization/forfeitures
1,565

 
40,466

 
—

 
(21
)
 
—

 
42,010

Common stock repurchase
—

 
—

 
—

 
(140,127
)
 
—

 
(140,127
)
Stock awards/issuance, net of amortization/forfeitures
558

 
23,497

 
(19
)
 
(10,407
)
 
—

 
13,629

Translation adjustment recorded as loss on sale of CRO
—

 
—

 
—

 
—

 
(2,210
)
 
(2,210
)
Other
—

 
—

 
(348
)
 
—

 
—

 
(348
)
Net income
—

 
—

 
86,924

 
—

 
—

 
86,924

Other comprehensive income (loss), net of tax
—

 
—

 
—

 
—

 
(5,972
)
 
(5,972
)
Balance at December 31, 2011
131,757

 
2,488,941

 
1,651,829

 
(484,123
)
 
7,032

 
3,795,436

Dividends paid ($0.42 per share)
—

 
—

 
(45,214
)
 
—

 
—

 
(45,214
)
Stock acquired/issued for benefit plans
—

 
—

 
—

 
39

 
—

 
39

Stock option exercises, amortization/forfeitures and adjustments
1,295

 
50,093

 
—

 
(232
)
 
—

 
51,156

Common stock repurchase
—

 
—

 
—

 
(339,117
)
 
—

 
(339,117
)
Purchase of capped call
—

 
(48,126
)
 
—

 
—

 
—

 
(48,126
)
Debt exchange
—

 
(54,546
)
 
—

 
—

 
—

 
(54,546
)
Equity forward contract
—

 
(50,000
)
 
—

 
—

 
—

 
(50,000
)
Stock awards/issuance, net of amortization/forfeitures
451

 
33,608

 
(414
)
 
(22,583
)
 
—

 
11,062

Translation adjustment recorded on divestiture of business
—

 
—

 
—

 
—

 
(9,722
)
 
(9,722
)
Net income
—

 
—

 
194,874

 
—

 
—

 
194,874

Other comprehensive income (loss), net of tax
—

 
—

 
—

 
—

 
(130
)
 
(130
)
Balance at December 31, 2012
$
133,503

 
$
2,419,970

 
$
1,801,075

 
$
(846,016
)
 
$
(2,820
)
 
$
3,505,712

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

41

Notes to Consolidated Financial Statements

Note 1 - Description of Business and Summary of Significant Accounting Policies

Description of Business

Omnicare, Inc. ("Omnicare" or the "Company") is a leading healthcare services company that specializes in the management of complex pharmaceutical care. The Company operates two primary businesses, Long-Term Care Group ("LTC") and Specialty Care Group ("SCG"), each serving a different customer population but sharing a common objective: advancing health outcomes at the lowest possible cost. Through LTC, Omnicare is the nation's largest provider of pharmaceuticals and related pharmacy and ancillary services to long-term care facilities as well as chronic care facilities and other settings. SCG provides specialty pharmacy, commercialization services for the biopharmaceutical industry and to end-of-life pharmaceutical care management for hospice care agencies. Omnicare leverages its specialized clinical capabilities and innovative technology solutions across both primary businesses as key components of the value Omnicare believes it provides to its customers.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries.  Omnicare consolidates entities in which the Company is the primary beneficiary, in accordance with the authoritative guidance regarding the consolidation of variable interest entities.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Translation of Foreign Financial Statements

Assets and liabilities of the Company’s foreign operations were translated at the year-end rate of exchange, and the income statements were translated at average rates of exchange.  Gains or losses from translating foreign currency financial statements were accumulated in a separate component of stockholders’ equity. With the disposition of its Canadian pharmacy in the third quarter of 2012, the Company has no foreign operations as of December 31, 2012.

Cash Equivalents

Cash and cash equivalents include highly liquid investments with original maturities of three months or less. Carrying values of cash and cash equivalents approximate fair value due to the short-term nature of these instruments.

Omnicare maintains amounts on deposit with various financial institutions, which may, at times, exceed federally insured limits. However, management periodically evaluates the credit-worthiness of those institutions, and the Company has not experienced any losses on such deposits.

Restricted Cash

Restricted cash primarily represents cash transferred to separate irrevocable trusts for settlement of employee health and severance costs, and cash collected on behalf of third parties.

Fair Value of Financial Instruments

The Company applies the authoritative guidance for fair value measurements, which defines a hierarchy prioritizing the inputs used in fair value measurements.  “Level 1” measurements use quoted prices in active markets for identical assets or liabilities.  “Level 2” measurements use significant observable inputs.  “Level 3” measurements use 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.

See further discussion at the “Fair Value” note of the Notes to Consolidated Financial Statements.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist primarily of interest-bearing cash and cash equivalents, accounts receivable and fixed to floating interest rate swap agreements.


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The Company is exposed to credit risk in the event of default by the financial institutions or issuers of cash and cash equivalents to the extent recorded on the Consolidated Balance Sheets.  Specifically, at any given point in time, the Company has cash on deposit with financial institutions, and cash invested in high quality short-term money market funds and/or U.S. government-backed repurchase agreements, generally having original maturities of three months or less, in order to minimize its credit risk.

The Company establishes allowances for doubtful accounts based on various factors, including historical credit losses and specifically identified credit risks.  Management reviews the allowances for doubtful accounts on an ongoing basis for appropriateness.  For the years ended December 31, 2012, 2011 and 2010, no single customer accounted for 10% or more of revenues.  The Company generally does not require collateral from its customers relating to the extension of credit in the form of accounts receivable balances.

In 2012, approximately one-half of Omnicare’s pharmacy services billings were directly reimbursed by government-sponsored programs.  These programs include primarily federal Medicare Part D and, to a lesser extent, the state Medicaid programs.  The remainder of Omnicare’s billings were paid or reimbursed by individual residents or their responsible parties (private pay), facilities and other third-party payors, including private insurers.  A portion of these revenues also are indirectly dependent on government programs.  The table below represents the Company’s approximated payor mix (as a % of annual sales) for the last three years ended:
 
December 31,
 
2012
 
2011
 
2010
Private pay, third-party and facilities (a)
39
%
 
41
%
 
42
%
Federal Medicare program (Part D & Part B)
50
%
 
47
%
 
46
%
State Medicaid programs
7
%
 
9
%
 
9
%
Other sources
4
%
 
3
%
 
3
%
Totals
100
%
 
100
%
 
100
%
(a) Includes payments from SNFs on behalf of their federal Medicare program-eligible residents (Medicare Part A) and for other services and supplies, as well as payments from third-party insurers and private pay.

Accounts Receivable

The following table is an aging of the Company’s December 31, 2012 and 2011 gross accounts receivable (net of allowances for contractual adjustments, and prior to allowances for doubtful accounts), aged based on payment terms and categorized based on the four primary overall types of accounts receivable characteristics (in thousands):

December 31, 2012
Current and 0-180 Days Past Due
 
181 Days and Over Past Due
 
Total
Medicare (Part D and Part B), Medicaid
 
 
 
 
 
and Third-Party payors
$
238,348

 
$
163,773

 
$
402,121

Facility payors
383,848

 
168,945

 
552,793

Private Pay payors
70,835

 
100,719

 
171,554

Total gross accounts receivable
$
693,031

 
$
433,437

 
$
1,126,468

December 31, 2011
 
Medicare (Part D and Part B), Medicaid
 

 
 

 
 

and Third-Party payors
$
257,782

 
$
199,303

 
$
457,085

Facility payors
387,509

 
204,419

 
591,928

Private Pay payors
85,934

 
155,080

 
241,014

Total gross accounts receivable
$
731,225

 
$
558,802

 
$
1,290,027


During the fourth quarter 2010, Omnicare implemented a Company-wide Reorganization Program.  Among other changes, this program has resulted in numerous senior management and other organizational leadership changes, including a realignment of division presidents for LTC and change in its Office of General Counsel.  As a result of these activities and the performance of its year end closing process, the Company reassessed the allowance for doubtful accounts for facility receivables and concluded that an incremental charge of $48.5 million was necessary.  The key factors leading to management’s change in estimate relate primarily

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to a decision in the fourth quarter of 2010 to implement a different strategic approach for the resolution of past due accounts which are disputed and/or currently in litigation.  In particular, this new approach includes a heightened focus on settling outstanding accounts receivable disputes and the avoidance of protracted costly and often disruptive litigation with customers, where possible.    As a result of this change in approach, the Company believes it will have reduced opportunities to monetize disputed receivables through litigation, increasing the risk of uncollectible accounts receivable. Further, many state medicaid agencies are experiencing budgetary and monetary pressures which could cause them to delay payments.

Notes Receivable

The Company periodically enters into notes receivable from its customers.  These notes receivable and the related allowance for losses are recorded in the “Other Current Assets” and “Other Non-Current Assets” captions of the Consolidated Balance Sheets, and are not considered material to the consolidated financial position of the Company.  The Company assesses and monitors credit risk associated with notes receivable through review of the customer’s net worth, payment history, long-term debt ratings and/or other information available from recognized credit rating services.  The receivables are periodically assessed for significant changes in credit ratings or other information indicating an increase in exposure to credit risk.  Historic losses on notes receivable have not been material.

Inventories

Inventories consist primarily of purchased pharmaceuticals and medical supplies held for sale to customers and are stated at the lower of cost or market.  Cost is determined using the first-in, first-out method.  Physical inventories are typically performed on a monthly basis at all pharmacy sites, and in all cases the Company’s policy is to perform them at least once a quarter.  Cost of goods sold is recorded based on the actual results of the physical inventory counts.

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 the 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 to the levels of inventories remaining on-hand.  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. Historical estimates have not differed materially from actual results.

Properties and Equipment

Properties and equipment are stated at cost less accumulated depreciation.  Expenditures for maintenance, repairs, renewals and betterments that do not materially prolong the useful lives of the assets are charged to expense as incurred.  Depreciation of properties and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from three to 10 years for computer equipment and software, machinery and equipment, and furniture and fixtures.  Buildings and building improvements are depreciated over 40 years, and leasehold improvements are amortized over the lesser of the initial lease terms or their useful lives.  The Company capitalizes certain costs that are directly associated with the development of internally developed software, representing the historical cost of these assets.  Once the software is completed and placed into service, such costs are amortized over the estimated useful lives, ranging from three to 10 years.

Leases

Rental payments under operating leases are expensed.  Leases that substantially transfer all of the benefits and risks of ownership of property to Omnicare or otherwise meet the criteria for capitalization are accounted for as capital leases.  An asset is recorded at the time a capital lease is entered into together with its related long-term obligation to reflect its purchase and financing.  Property and equipment recorded under capital leases are depreciated on the same basis as previously described.

Valuation of Long-Lived Assets

Long-lived assets such as property and equipment, software (acquired and internally developed) and investments are reviewed for impairment when events or changes in circumstances indicate that the book carrying amount of the assets may not be recoverable.  An impairment loss is recognized when estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its book carrying amount.


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Goodwill, Intangibles and Other Assets

Intangible assets are comprised primarily of goodwill, customer relationship assets, noncompete agreements, technology assets, and trademarks and trade names, all originating from business combinations accounted for as purchase transactions.   The Company has adopted the revised authoritative guidance regarding the testing for goodwill impairment which allows an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that the fair value of a reporting unit is less than the carrying amount then the Company would perform the two step goodwill impairment test. The first step, used to identify potential impairment, is a comparison of the reporting unit's estimated fair value to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of the impairment, if any. The second step requires the Company to calculate an implied fair value of goodwill at the reporting unit level. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess.  

Intangible assets are amortized over their useful lives.  Indefinite-lived intangible assets are reviewed annually for impairment, which resulted in a write-off of approximately $13.3 million during 2010. See further discussion at the “Goodwill and Other Intangible Assets” note of the Notes to Consolidated Financial Statements.

Debt issuance costs are included in the “Other noncurrent assets” line of the Consolidated Balance Sheets and are amortized over the life of the related debt, and to the put and initial redemption date of December 15, 2015 in the case of the 3.25% convertible senior debentures due 2035.

Insurance Accruals

The Company is self-insured for certain employee health, property and casualty insurance, worker's compensation, medical professional liability and automobile liability insurance claims.  The Company carries a stop-loss umbrella policy for health insurance to limit the maximum potential liability for both individual and aggregate claims for a plan year.  Claims are paid as they are submitted to the respective plan administrators.  The Company records monthly expense for the self-insurance plans in its financial statements for incurred claims, based on historical claims experience and input from third-party insurance professionals in order to determine the appropriate accrual level.  The accrual gives consideration to claims that have been incurred but not yet paid and/or reported to the plan administrator.  The Company establishes the accruals based on the historical claim lag periods, current payment trends for similar insurance claims and input from third-party insurance and valuation professionals. The discount rate utilized in the computation of the property and casualty accrual balance at December 31, 2012 and 2011, was 0.91% and 1.1%, respectively.

Revenue Recognition

In general, Omnicare recognizes revenue when products are delivered or services are rendered or provided to the customer, prices are fixed and determinable and collection is reasonably assured.

A significant portion of the Company’s revenues from sales of pharmaceutical and medical products have been reimbursed by the federal Medicare Part D plan and, to a lesser extent, state Medicaid programs.  Payments for services rendered to patients covered by these programs are generally less than billed charges.  The Company monitors its revenues and receivables from these reimbursement sources, as well as other third-party insurance payors, and records an estimated contractual allowance for certain sales and receivable balances at the revenue recognition date, to properly account for anticipated differences between billed and reimbursed amounts.  Accordingly, the total net sales and receivables reported in the Company’s financial statements are recorded at the amount ultimately expected to be received from these payors.  Since billing functions for a portion of the Company’s revenue systems are largely computerized, enabling on-line adjudication (i.e., submitting charges to Medicare, Medicaid or other third-party payors electronically, with simultaneous feedback of the amount to be paid) at the time of sale to record net revenues, exposure to estimating contractual allowance adjustments is limited primarily to unbilled and/or initially rejected Medicare, Medicaid and third-party claims (typically approved for reimbursement once additional information is provided to the payor).  For the remaining portion of the Company’s revenue systems, the contractual allowance is estimated for all billed, unbilled and/or initially rejected Medicare, Medicaid and third-party claims.  The Company evaluates several criteria in developing the estimated contractual allowances for billed, unbilled and/or initially rejected claims on a monthly basis, including historical trends based on actual claims paid, current contract and reimbursement terms, and changes in customer base and payor/product mix.  Contractual allowance estimates are adjusted to actual amounts as cash is received and claims are settled, and the aggregate impact of these resulting adjustments were not significant to the Company’s operations for any of the periods presented.


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Patient co-payments are associated with certain state Medicaid programs, Medicare Part B, Medicare Part D and certain third-party payors and are typically not collected at the time products are delivered or services are rendered, but are billed to the individual as part of the Company’s normal billing procedures.  These co-payments are subject to the Company’s normal accounts receivable collections procedures.

Under certain circumstances, the Company accepts returns of medications and issues a credit memo to the applicable payor.  The Company estimates and accrues for sales returns based on historical return experience, giving consideration to the Company’s return policies.  Product returns are processed in the period received, and are not significant.

Stock-Based Compensation

The Company records compensation costs relating to share-based payment transactions in its financial statements under a fair value recognition model.  Under the provisions of this guidance, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award (usually the vesting period).

Delivery Expenses

Omnicare incurred expenses totaling approximately $181 million, $180 million and $177 million for the years ended December 31, 2012, 2011 and 2010, respectively, to deliver the products sold to its customers.  Delivery expenses are included in the “Selling, general and administrative expenses” line of the Consolidated Statements of Comprehensive Income.

Evaluation of Subsequent Events

The Company evaluated subsequent events through the date the Consolidated Financial Statements were issued.  No matters were identified that would materially impact the Company’s Consolidated Financial Statements or associated disclosures.

Income Taxes

The Company accounts for income taxes using the asset and liability method under which deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates to differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements.

Future tax benefits are recognized to the extent that realization of those benefits are considered to be more likely than not, and a valuation allowance is established for deferred tax assets which do not meet this threshold.

Under the authoritative guidance regarding the accounting for uncertainty in income taxes, which provides guidance for the financial statement recognition and measurement of income tax positions taken or expected to be taken in a tax return, recognition and measurement are considered discrete events.  The recognition threshold is met when it is determined a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination by the relevant taxing authority.  If a tax position does not meet the more likely than not recognition threshold, the benefit of that position is not recognized in the financial statements.  A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to be recognized in the financial statements.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) consists of the following (in thousands):
 
December 31,
 
2012
 
2011
Cumulative foreign currency translation adjustments
$
9,722

 
$
8,338

Translation adjustment recorded as divestiture of business
(9,722
)
 
—

Unrealized gain (loss) on fair value of investments
(428
)
 
(277
)
Pension and postemployment benefits
(2,392
)
 
(1,029
)
Total accumulated other comprehensive income (loss), net
$
(2,820
)
 
$
7,032


The amounts are net of applicable tax benefits which were inconsequential in the years ended December 31, 2012 and 2011.


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Other Charges (Credits)

Other Charges (Credits) consist of the following (in thousands):
 
December 31,
 
2012
 
2011
 
2010
Acquisition and other related costs (1)
$
1,380

 
$
25,549

 
$
5,319

Restructuring and other related charges (2)
11,046

 
—

 
17,165

Disposition of businesses (3)
(1,777
)
 
—

 
—

Stock option expense (4)
—

 
—

 
4,207

Repack matters - SG&A (5)
—

 
(10,500
)
 
663

Asset impairment charges (6)
—

 
—

 
22,884

Separation, benefit plan termination and related costs (7)
21,000

 
1,044

 
64,760

Loss on sale of plane and termination of plane lease (8)
1,062

 
—

 
6,785

Debt redemption loss and costs (9)
35,092

 
—

 
27,346

Subtotal - other charges
67,803

 
16,093

 
149,129

Repack matters - COS (5)
—

 
—

 
(1,898
)
Total - other charges, net
$
67,803

 
$
16,093

 
$
147,231


(1)
See further discussion at the “Acquisitions” note of the Notes to Consolidated Financial Statements.
(2)
See further discussion at the "Restructuring and Other Related Charges" note of the Notes to Consolidated Financial Statements.
(3)
See further discussion at the "Disposition of Business" caption of this note.
(4)
See further discussion at the “Stock-Based Compensation” note of the Notes to Consolidated Financial Statements.
(5)
See further discussion at the “Commitments and Contingencies” note of the Notes to Consolidated Financial Statements.
(6)
In its annual assessment for the year ended December 31, 2010, the Company concluded that certain trade names of the business were impaired and recorded a non-cash impairment loss of approximately $13.3 million in 2010. The Company also recorded other non-cash asset impairment charges of approximately $10 million in 2010, primarily to write-off certain technology assets that were abandoned, and related non-compete agreement assets.
(7)
See additional information at the "Separation, Benefit Plan Termination and Related Costs" note of the Notes to Consolidated Financial Statements.
(8)
The Company sold its corporate aircraft in 2012 for a $1.1 million loss. The years ended December 31, 2012 and 2010 include charges relating to the sale of the Company's aircraft and the termination of the Company’s prior aircraft lease, respectively.
(9)
See further discussion at the “Debt” note of the Notes to Consolidated Financial Statements.

Use of Estimates in the Preparation of Financial Statements

The preparation of the Company’s consolidated financial statements in accordance with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities and stockholders’ equity at the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and amounts reported in the accompanying notes to consolidated financial statements.  Significant estimates underlying the accompanying consolidated financial statements include the allowance for doubtful accounts and contractual allowance reserve; the net carrying value of inventories; acquisition-related accounting including goodwill and other indefinite-lived intangible assets, and the related impairment assessments; accruals pursuant to the Company’s restructuring initiatives; stock-based compensation; various other operating allowances and accruals (including employee health, property and casualty insurance accruals and related assumptions); fair value determinations; accruals related to pending litigation; and current and deferred tax assets, liabilities and provisions.  Actual results could differ from those estimates depending upon the resolution of certain risks and uncertainties.

Potential risks and uncertainties, many of which are beyond the control of Omnicare, include, but are not necessarily limited to, such factors as overall economic, financial and business conditions; delays and reductions in reimbursement by the government and other payors to Omnicare and/or its customers; the overall financial condition of Omnicare’s customers; the effect of new government regulations, executive orders and/or legislative initiatives, including those relating to reimbursement and drug pricing policies and changes in the interpretation and application of such policies; efforts by payors to control costs; the outcome of disputes and litigation; the outcome of audit, compliance, administrative or investigatory reviews, including governmental/ regulatory inquiries; other contingent liabilities; the ability to consummate pending acquisitions and the successful integration of acquired

47

companies; changes in international economic and political conditions; changes in interest rates; changes in the valuation of the Company’s financial instruments, including the swap agreements and other derivative instruments; changes in tax laws and regulations; access to capital and financing; the demand for Omnicare’s products and services; pricing and other competitive factors in the industry; changes in insurance claims experience and related assumptions; the outcome of the Company’s annual goodwill and other identifiable intangible assets impairment assessments; variations in costs or expenses; and changes in accounting rules and standards.

Recently Issued Accounting Standards

In July 2012, the Financial Accounting Standards Board ("FASB") amended the authoritative guidance regarding the impairment testing for indefinite-lived intangible assets. Under the amendments, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. This amended guidance will not have any material impact on the Company's consolidated results of operations, financial position and cash flows.

Disposition of Businesses

In the year ended December 31, 2012 the Company completed the disposition of its Canadian pharmacy and the Company's pharmacy operational software business, which were not considered, individually or in the aggregate, significant to the operations of Omnicare. The Company recorded a gain on the disposition of these businesses of $1.8 million, which is reflected in the "Other charges" caption of the Consolidated Statements of Comprehensive Income.

Reclassifications

Certain reclassifications of prior-year amounts have been made to conform with the current-year presentation, none of which were considered material to the Company’s financial statements taken as a whole.

Note 2 - Common Stock Repurchase Program

The following chart summarizes the Company's stock repurchase programs as approved by the Board of Directors in effect for the periods ended December 31, 2010 through December 31, 2012 (in thousands):
Date Approved
 
Amount Approved
 
Term Date
 
Remaining Repurchase Authority
May 3, 2010
 
$
200,000

 
May 3, 2012
 
—

May 26, 2011
 
$
100,000

 
December 31, 2012
 
—

February 21, 2012
 
$
200,000

 
February 28, 2014
 
—

September 12, 2012
 
$
350,000

 
December 31, 2014
 
$
219,963


As part of the share repurchase program, on November 29, 2012, the Company entered into an accelerated share repurchase ("ASR") program with Goldman, Sachs & Co. ("Goldman") pursuant to which the Company will repurchase $250 million of outstanding common stock.

Pursuant to the ASR Agreement, the Company made a $250 million payment to Goldman on November 30, 2012 and received an initial number of approximately 5.8 million shares of its outstanding common stock from Goldman on the same day. The average price paid for the initial share delivery was based on 80% of the $250 million payment to Goldman. The initial shares were valued at $200 million and recorded in treasury stock. The remaining $50 million balance was recorded as an equity forward contract which is included in paid in capital at December 31, 2012. The specific number of shares that the Company ultimately will repurchase under the ASR Agreement will be based generally on the average of the daily volume-weighted average price per share of the Company's common stock during a repurchase period, subject to adjustments pursuant to the terms and conditions of the ASR Agreement. At settlement, under certain circumstances, Goldman may be required to deliver additional shares of common stock to the Company, or, under certain circumstances, the Company may be required to deliver shares of its common stock or

48

may elect to make a cash payment to Goldman. The ASR Agreement contains provisions customary for agreements of this type, including provisions for adjustments to the transaction terms, the circumstances generally under which the ASR Agreement may be accelerated, extended or terminated early by Goldman and various acknowledgments, representations and warranties made by the parties to one another. The transaction is expected to be completed during the first half of 2013.

In the year ended December 31, 2012, the Company repurchased approximately 10 million shares (including shares pursuant to the ASR agreement) at an aggregate cost of approximately $339 million, for a cumulative amount of approximately 19.2 million shares and approximately $580 million through December 31, 2012.  Accordingly, the Company had approximately $220 million of share repurchase authority remaining as of December 31, 2012, including the $50 million equity forward contract recorded as part of the ASR. In the year ended December 31, 2011 the Company repurchased approximately 4.8 million shares at an aggregate cost of approximately $140 million. In the year ended December 31, 2010 the Company repurchased approximately 4.4 million shares at an aggregate cost of approximately $101 million.

Note 3 - Discontinued Operations

Non-Core Disposal Group
In 2009, the Company commenced activities to divest certain home healthcare and related ancillary businesses (“the Disposal Group”) that were non-strategic in nature. In 2010, Omnicare divested the home infusion business portion of the Disposal Group. Also, in 2010, the Company entered into a letter of intent (“LOI”) regarding its disposition of the remaining durable medical equipment (“DME”) portion of the Disposal Group. In the third quarter of 2011, the prior LOI was terminated, and a new LOI was entered into with a separate party. The Company closed the DME transaction in the fourth quarter of 2011. In connection with these activities, Omnicare recorded an impairment loss in discontinued operations for the DME portion of the Disposal Group totaling $18.0 million in the year ended December 31, 2011. Additionally, in the second quarter of 2011, the Company divested of its Tidewater Group Purchasing Organization (“Tidewater”) as the Company determined it was no longer a good strategic fit within the Company’s portfolio of assets. The Company does not consider the operations of the Disposal Group and Tidewater (collectively, the “Non-Core Disposal Group”) as significant, individually or in the aggregate, to the operations of Omnicare.
In the year ended December 31, 2011, the Non-Core Disposal Group recorded an impairment loss of $23 million to reduce the carrying value of DME and Tidewater to fair value based on the final terms of the divestitures. In the year ended December 31, 2010, the Non-Core Disposal Group recorded an impairment loss of approximately $10.3 million to reduce the carrying value of the Disposal Group to fair value as of December 31, 2010. The net assets held for sale of the Non-Core Disposal Group were required to be measured at the lower of cost or fair value less costs to sell. Prior to divestiture, the fair values were based on a market approach utilizing both selected guideline public companies and comparable industry transactions, which were considered “Level 3” inputs within the fair value hierarchy. The fair value amount was estimated, reviewed quarterly and finalized upon disposition of the individual components of the Non-Core Disposal Group.
CRO Services
As previously disclosed by the Company, the Contract Research Services (“CRO Services”) industry had been facing unfavorable market conditions. The Company determined that its CRO Services business was no longer a good strategic fit within the Company’s portfolio of assets. In light of these factors, and in connection with the reallocation of resources started in the second half of 2010, the Company committed to a plan to divest of its CRO Services business in the first quarter of 2011 and completed the divestiture in April 2011. For the year ended December 31, 2011, CRO Services recorded an impairment loss of $50 million to reduce the carrying value of the CRO Services operations to fair value based on the final terms of the divestiture. During 2010, the Company performed an interim impairment test with respect to goodwill and certain other intangible assets related to its CRO Services reporting unit outside of its normal fourth quarter test period. Based on the results of the tests performed, the Company recorded a goodwill impairment loss of approximately $91 million in the third quarter of 2010.
The results from operations for all periods presented have been revised to reflect the results of the Non-Core Disposal Group and CRO Services as discontinued operations, including the impairment losses, as well as certain expenses of the Company related to the divestitures.

49

Selected financial information related to the discontinued operations of the Non-Core Disposal Group and CRO Services follows (in thousands):
 
For the years ended December 31,
 
2011
 
2010
Net sales - Non-Core Disposal Group ("NCDG")
$
24,858

 
$
59,656

Net sales - CRO Services
32,146

 
109,176

Net sales - total discontinued
57,004

 
168,832

 
 
 
 
(Loss) from operations of NCDG, pretax
(4,298
)
 
(14,025
)
(Loss) from operations of CRO Services, pretax
(4,921
)
 
(19,269
)
(Loss) from operations - total discontinued, pretax
(9,219
)
 
(33,294
)
 
 
 
 
Income tax benefit - NCDG
1,450

 
3,614

Income tax benefit - CRO Services
1,923

 
8,116

Income tax benefit - total discontinued
3,373

 
11,730

 
 
 
 
(Loss) from operations of NCDG, aftertax
(2,848
)
 
(10,411
)
(Loss) from operations of CRO Services, aftertax
(2,998
)
 
(11,153
)
(Loss) from operations - total discontinued, aftertax
(5,846
)
 
(21,564
)
 
 
 
 
Impairment loss on NCDG, pretax
(23,105
)
 
(10,343
)
Impairment loss on CRO Services, pretax
(49,978
)
 
(90,628
)
Income tax (expense) benefit of impairment loss on NCDG
(2,996
)
 
1,859

Income tax benefit of impairment loss on CRO Services
7,317

 
103

Impairment loss on discontinued, aftertax
(68,762
)
 
(99,009
)
 
 
 
 
Loss from discontinued operations of NCDG
(28,949
)
 
(18,895
)
Loss from discontinued operations of CRO Services
(45,659
)
 
(101,678
)
Loss from discontinued operations - total
$
(74,608
)
 
$
(120,573
)
 
 
 
 
Note 4 - Acquisitions

Historically, 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 which complement the Company’s core businesses.

In the years ended December 31, 2012, 2011 and 2010, the Company incurred acquisition and other related costs of approximately $1.4 million, $25.5 million and $5.3 million, respectively, which were primarily related to professional fees and acquisition related restructuring costs for acquisitions offset in part by a reduction of the Company’s original estimate of contingent consideration payable for certain acquisitions.

During the years ended December 31, 2012, 2011 and 2010, the Company completed one, two and four acquisitions of businesses (all of which were in the LTC segment), respectively, none of which were, individually or in the aggregate, significant to the Company.  Acquisitions of businesses required cash payments of approximately $35 million, $102 million and $112 million (including amounts payable pursuant to acquisition agreements relating to prior-period acquisitions) in 2012, 2011 and 2010, respectively.  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 net assets and operating results of acquisitions have been included in the Company’s consolidated financial statements from their respective dates of acquisition.

Amounts contingently payable through 2013, primarily representing payments originating from earnout provisions of acquisitions which were completed prior to January 1, 2009, were immaterial as of December 31, 2012.

Note 5 - Cash and Cash Equivalents

50


A summary of cash and cash equivalents follows (in thousands):
 
December 31,
 
2012
 
2011
Cash
$
404,158

 
$
580,047

Money market funds
50,055

 
215

 
$
454,213

 
$
580,262


See additional information at the “Description of Business and Summary of Significant Accounting Policies” and “Fair Value” notes of the Notes to Consolidated Financial statements.

Note 6 - Properties and Equipment

A summary of properties and equipment follows (in thousands):
 
December 31,
 
2012
 
2011
Land
$
3,726

 
$
3,646

Buildings and building improvements
15,526

 
15,084

Computer equipment and software
256,439

 
251,087

Machinery and equipment
116,246

 
130,064

Furniture, fixtures and leasehold improvements
119,613

 
125,276

 
511,550

 
525,157

Accumulated depreciation
(228,890
)
 
(299,900
)
 
$
282,660

 
$
225,257


Note 7 - Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill, by business segment, are as follows (in thousands):
 
 
LTC
 
SCG
 
Total
Goodwill balance as of January 1, 2011
 
$
3,504,340

 
$
678,588

 
$
4,182,928

Goodwill acquired in the year ended December 31, 2011
 
52,924

 
—

 
52,924

Other
 
14,687

 
40

 
14,727

Goodwill balance as of December 31, 2011
 
3,571,951

 
678,628

 
4,250,579

Goodwill acquired in the year ended December 31, 2012
 
21,184

 
—

 
21,184

Disposition of businesses
 
(14,258
)
 
—

 
(14,258
)
Other
 
(546
)
 
—

 
(546
)
Goodwill balance as of December 31, 2012
 
$
3,578,331

 
$
678,628

 
$
4,256,959


The “Other” caption above includes the settlement of acquisition matters relating to prior-year acquisitions .  “Other” also included the effect of adjustments due to foreign currency translations, which related primarily to the Company's pharmacy that was located in Canada, which was included in LTC and was disposed of in the third quarter of 2012.

The Company performed its annual goodwill impairment analysis for the year ended December 31, 2012 in accordance with the authoritative guidance on goodwill impairment. This analysis included an assessment of qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than their carrying amounts. The impairment analysis involves an assessment of certain qualitative factors including, but not limited to, macroeconomic, industry and market conditions; cost factors that have a negative effect on earnings; overall financial performance; the movement of the Company's share price; and other relevant entity and reporting unit specific events. This assessment includes the determination of the likely effect of each factor on the fair value of each reporting unit. Although the Company believes the factors considered in the impairment analysis

51

are reasonable, significant changes in any of the assumptions could produce a significantly different result. Based on the Company's annual goodwill impairment analysis for the years ended December 31, 2012 and 2011, except for the impairment charges disclosed in the "Discontinued Operations" note of the Notes to Consolidated Financial Statements, Omnicare concluded that goodwill had not been impaired.

The table below presents the Company’s other identifiable intangible assets, all of which are subject to amortization, except trademark and trade names as described below (in thousands):
 
 
 
 
 
 
 
 
December 31, 2012
 
 
Original Amortization Life (in years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Customer relationship assets
 
6.0
 
—
 
15
 
$
369,782

 
$
(213,987
)
 
$
155,795

Trademarks and trade names
 
 
 
—
 
(a)
 
28,565

 
(2,434
)
 
26,131

Non-compete agreements
 
2
 
—
 
15
 
29,042

 
(15,571
)
 
13,471

Technology assets
 
10
 
—
 
11
 
5,600

 
(4,124
)
 
1,476

Total
 
 
 
 

 
 
 
$
432,989

 
$
(236,116
)
 
$
196,873

 
 
 
 
 

 
 
 
December 31, 2011
 
 
Original Amortization Life (in years)
 
Gross Carrying Amount
 
Accumulated Amortization and Impairment Losses
 
Net Carrying Amount
Customer relationship assets
 
8.5
 
—
 
15
 
$
405,036

 
$
(221,477
)
 
$
183,559

Trademarks and trade names
 
 
 
—
 
(a)
 
28,122

 
(837
)
 
27,285

Non-compete agreements
 
5
 
—
 
15
 
42,010

 
(20,063
)
 
21,947

Technology assets
 
10
 
—
 
11
 
5,976

 
(3,575
)
 
2,401

Other
 
10
 
—

 
15
 
326

 
(248
)
 
78

Total
 
 
 
 

 
 
 
$
481,470

 
$
(246,200
)
 
$
235,270

(a)Certain of Omnicare's trademarks and trade names are amortized over their useful lives ranging up to five years.
The remainder have indefinite useful lives as further discussed below. The value of intangible assets with indefinite lives is $24.1 million as of December 31, 2012 and 2011.

Amortization expense related to identifiable intangible assets was $43.1 million, $41.6 million and $38.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.  Omnicare’s trademarks and trade names primarily constitute identifiable intangible assets with indefinite useful lives.  Accordingly, these trademarks and trade names are not amortized, but are reviewed annually for impairment.  The Company performed its annual assessment for the year ended December 31, 2012 and 2011 and concluded that these assets had not been impaired.  The fair value at December 31, 2012 and 2011 was determined using projected revenue and cash flows developed by the Company (Level 3 inputs).
 
Estimated annual amortization expense for intangible assets subject to amortization at December 31, 2012 for the next five fiscal years is as follows (in thousands):
Year ended
 
Amortization
December 31,
 
Expense
2013
 
$
(37,563
)
2014
 
(36,010
)
2015
 
(34,796
)
2016
 
(23,976
)
2017
 
(15,215
)


52

Note 8 - Fair Value

The Company’s assets and (liabilities) measured at fair value were as follows (in thousands):

 
 
 
Based on
 
Fair Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
December 31, 2012
 
 
 
 
 
 
 
Assets and (Liabilities) Measured at Fair Value on a Recurring Basis:
 
 
 
 
 
 
 
Bond Portfolio (1)
$
24,887

 
$
—

 
$
24,887

 
$
—

7.75% interest rate swap agreement - fair value hedge (2)
46,090

 
—

 
46,090

 
—

Derivatives (3)
—

 
—

 
—

 
—

Total
$
70,977

 
$
—

 
$
70,977

 
$
—

 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
Assets and (Liabilities) Measured at Fair Value on a Recurring Basis:
 
 
 
 
 
 
 
7.75% interest rate swap agreement - fair value hedge (2)
$
35,473

 
$
—

 
$
35,473

 
$
—

Derivatives (3)
—

 
—

 
—

 
—

Total
$
35,473

 
$
—

 
$
35,473

 
$
—


See further discussion of Omnicare’s application of the authoritative guidance for fair value measurements, including clarification of Levels 1, 2 and 3, at the “Fair Value of Financial Instruments” caption of the “Description of Business and Summary of Significant Accounting Policies” note of the Notes to Consolidated Financial Statements.

(1)
The bond portfolio is presented in "Other Current Assets" and is representative of investments in a portfolio of high quality corporate bonds and U.S. Treasury bonds which is managed by a third party. The fair value is based on quoted market prices of the individual bonds that make up the portfolio.
(2)
The fair value of the Company’s interest rate swap agreements ("swaps") are valued using market inputs with mid-market pricing as a practical expedient for the bid/ask spread.  As such, these swaps are categorized within Level 2 of the hierarchy.  The Company’s swaps are discussed in further detail at the “Debt” note of the Notes to Consolidated Financial Statements.
(3)
The Company’s derivative instruments are discussed in further detail at the “Debt” note of the Notes to Consolidated Financial Statements.

For cash and cash equivalents, restricted cash, accounts receivable and accounts payable, the net carrying value of these items approximates their fair value at period end (level 1).  Further, at period end, the fair value of Omnicare’s variable rate debt facilities approximates the carrying value, as the effective interest rates fluctuate with changes in market rates.  The fair value of the Company’s fixed-rate debt facilities is based on quoted market prices and, while recorded on the Consolidated Balance Sheets at carrying value, and thus excluded from the table above, are included in the Debt note of the Notes to Consolidated Financial Statements.

Note 9 - Leasing Arrangements

The Company has operating leases that cover various operating and administrative facilities and certain operating equipment.  In most cases, the Company expects that these leases will be renewed, or replaced by other operating leases, in the normal course of business.  There are no significant contingent rentals in the Company’s operating leases.  Omnicare, Inc. routinely guarantees many of the lease obligations of its subsidiaries in the normal course of business.


53

The following is a schedule of future minimum rental payments required under operating leases that have initial or remaining non-cancelable terms in excess of one year as of December 31, 2012 (in thousands):


Year ended
 
December 31,
 
2013
$
28,367

2014
27,536

2015
19,951

2016
15,533

2017
12,262

Later years
15,395

Total minimum payments required
$
119,044



Aggregate minimum rentals scheduled to be received in the future under non-cancelable subleases as of December 31, 2012, which would serve to partially reduce the total minimum payments required as presented in the table above, are not significant.

Total rent expense under operating leases for the years ended December 31, 2012, 2011 and 2010 were $58.4 million, $56.6 million and $56.7 million, respectively.

Note 10 - Debt

A summary of debt follows (in thousands):
 
December 31,
 
2012
 
2011
Revolving loans, due 2017
$
—

 
$
—

Senior term loan, due 2017
419,688

 
444,375

7.75% senior subordinated notes, due 2020
550,000

 
550,000

3.75% convertible senior subordinated notes, due 2025
318,054

 
575,000

4.00% junior subordinated convertible debentures, due 2033
345,000

 
345,000

3.25% convertible senior debentures, due 2035
427,500

 
452,500

3.75% convertible senior subordinated notes, due 2042
390,000

 
—

Capitalized lease and other debt obligations
23,685

 
15,054

Subtotal
2,473,927

 
2,381,929

Add interest rate swap agreements
46,090

 
35,473

(Subtract) unamortized debt discount
(462,274
)
 
(422,681
)
(Subtract) current portion of debt
(27,713
)
 
(26,447
)
Total long-term debt, net
$
2,030,030

 
$
1,968,274


The following is a schedule of required debt payments due during each of the next five years and thereafter, as of December 31, 2012 (in thousands):

54

Year ended
 
December 31,
 
2013
$
27,713

2014
27,995

2015
26,188

2016
25,091

2017
336,386

Later years
2,030,554

Total debt payments
$
2,473,927


Total cash interest payments made for the years ended December 31, 2012, 2011 and 2010 were $90.9 million, $111.1 million and $110.3 million excluding early redemption and tender premium payments.  As of December 31, 2012, the Company had approximately $11 million outstanding relating to standby letters of credit, substantially all of which are subject to automatic annual renewals.

Senior Credit Agreement
Revolving Loans and Term Loans
During 2012, the Company amended and extended its existing senior unsecured credit agreement (as amended and restated, the "Credit Facility"). The Credit Facility consists of a $300 million five-year senior unsecured revolving credit facility (the "Revolving Credit Facility") and a $425 million, five-year senior unsecured term loan facility (the "Term Loan"). The amendment and restatement, among other things, provided for (i) an extension of the maturity date of the credit facilities to September 28, 2017 and (ii) a reduction in pricing. The Credit Facility is guaranteed by the subsidiaries of the Company, subject to certain exceptions. The interest rate applicable to the Credit Facility is, at the Company's option, a floating base rate plus an applicable margin or the London interbank offered rate ("LIBOR") plus an applicable margin. Initially, the applicable margins were set to 0.75% with respect to the floating base rate loans and 1.75% with respect to the LIBOR loans. The applicable margins for the Credit Facility may increase or decrease based on the Company's consolidated total leverage ratio as specified in the Credit Facility. The interest rate on the Term Loan was 1.97% at December 31, 2012. In connection with the amendment and restatement, the Company recorded $2.0 million in new deferred debt issuance costs. Total debt issuance costs associated with the Credit Facility are $6.3 million, of which $0.3 million were amortized to interest expense in the year ended December 31, 2012.

The Credit Facility contains certain financial covenants requiring maintenance of certain interest coverage and leverage ratios, and customary affirmative and negative covenants including without limitation, a restriction on the payment of dividends.

At December 31, 2012, there was no outstanding balance under the Revolving Credit Facility and $419.7 million in loans outstanding under the Term Loan.
  
In connection with entering into the Credit Facility, the Company’s existing $750 million senior unsecured credit agreement, dated as of August 24, 2011 (the “Senior Credit Agreement”) was terminated.The Senior Credit Agreement consisted of a $300 million five-year senior unsecured revolving credit facility (the “2011 Revolving Credit Facility”) and a $450 million, five-year senior unsecured term loan facility (the “2011 Term Loan”). There was $433 million outstanding under the 2011 Term Loan at the time of its termination. Existing letters of credit under the Senior Credit Agreement were rolled over into or transferred to the Credit Facility. In connection with the termination of the Senior Credit Agreement, the Company wrote off approximately $8.3 million of deferred debt issuance costs, which was recorded in interest expense in the third quarter of 2012. Approximately $1.1 million of these expenses were amortized to expense in the year ended December 31, 2011.

On August 24, 2011, in connection with entering into the Senior Credit Agreement, the Company’s existing $400 million senior secured revolving credit facility, dated as of May 18, 2010 (the “2010 Revolving Credit Facility”) was terminated. There were no outstanding loans under the 2010 Revolving Credit Facility at the time of its termination. Existing letters of credit under the 2010 Revolving Credit Facility were rolled over into or transferred to the Senior Credit Agreement. In connection with the termination of the 2010 Revolving Credit Facility, the Company wrote off approximately $2.5 million of deferred debt issuance costs, which was recorded in interest expense in the third quarter of 2011. Approximately $1.1 million of these expenses were amortized to expense in the year ended December 31, 2010.


55


6.125% Senior Subordinated Notes
The Company completed, during the second quarter of 2003, its offering of $250 million of 6.125% senior subordinated notes due 2013 (the “6.125% Notes”).  In connection with the issuance of the 6.125% Notes, the Company deferred $6.6 million in debt issuance costs, of which approximately $0.2 million was amortized to expense in year ended December 31, 2011 and $0.7 million was amortized to expense in the year ended December 31, 2010.  

In 2011, the Company redeemed all $250 million aggregate principal amount of its outstanding 6.125% Notes. In connection with the redemption of the 6.125% Notes, the Company incurred debt redemption costs of approximately $1.6 million, which were recorded in interest expense for the year ended December 31, 2011.

In connection with its offering of the 6.125% Notes, the Company entered into an interest rate swap agreement with respect to all $250 million of the aggregate principal amount of the 6.125% Notes (the “6.125% Swap Agreement”).  In the second quarter of 2010, the counterparties to the interest rate swap agreement on the 6.125% Senior Notes terminated the swap agreement, effective June 1, 2010.  In connection with terminating the 6.125% Swap Agreement, the counterparties paid the Company approximately $2.6 million, which was being amortized as a reduction to interest expense over the remaining term of the 6.125% Notes until the redemption was completed in 2011.  

6.875% Senior Subordinated Notes
On December 15, 2005, Omnicare completed its offering of $525 million aggregate principal amount of 6.875% Senior Subordinated Notes (the “6.875% Notes”).  In connection with the issuance of the 6.875% Notes, the Company deferred $10.7 million in debt issuance costs, of which approximately $1 million was amortized to expense in each of the years ended December 31, 2011 and 2010, respectively.  

In December 2010, the Company entered into a Swap Agreement on all $525 million of aggregate principal amount of the 6.875% Notes (“the 6.875% Swap Agreement”).  In the second quarter of 2011, the 6.875% Swap Agreement was terminated, and the Company began paying interest at the 6.875% stated rate effective May 11, 2011.

In 2011, the Company redeemed all $525 million aggregate principal amount of its outstanding 6.875% Notes. In connection with the redemption of the 6.875% Notes, the Company incurred debt redemption costs, of approximately $22 million, primarily in the third quarter, consisting of a $18 million call premium and net write-off of approximately $4 million of deferred debt issuance costs, which were recorded in interest expense for the year ended December 31, 2011.

7.75% Senior Subordinated Notes
As of December 31, 2012, the Company had $550 million aggregate principal outstanding of the Company's 7.75% Senior Subordinated Notes due 2020 (the "7.75%" Notes). On May 18, 2010, Omnicare, Inc. completed its initial offering of $400 million aggregate principal amount of the 7.75% Notes, (the “Initial 7.75% Notes”) and on September 20, 2011, the Company completed its offering of an additional $150 million aggregate principal amount of its 7.75% Notes (the "Additional 7.75% Notes"). In connection with the issuance of the 7.75% Notes, the Company deferred approximately $12.6 million in debt issuance costs, of which approximately $1.2 million, $1.1 million and $0.6 million was amortized to expense in the years ended December 31, 2012, 2011 and 2010, respectively.  The 7.75% Notes contain certain restrictive covenants and events of default customary for such instruments, including without limitation, restrictions on the payment of dividends, incurrence of additional debt and other restrictions contained in the indenture governing the 7.75% Notes.  The 7.75% Notes are guaranteed by the Company’s subsidiaries, subject to certain exceptions.

In connection with its offering of the Initial 7.75% Notes, the Company entered into an interest rate swap agreement (the "Initial 7.75% Swap Agreement") and in connection with its offering of the Additional 7.75% Notes, the Company entered into two swap agreements (the “Additional 7.75% Swap Agreements”) (collectively the "7.75% Swap Agreements"), which are designed to effectively lower the Company's cost, but subject the Company to variable interest rate risk.  Under the Initial 7.75% Swap Agreement 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%.  Under the Additional 7.75% Swap Agreements the Company receives a fixed rate of 7.75% and pays a floating rate based on LIBOR with an interest period of six months, plus a weighted average spread of 5.32%. The floating rates for the 7.75% Swap Agreements are 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% Notes at the floating rates. The overall weighted average floating interest rate on the 7.75% Swap Agreements was 4.77% at December 31, 2012 .
 
The 7.75% Swap Agreements, which match the terms of the 7.75% Notes, are designated and accounted for as fair value hedges.  Accordingly, changes in the fair value of the interest rate swap agreements are offset by changes in the recorded carrying value of the related 7.75% Notes.  The fair value of the interest rate swap agreements, approximately $46 million and $35 million

56

at December 31, 2012 and 2011, respectively, are recorded in “Other noncurrent assets” or “Other noncurrent liabilities” on the Consolidated Balance Sheets, as applicable, and as an adjustment to the book carrying value of the related 7.75% Notes.

3.75% Convertible Senior Subordinated Notes due 2025
On December 7, 2010, Omnicare completed its offering of $575 million aggregate principal amount of 3.75% convertible senior subordinated notes due 2025 (the “2025 Notes”).  The 2025 Notes bear interest at a rate of 3.75% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2011. The initial conversion rate is 36.4409 shares of common stock per $1,000 principal amount of 2025 Notes (equivalent to an initial conversion price of approximately $27.44 per share), subject to adjustment in certain circumstances. The holders may convert their 2025 Notes, prior to December 15, 2023, on any date during any calendar quarter beginning after March 31, 2011 (and only during such calendar quarter) if the closing sale price of the Company's common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on, and including, the last trading day of the previous quarter, or at any time on or after December 15, 2023 or under certain other specified circumstances. Upon conversion, the Company will pay cash and shares of its common stock, if any, based on a daily conversion value calculated on a proportionate basis for each day of the 25 trading-day cash settlement averaging period. The conversion price is a 23.5% premium to the $22.22 closing price of the Company's common stock on December 1, 2010.  The 2025 Notes are guaranteed by the Company’s subsidiaries, subject to certain excluded subsidiaries.  Embedded in the 2025 Notes are two derivative instruments, specifically, a contingent interest provision and a contingent conversion parity provision.  The embedded derivatives are valued periodically, and at period end, the values of the derivatives embedded in the 2025 Notes were not material.  However, the values are subject to change, based on market conditions, which could affect the Company’s future results of operations, financial position or cash flows. 

In connection with the issuance of the 2025 Notes, the Company has deferred approximately $9.4 million in debt issuance costs, of which approximately $0.4 million, $0.6 million and $0.1 million were amortized to expense for the years ended December 31, 2012, 2011 and 2010, respectively, in addition approximately $3.8 million were written off in connection with the repurchase. The Company recognized a non-cash loss on the debt exchange of approximately $33.3 million in the second quarter of 2012, which was reflected in "Other charges" on the Consolidated Statements of Comprehensive Income.

3.75% Convertible Senior Subordinated Notes due 2042
Omnicare entered into separate, privately negotiated exchange agreements under which, effective April 3, 2012, the Company retired $256.9 million in aggregate principal amount of outstanding 2025 Notes in exchange for its issuance of $390 million in aggregate principal amount of new 3.75% Convertible Senior Subordinated Notes due 2042 (the "2042 Notes"). The 2042 Notes are guaranteed by substantially all of the Company's subsidiaries, subject to certain exceptions.

The 2042 Notes mature in April 2042 and will pay interest semiannually at a rate of 3.75% per year. Commencing with the interest period beginning April 1, 2019, the 2042 Notes will also pay contingent interest under certain circumstances based on their then current trading price. The 2042 Notes are convertible, upon certain circumstances, into cash and, if applicable, shares of Omnicare common stock. The 2042 Notes have an initial conversion rate of 24.09639 shares of common stock per $1,000 original principal amount of notes (subject to adjustment in certain events). This is equivalent to an initial conversion price of approximately $41.50 per share.

Under certain circumstances, the Company has the right to redeem the 2042 Notes on or before April 1, 2016 by paying a coupon make-whole amount plus accrued but unpaid interest. After April 1, 2016 the Company may, as its option, redeem the 2042 Notes by paying par plus accrued but unpaid interest. In addition, holders may require the Company to repurchase all or part of their 2042 Notes upon a fundamental change (as defined in the indenture governing the 2042 Notes) at a cash repurchase price equal to par plus accrued but unpaid interest.

In connection with the issuance of the 2042 Notes, the Company also entered into capped call transactions with a counterparty. The capped calls are subject to adjustment or termination upon the occurrence of specified events affecting the Company and are subject to additional disruption events that may give rise to termination. The capped call transactions are intended to reduce potential economic dilution upon conversion of the 2042 Notes.

In connection with the issuance of the 2042 Notes, the Company has deferred approximately $3.6 million in debt issuance costs, of which approximately $0.1 million were amortized to expense in the year ended December 31, 2012.


4.00% Junior Subordinated Convertible Debentures
During the first quarter of 2005, the Company completed its offer to exchange up to $345 million aggregate liquidation amount of 4.00% Trust Preferred Income Equity Redeemable Securities due 2033 of Omnicare Capital Trust I (the “Old Trust”), for an equal amount of Series B 4.00% Trust Preferred Income Equity Redeemable Securities  of Omnicare Capital Trust II (the “New

57

Trust”).  The New Trust PIERS have substantially similar terms to the Old Trust PIERS, except that the New Trust PIERS have a net share settlement feature.  In connection with the exchange offer, the composition of the Company’s 4.00% junior subordinated convertible debentures underlying the trust PIERS was impacted.  Additional information regarding the 4.00% junior subordinated convertible debentures underlying the Old Trust PIERS and the New Trust PIERS is summarized below.

Original 4.00% Junior Subordinated Convertible Debentures

In connection with the offering of the Old Trust PIERS in the second quarter of 2003, the Company issued a corresponding amount of 4.00% junior subordinated convertible debentures (the “Old 4.00% Debentures”) due 2033 to the Old Trust.  The Old Trust is a 100%-owned finance subsidiary of the Company.  The Company has fully and unconditionally guaranteed the securities of the Old Trust.  The Old Trust PIERS offer fixed cash distributions at a rate of 4.00% per annum payable quarterly, and a fixed conversion price of $40.82 under a contingent conversion feature whereby the holders may convert their Old Trust PIERS if the closing sales price of Company common stock for a predetermined period, beginning with the quarter ending September 30, 2003, is more than 130% of the then-applicable conversion price or, during a predetermined period, if the daily average of the trading prices for the Old Trust PIERS is less than 105% of the average of the conversion values for the Old Trust PIERS through 2028 (98% for any period thereafter through maturity).  The Old Trust PIERS also will pay contingent distributions, commencing with the quarterly distribution period beginning June 15, 2009, if the average trading prices of the Old Trust PIERS for a predetermined period equals 115% or more of the stated liquidation amount of the Old Trust PIERS.  In this circumstance, the holder of the convertible debenture will receive 0.125 percent of the average trading price during the predetermined period.  Embedded in the Old Trust PIERS are two derivative instruments, specifically, a contingent interest provision and a contingent conversion parity provision.  The embedded derivatives are periodically valued, and at period end, the values of both derivatives embedded in the Old Trust PIERS were not material.  However, the values are subject to change, based on market conditions, which could affect the Company’s future results of operations, financial position or cash flows.  Omnicare irrevocably and unconditionally guarantees, on a subordinated basis, certain payments to be made by the Old Trust in connection with the Old Trust PIERS.  Subsequent to the first quarter 2005 exchange offer discussed in further detail at the Series B 4.00% Junior Subordinated Convertible Debentures caption below, the Company has $11,233,050 aggregate liquidation amount of the Old Trust PIERS and underlying Old 4.00% Debentures remaining outstanding at period end.

Series B 4.00% Junior Subordinated Convertible Debentures

On March 8, 2005, the Company completed the exchange of $333,766,950 aggregate liquidation amount of the Old Trust PIERS (representing 96.7% of the total liquidation amount of the Old Trust PIERS outstanding) for an equal amount of the New Trust PIERS, plus an exchange fee of $0.125 per $50 stated liquidation amount of Old Trust PIERS.  Each New Trust PIERS represents an undivided beneficial interest in the assets of the New Trust, which assets consist solely of a corresponding amount of Series B 4.00% junior subordinated convertible debentures (the “4.00% Convertible Debentures”) issued by the Company with a stated maturity of June 15, 2033.  The Company has fully and unconditionally guaranteed the securities of the New Trust.  Subsequent to the completion of the exchange offering and at period end, the Company has $333,766,950 of 4.00% Convertible Debentures outstanding.

The terms of the New Trust PIERS are substantially identical to the terms of the Old Trust PIERS, except that the New Trust PIERS are convertible into cash and, if applicable, shares of Company common stock, whereas the outstanding Old Trust PIERS are convertible only into Company common stock (except for cash in lieu of fractional shares).

The purpose of the exchange offer was to change the conversion settlement provisions of the Old Trust PIERS.  By committing to pay up to the stated liquidation amount of the New Trust PIERS to be converted in cash upon conversion, the Company is able to account for the New Trust PIERS under the treasury stock method.

As of December 31, 2012 and 2011, the aforementioned contingent threshold had not been met and, accordingly, the Old 4.00% Debentures and the 4.00% Convertible Debentures have been classified as long-term debt on the December 31, 2012 and 2011 Consolidated Balance Sheets.

In connection with the issuance of the Old 4.00% Debentures and the 4.00% Convertible Debentures, the Company has deferred $6.1 million in debt issuance costs, of which approximately $0.2 million was amortized to expense in each of the years ended December 31, 2012, 2011 and 2010.

3.25% Convertible Senior Debentures
On December 15, 2005, Omnicare completed its offering of $977.5 million aggregate principal amount of 3.25% convertible senior debentures due 2035 (with optional redemption by Omnicare on or after, and optional repurchase right of holders on, December 15, 2015, at par) (the “3.25% Convertible Debentures").  The 3.25% Convertible Debentures have an initial conversion

58

price of approximately $79.73 per share under a contingent conversion feature whereby the holders may convert their 3.25% Convertible Debentures, prior to December 15, 2033, on any date during any fiscal quarter beginning after March 31, 2006 (and only during such fiscal quarter) if the closing sales price of the Company’s common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter or during any five consecutive trading days period if, during each of the previous five consecutive trading days, the trading price of the convertible debentures for each day was less than 98 percent of the then current conversion price.  The 3.25% Convertible Debentures bear interest at a rate of 3.25% per year, subject to an upward adjustment on and after December 15, 2015 in certain circumstances, up to a rate not to exceed 1.99 times the original 3.25 percent interest rate per year.  The 3.25% Convertible Debentures also will pay contingent interest in cash, beginning with the six-month interest period commencing December 15, 2015, during any six-month period in which the trading price of the 3.25% Convertible Debentures for each of the five trading days ending on the second trading day immediately preceding the first day of the applicable six-month interest period equals or exceeds 120% of the principal amount of the 3.25% Convertible Debentures.  Embedded in the 3.25% Convertible Debentures are three derivative instruments, specifically, a contingent interest provision, an interest reset provision and a contingent conversion parity provision.  The embedded derivatives are valued periodically, and at period end, the values of the derivatives embedded in the 3.25% Convertible Debentures were not material.  However, the values are subject to change, based on market conditions, which could affect the Company’s future results of operations, financial position or cash flows.  In connection with the issuance of the 3.25% Convertible Debentures, the Company has deferred approximately $17.6 million in debt issuance costs, of which approximately $0.8 million, $1 million and $2 million were amortized to expense for the years ended December 31, 2012, 2011 and 2010, respectively.

On December 16, 2010, Omnicare purchased $525 million aggregate principal amount of its outstanding 3.25% Convertible Debentures pursuant to a tender offer.  Total consideration required to complete the purchase, including accrued and unpaid interest, was approximately $498.8 million.  Also, in the second quarter of 2012, the Company purchased an additional $25 million aggregate principal amount of its 3.25% Convertible Debentures. After giving effect to the purchase of the tendered debentures, $428 million aggregate principal amount of the 3.25% Convertible Debentures remain outstanding.  In connection with the initial purchase of the 3.25% Convertible Debentures, the Company wrote-off debt issuance costs of $4.6 million, which were recorded in interest expense for the three months and year ended December 31, 2010.

Further, in connection with the extinguishment of $525 million of 3.25% Convertible Debentures, the Company was required to recognize a non-cash loss of $25.6 million due to its application of the authoritative guidance for extinguishments of convertible debt.  The Company also incurred $1.3 million of professional fees associated with the purchase of the 3.25% Convertible Debentures.  The aforementioned losses on extinguishment and related professional fees were recorded in the “Other Charges” caption of its Consolidated Statements of Comprehensive Income, during the three months and year ended December 31, 2010. In connection with the additional repurchase, the Company recognized a non-cash loss on the debt extinguishment of $1.8 million which was recorded in "Other Charges" during the second quarter of 2012.

6.75% Senior Subordinated Notes
In 2010 the Company completed the redemption of all $225 million aggregate principal amount of 6.75% senior subordinated notes due 2013 (the “6.75% Notes”).  In connection with the purchase of the 6.75% Notes, the Company incurred early redemption fees of $7.6 million and the write-off of debt issuance costs of $2.1 million, both of which were recorded in interest expense in the second quarter of the year ended December 31, 2010.  Additionally, the Company incurred approximately $0.4 million of professional fees associated with the purchase of the 6.75% Notes, which were recorded in selling, general and administrative expenses for the year ended December 31, 2010.

Favorably impacting operating cash flow was the excess of tax deductible interest expense over book interest expense related to the Company’s 4.00% Convertible Debentures, 3.25% Convertible Debentures and 3.75% Convertible Notes.  This resulted in an increase in the Company’s deferred tax liabilities during the year ended December 31, 2012, 2011 and 2010 of $15.0 million, $10.4 million and $30.3 million, respectively ($173 million cumulative as of December 31, 2012).  The recorded deferred tax liability could, under certain circumstances, be realized in the future upon conversion or redemption which would serve to reduce operating cash flows.

Information relating to the Company's convertible securities at December 31, 2012 can be found in the following table:


59

Convertible Debt
 
Carrying Value of Equity Component (in thousands)
 
Remaining Amortization Period
 
Effective Interest Rate
3.75% convertible senior subordinated notes, due 2025
 
$
27,230

 
13.00
 
8.250
%
4.00% junior subordinated convertible debentures, due 2033
 
$
151,655

 
20.50
 
8.010
%
3.25% convertible senior debentures, due 2035
 
$
245,433

 
3.00
 
7.630
%
3.75% convertible senior subordinated notes, due 2042
 
$
161,600

 
29.25
 
7.110
%
The fair value of the Company’s fixed-rate debt facilities, excluding the previously disclosed swap values, is based on quoted market prices (Level II) and is summarized as follows (in thousands):

Fair Value of Financial Instruments
 
 
December 31, 2012
 
December 31, 2011
Financial Instrument:
 
Book Value
 
Market Value
 
Book Value
 
Market Value
7.75% senior subordinated notes, due 2020, gross
 
$
550,000

 
$
614,600

 
$
550,000

 
$
591,300

3.75% convertible senior subordinated notes, due 2025
 
 

 
 

 
 

 
 

Carrying value
 
204,608

 
—

 
361,345

 
—

Unamortized debt discount
 
113,446

 
—

 
213,655

 
—

Principal amount
 
318,054

 
459,600

 
575,000

 
816,500

4.00% junior subordinated convertible debentures, due 2033
 
 

 
 

 
 

 
 

Carrying value
 
206,266

 
—

 
203,675

 
—

Unamortized debt discount
 
138,734

 
—

 
141,325

 
—

Principal amount
 
345,000

 
331,600

 
345,000

 
318,800

3.25% convertible senior debentures, due 2035
 
 

 
 

 
 

 
 

Carrying value
 
377,782

 
—

 
384,799

 
—

Unamortized debt discount
 
49,718

 
—

 
67,701

 
—

Principal amount
 
427,500

 
425,400

 
452,500

 
404,600

3.75% convertible senior debentures, due 2042
 
 

 
 

 
 

 
 

Carrying value
 
229,624

 
—

 
—

 
—

Unamortized debt discount
 
160,376

 
—

 
—

 
—

Principal amount
 
390,000

 
397,100

 
—

 
—


Note 11 - Stock-Based Compensation

Stock-Based Compensation Plans

During 2004, stockholders of the Company approved the 2004 Stock and Incentive Plan (the “2004 Plan”), under which the Company is authorized to grant equity-based and other incentive compensation to employees, officers, directors, consultants and advisors of the Company in an amount aggregating up to 10.0 million shares of Company common stock.  Beginning May 18, 2004, stock-based incentive awards are made only from the 2004 Stock and Incentive Plan. The 2004 Plan includes grants of options, restricted stock, and performance based restricted stock units.

Prior to the 2004 Plan, the Company had the 1998 Long-Term Employee Incentive Plan and the 1992 Long-Term Stock Incentive Plan, all of which no longer issue stock-based incentives but which had outstanding awards at December 31, 2012.

Under these plans, stock options vest and become exercisable at varying points in time, ranging up to four years in length, and have terms that generally span ten years from the grant date.  Stock option awards are granted with an exercise price at least equal to the fair market value of Company stock upon grant.  Omnicare’s normal practice is to issue new shares upon stock option exercise.  Certain stock option and share awards provide for accelerated vesting if there is a change in control, as defined in the plans.


60

Employee Stock Purchase Plan

In November 1999, the Company’s Board of Directors adopted the Omnicare StockPlus Program, a non-compensatory employee stock purchase plan (the “ESPP”).  Under the ESPP, employees and non-employee directors of the Company who elect to participate may contribute up to 6% of eligible compensation (or an amount not to exceed $20,000 for non-employee directors) to purchase shares of the Company’s common stock.  For each share of stock purchased, the participant also receives two options to purchase additional shares of the Company’s stock.  The stock options are subject to a four-year vesting period and are generally subject to forfeiture in the event the related shares purchased are not held by the participant for a minimum of two years.  The stock options have a ten-year life from the date of issuance.  Amounts contributed to the ESPP are used by the plan administrator to purchase the Company’s stock on the open market or for shares issued by Omnicare.

Restricted Stock Awards

Non-vested stock awards are granted at the discretion of the Compensation Committee of the Board of Directors.  These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods, typically three to ten-year periods (vesting on a straight-line basis).  Members of the Board of Directors can elect to receive either a restricted stock award or a restricted stock unit, which is deferred until their separation from the board, vesting of these awards/units mirrors their term of service (currently one year).  The fair value of a stock award is equal to the fair market value of a share of Company stock on the grant date.

Performance Based Restricted Unit Awards

Performance based restricted unit awards are granted at the discretion of the Compensation Committee of the Board of Directors. These awards are restricted as to the transfer of ownership and vest based on the the Company's achievement of earnings per share targets over a three year period.

Stock-Based Compensation

The Company uses the Black-Scholes options pricing model to determine the fair value of stock options on the grant date, which is affected by Omnicare’s stock price as well as assumptions regarding a number of complex and subjective variables.  These variables include Omnicare’s expected stock price volatility over the expected term of the awards, actual and projected employee exercise behaviors, the risk-free interest rate and the stock’s dividend yield.

The expected term of stock options granted represents the period of time that the stock options are expected to be outstanding and is estimated based primarily on historical stock option exercise experience.  The expected volatility is based primarily on the historical volatility of the Company’s stock over a period generally commensurate with the expected term of the stock options.  The risk-free interest rate used in the option valuation model is based on United States Treasury Strip (“stripped coupon interest”) issues with remaining terms similar to the expected term of the stock options.  The expected dividend yield is based on the current Omnicare stock dividend yield.  The Company is required to estimate forfeitures at the time of the grant and revise those estimates in subsequent periods as necessary to reflect any changes in actual forfeiture experience.  Omnicare uses historical data to estimate pre-vesting stock option forfeitures and records stock-based compensation expense only for those awards that are expected to vest.  All stock option awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting period.

The table below represents the assumptions used to value stock options granted during the years ended December 31,:
 
2012
 
2011
 
2010
Expected volatility
33.6
%
 
35
%
 
35
%
Risk-free interest rate
0.7
%
 
1.0
%
 
1.0
%
Expected dividend yield
1.7
%
 
0.5
%
 
0.5
%
Expected term of options (in years)
5.00

 
5.00

 
4.90

Weighted average fair value per option
$9.72
 
$
8.74

 
$
7.54


Total pretax stock-based compensation expense recognized in the Consolidated Statements of Comprehensive Income as part of S,G&A expense for stock options and stock awards for the year ended December 31, 2012 is approximately $1.3 million and $15.3 million, approximately $2.0 million and $19.7 million for the year ended December 31, 2011 (including the stock option and restricted stock award separation costs disclosed at the “Separation, Benefit Plan Termination and Related Costs” note of the Notes

61

to Consolidated Financial Statements), and approximately $5.4 million and $32.4 million for the year ended December 31, 2010, respectively.

As of December 31, 2012, there was approximately $38 million of total unrecognized compensation cost related to nonvested stock awards and stock options granted to Omnicare employees, which is expected to be recognized over a remaining weighted-average period of approximately three years.  The total grant date fair value of shares vested during the years ended December 31, 2012, 2011, and 2010 related to stock options was approximately $2.1 million, $0.8 million and $3.7 million respectively. The total grant date fair value of shares vested during the years ended December 31, 2012, 2011, and 2010 related to stock awards was $17.6 million, $18.7 million and $41.1 million respectively.

General Stock Option Information

A summary of stock option activity under the plans for the year ended December 31, 2012, is presented below (in thousands, except exercise price data):
 
2012
 
Shares
 
Weighted Average Exercise Price
Options outstanding, beginning of year
3,477

 
$
36.17

Options granted
313

 
34.60

Options exercised
(1,291
)
 
26.36

Options forfeited
(400
)
 
40.82

Options outstanding, end of year
2,099

 
41.09

Options exercisable, end of year
1,688

 
$
43.87


The total exercise date intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was approximately $11.9 million, $11.5 million and $3.6 million, respectively.

The following summarizes information about stock options outstanding and exercisable (in thousands, except exercise price and remaining life data):

OPTIONS OUTSTANDING
 
OPTIONS EXERCISABLE
Range of Exercise Prices
 
Number Outstanding at December 31, 2012
 
Weighted Average Remaining Contractual Life (in years)
 
Weighted Average Exercise Price
 
Number Exercisable at December 31, 2012
 
Weighted Average Remaining Contractual Life (in years)
 
Weighted Average Exercise Price
$15.46 - $23.17
 
62

 
5.77
 
$
21.78

 
38

 
5.11
 
$
21.75

23.18 - 30.90
 
440

 
5.42
 
26.31

 
239

 
3.70
 
26.02

30.91 - 38.61
 
252

 
6.89
 
34.28

 
66

 
3.20
 
35.16

38.62 - 61.79
 
1,345

 
1.14
 
48.09

 
1,345

 
1.14
 
48.09

$15.46 - $61.79
 
2,099

 
2.86
 
$
41.09

 
1,688

 
1.67
 
$
43.87


General Restricted Stock Award Information

A summary of nonvested restricted stock awards and performance based restricted stock units for the year ended December 31, 2012, is presented below (in thousands, except fair value data):

62

 
2012
 
Shares
 
Weighted Average Grant Date Price
Nonvested shares, beginning of year
2,126

 
$
26.42

Shares awarded
651

 
34.30

Shares vested
(667
)
 
26.45

Shares forfeited
(499
)
 
28.62

Nonvested shares, end of year
1,611

 
$
28.97


Note 12 - Separation, Benefit Plan Termination and Related Costs

Separation Costs:

During the year ended December 31, 2012, the Company recorded a $21 million charge in connection with the separation of certain executives of the Company, including charges resulting from the resignation of the Company's former Chief Executive Officer on June 10, 2012 and the separation of other executives in the first and third quarters. These charges, primarily related to severance and accelerated vesting of restricted stock, are reflected in the "Other charges" caption of the Consolidated Statements of Comprehensive Income.

In the quarter and year ended December 31, 2011, the Company recorded a charge of approximately $1 million for restricted stock award amortization for a former executive. In 2010, Joel F. Gemunder retired from his position as the Company's President and Chief Executive Office and as a member of the Board of Directors. Also, Cheryl D. Hodges, Senior Vice President and Secretary of the Company, resigned from the Company, both effective July 31, 2010. In connection with the separation of these former executives, the Company recorded a charge of approximately $40 million for separation related expenses, primarily related to severance and accelerated vesting of stock options and restricted stock.

Benefit Plan Termination and Related Costs:
See additional information at the “Employee Benefit Plans” note of the Notes to Consolidated Financial Statements.

Note 13 - 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.  Several of the plans were adopted in connection with certain of the Company’s acquisitions.  The plans are primarily tax-deferred arrangements pursuant to Internal Revenue Code (“IRC”) Section 401(k) and are subject to the provisions of the Employee Retirement Income Security Act (“ERISA”).  The Company matches employee contributions in varying degrees (either in cash in 2012 and 2011 or shares of the Company’s common stock or cash in 2010, in accordance with the applicable plan provisions) based on the contribution levels of the employees, as specified in the respective plan documents.  Expense relating primarily to the Company’s matching contributions for these defined contribution plans for the years ended December 31, 2012, 2011 and 2010 was $8.9 million, $6.5 million and $5.6 million, respectively.

The Company has a non-contributory, defined benefit pension plan covering certain corporate headquarters employees and the employees of several companies sold by the Company in 1992, for which benefits ceased accruing upon the sale (the “Qualified Plan”).  Benefits accruing under this plan to corporate headquarters employees were fully vested and frozen as of January 1, 1994.
The Company also had an excess benefit plan (“EBP”) that provides retirement payments to certain headquarters employees in amounts generally consistent with what they would have received under the Qualified Plan.  The retirement benefits provided by the EBP are generally comparable to those that would have been earned in the Qualified Plan, if payments under the Qualified Plan were not limited by the IRC.  On September 30, 2010, the Company terminated the defined benefit portion of its Excess Benefit Plan.  See additional information at the “Plan curtailment” and “Benefit plan termination and related costs” section of this Note.

The Qualified Plan is funded with an irrevocable trust, which consists of assets held in the Vanguard Intermediate Term Treasury Fund Admiral Shares fund (“Vanguard Fund”), a mutual fund holding U.S. Treasury obligations.  In addition, the Company has established rabbi trusts, which are also held in the Vanguard Fund, to provide for retirement obligations under the EBP.  The Company’s general approach is to fund its pension obligations in accordance with the funding provisions of ERISA.

63

Components of Net Periodic Pension Cost and Other Amounts
Recognized in Other Comprehensive Income (Pre-tax)
(in thousands):
 
For the years ended December 31,
Net Periodic Pension Cost (Pre-tax):
2012
 
2011
 
2010
Service cost
$
—

 
$
—

 
$
2,226

Interest cost
270

 
269

 
3,323

Amortization of deferred amounts (primarily prior actuarial losses)
272

 
109

 
4,891

Expected return on assets
(261
)
 
(241
)
 
(224
)
Net periodic pension cost
281

 
137

 
10,216

Benefit plan termination and related costs (see below)
—

 
—

 
25,187

Net periodic pension costs and benefit plan termination and related costs
281

 
137

 
35,403

Other Changes in Plan Assets and Benefit Obligations
 

 
 

 
 

Recognized in Other Comprehensive Income (Pre-tax):
 
 
 
 
 
Net loss (gain), net of curtailment
753

 
1,145

 
(49,463
)
Amortization of net (loss)
(272
)
 
(110
)
 
(4,891
)
Amortization of prior service cost
—

 
—

 
—

Total loss (gain) recognized in other comprehensive income
481

 
1,035

 
(54,354
)
Total loss (gain) recognized in net periodic pension cost and other comprehensive income
$
762

 
$
1,172

 
$
(18,951
)

Plan curtailment
As a result of plan curtailments, the projected benefit obligation of the Excess Benefit Plan was remeasured as of July 31, 2010 and September 30, 2010, resulting in a pretax increase to other comprehensive income of approximately $23.3 million during the 2010 year.

Benefit plan termination and related costs
On September 30, 2010, the Company terminated the defined benefit portion of its Excess Benefit Plan (“the Plan”) which was not a qualified plan under the Internal Revenue Code of 1986, as amended.  As a result of the termination, each active participant’s terminated plan liability was determined, based primarily on the participant’s compensation and duration of employment, as of September 30, 2010.  Partial payments were made to non-active participants through September 30, 2010, with the final payments made in September 2011. As a result of the Plan termination, the Company recognized a one-time charge to expense of approximately $25 million in the third quarter of 2010 for benefit plan termination and related costs, primarily comprised of the recognition of previously deferred actuarial losses.

Approximately $75 million and $58 million of payments were made during 2011 and 2010, respectively to former plan participants, primarily to three former executives (Joel F. Gemunder, Cheryl D. Hodges and Patrick E. Keefe) using funds obtained upon the liquidation of rabbi trust assets.  In addition, under the terms of the related separation agreements, Mr. Gemunder and Ms. Hodges earned interest on their unpaid benefit plan amounts at a rate of 8.75% per annum until the final payments were made in February 2011.  In connection with the funding of the payments in 2010 to the former executives, the Company recorded a gain of approximately $3.6 million in the fourth quarter of 2010 on rabbi trust assets liquidated to make the payments.

The estimated amount of net loss in accumulated other comprehensive income expected to be recognized as a component of net periodic pension cost during the 2013 year is approximately $0.3 million.

The actuarial assumptions used to calculate net periodic pension costs for years ended December 31 were as follows:
 
2012
 
2011
 
2010
Discount rate
4.3
%
 
5.4
%
 
3.8
%
Rate of increase in compensation levels
N/A

 
N/A

 
15.0
%
Expected rate of return on assets
6.0
%
 
6.0
%
 
6.0
%


64

The actuarial assumptions used to calculate the benefit obligations at the end of plan year were as follows:
 
2012
 
2011
 
2010
Discount rate
3.8
%
 
4.3
%
 
5.4
%
Rate of increase in compensation levels
N/A

 
N/A

 
N/A

Expected rate of return on assets
6.0
%
 
6.0
%
 
6.0
%

The discount rate assumption was determined giving consideration primarily to the Citigroup Pension Liability Index.  The expected rate of return on assets was estimated based primarily on the historical rate of return on intermediate-term U.S. Government securities.

Obligations and Funded Status
(in thousands):
 
For the years ended December 31,
Change in Plan Assets:
2012
 
2011
Fair value of plan assets at end of prior year
$
4,359

 
$
4,081

Actual return on plan assets
131

 
387

Employer contributions
230

 
31

Benefits paid
(190
)
 
(140
)
Fair value of plan assets at end of year
$
4,530


$
4,359

Change in Projected Benefit Obligation:
 

 
 

Projected benefit obligation at end of prior year
$
6,454

 
$
5,034

Interest cost
270

 
269

Actuarial loss
623

 
1,291

Benefits paid
(190
)
 
(140
)
Projected benefit obligation at end of year
$
7,157

 
$
6,454

Funded Status:
 

 
 

Projected benefit obligation in excess of plan assets
$
(2,627
)
 
$
(2,095
)
Accumulated benefit obligation at end of year
$
7,157


$
6,454


The Company’s investment strategy generally targets investing in intermediate U.S. government and agency securities funds, seeking a moderate and sustainable level of current income by investing primarily in intermediate-term U.S. Treasury obligations with a low credit default risk.

Amounts Recognized in the Consolidated Balance
Sheets Consist of (in thousands):
 
December 31,
 
2012
 
2011
Current liabilities
$
—

 
$
—

Noncurrent liabilities
2,627

 
2,095

Total
$
2,627

 
$
2,095

Amounts Recognized in Accumulated Other Comprehensive Income (Pretax) Consist of:
 

 
 

Net loss
$
2,467

 
$
1,985

Prior service cost
—

 
—

Total
$
2,467

 
$
1,985



65

Information for Pension Plans with an Accumulated Benefit Obligation in excess of Plan Assets
(in thousands):
 
December 31,
 
2012
 
2011
Qualified Plan:
 
 
 
Projected benefit obligation
$
7,157

 
$
6,454

Accumulated benefit obligation
7,157

 
6,454

Fair value of plan assets (1)
4,530

 
4,359

(1)
See "Obligations and Funded Status" table of this note for further discussion.

No significant funding is anticipated to be necessary in 2013 relating to the Qualified Plan.

Projected benefit payments, which reflect expected future service, as appropriate, for each of the next five fiscal years and in the aggregate for the five fiscal years thereafter as of December 31, 2012 are estimated at approximately $0.3 million per year through 2022.

Note 14 - Income Taxes

Provision
The provision for income taxes from continuing operations is comprised of the following (in thousands):
 
For the years ended December 31,
 
2012
 
2011
 
2010
Current provision
$
21,459

 
$
48,384

 
$
(3,908
)
Deferred provision
95,742

 
62,909

 
22,952

Total income tax provision from continuing operations
$
117,201

 
$
111,293

 
$
19,044


Tax benefits related to the exercise of stock options and stock awards have been credited (debited) to paid-in capital in amounts of $2.5 million, $5.0 million and $(1.2) million for the years ended December 31, 2012, 2011 and 2010, respectively.

Effective Income Tax Rate
The difference between the Company’s reported income tax expense from continuing operations and the federal income tax expense from continuing operations computed at the statutory rate of 35.0% is explained in the following table (in thousands):
 
For the years ended December 31,
 
2012
 
2011
 
2010
Federal income tax at the statutory rate
$
109,226

 
35.0
 %
 
$
95,489

 
35.0
 %
 
$
11,728

 
35.0
 %
State, local and foreign income taxes, net of federal income tax benefit
10,508

 
3.4

 
9,415

 
3.5

 
4,133

 
12.3

Reduction for tax positions settled, net of federal income tax benefit
80

 
—

 
(1,676
)
 
(0.6
)
 
(12,324
)
 
(36.8
)
Settlements
—

 
—

 
7,000

 
2.6

 
13,746

 
41.0

Other, net (including tax accrual adjustments)
(2,613
)
 
(0.8
)
 
1,065

 
0.3

 
1,761

 
5.3

Total income tax provision from continuing operations
$
117,201

 
37.6
 %
 
$
111,293

 
40.8
 %
 
$
19,044

 
56.8
 %

Income tax payments, net, amounted to $44.1 million, $6.4 million and $23.6 million the years ended December 31, 2012, 2011 and 2010, respectively.


66

Deferred Tax Assets and Liabilities
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
 
December 31,
 
2012
 
2011
Accounts receivable reserves
$
91,773

 
$
120,983

Net operating loss (“NOL”) and capital loss carryforwards
81,530

 
82,035

Accrued liabilities
78,331

 
88,073

Other
47,421

 
28,414

Gross deferred tax assets, before valuation allowances
299,055

 
319,505

Valuation allowances
(21,037
)
 
(20,502
)
Gross deferred tax assets, net of valuation allowances
$
278,018

 
$
299,003

 
 
 
 
Amortization of intangibles
$
606,933

 
$
568,849

Contingent convertible debentures interest
353,397

 
322,035

Fixed assets and depreciation methods
55,135

 
48,034

Subsidiary stock basis
12,271

 
12,203

Current and noncurrent assets
10,702

 
15,149

Other
18,054

 
18,146

Gross deferred tax liabilities
$
1,056,492

 
$
984,416


As of December 31, 2012, the Company has remaining deferred tax benefits related to its federal and state net operating losses and capital losses totaling approximately $82 million ($29 million federal, $50 million state and $3 million capital).  These NOLs and capital losses will expire, in varying amounts, beginning in 2013 through 2032.  The potential future tax benefits of the NOLs and capital losses have been offset by $21 million of valuation allowance based on the Company’s analysis of the likelihood of generating sufficient taxable income in the various jurisdictions to utilize the benefits before expiration.

Uncertain Tax Positions
At January 1, 2012, the Company had gross unrecognized tax benefits of $17.1 million and ended the year with gross unrecognized tax benefits of $14.2 million.  A reconciliation of the beginning and ending of year amount of unrecognized tax benefit is as follows (in thousands):
 
2012
 
2011
 
2010
Unrecognized tax benefits at beginning of year
$
17,091

 
$
18,034

 
$
27,700

Additions based on tax positions related to the current year
1,845

 
1,219

 
1,532

Additions for tax positions of prior years
2,050

 
5,212

 
3,100

Reductions for tax positions of prior years
(3,051
)
 
(492
)
 
(1,634
)
Settlement reductions
(3,410
)
 
(5,330
)
 
—

Reductions for tax positions settled through the expirations of the statute of limitations
(309
)
 
(1,552
)
 
(12,664
)
Unrecognized tax benefits at end of year
$
14,216

 
$
17,091

 
$
18,034

 
Included in the balance at December 31, 2012 are approximately $8.7 million of unrecognized tax benefits, net of federal tax benefit, that, if recognized, would affect the effective tax rate.  The liabilities for unrecognized tax benefits are carried in “Other noncurrent liabilities” on the Consolidated Balance Sheets because payment of cash is not anticipated within one year of the balance sheet date for any significant unrecognized amounts.  However, it is reasonably possible that $4.6 million, net of federal tax benefit, of unrecognized federal and state tax benefits will reverse within one year of the balance sheet date due to the expiration of statutes of limitation and settlement of the 2009 and 2010 IRS audit.  The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expenses.  During the year ended December 31, 2012, the Company recognized approximately $(0.1) million in interest, net of federal tax benefit, and penalties.  The Company had accrued approximately $2.9 million for the payment of interest and penalties accrued at December 31, 2012.

67


The Company files income tax returns in the U.S. federal jurisdiction and various states.  With few exceptions, the Company is no longer subject to U.S. federal examinations by tax authorities for years before 2009, and state and local, or non-U.S. income tax examinations, by tax authorities for years before 2008. The Internal Revenue Service is currently examining the 2009 and 2010 income tax returns. The Company is also currently under examination by various state jurisdictions.

Note 15 - 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):
 
 
For the years ended December 31,
2012:
 
Income (loss)(Numerator)
 
Common Shares(Denominator)
 
Per Common
Share Amounts
Basic EPS
 
 
 
 
 
 
Income from continuing operations
 
$
194,874

 
 
 
$
1.78

Loss from discontinued operations
 
—

 
 
 
—

Net income
 
194,874

 
109,531

 
$
1.78

Effect of Dilutive Securities
 
 

 
 

 
 

Convertible securities
 
284

 
2,891

 
 

Stock options, warrants and awards
 
—

 
566

 
 

Diluted EPS
 
 

 
 

 
 

Income from continuing operations plus assumed conversions
 
195,158

 
 

 
$
1.73

Loss from discontinued operations
 
—

 
 

 
—

Net income plus assumed conversions
 
$
195,158

 
112,988

 
$
1.73

2011:
 
 

 
 

 
 

Basic EPS
 
 

 
 

 
 

Income from continuing operations
 
$
161,532

 
 

 
$
1.43

Loss from discontinued operations
 
(74,608
)
 
 

 
(0.66
)
Net income
 
86,924

 
113,000

 
$
0.77

Effect of Dilutive Securities
 
 

 
 

 
 

Convertible securities
 
287

 
1,011

 
 

Stock options, warrants and awards
 
—

 
770

 
 

Diluted EPS
 
 

 
 

 
 

Income from continuing operations plus assumed conversions
 
161,819

 
 

 
$
1.41

Loss from discontinued operations
 
(74,608
)
 
 

 
(0.65
)
Net income plus assumed conversions
 
$
87,211

 
114,781

 
$
0.76

2010:
 

 

 

Basic EPS
 
 
 
 
 
 
Income from continuing operations
 
$
14,464

 
 
 
$
0.12

Loss from discontinued operations
 
(120,573
)
 
 
 
(1.04
)
Net loss
 
(106,109
)
 
116,348

 
$
(0.91
)
Effect of Dilutive Securities
 
 
 
 
 
 
4.00% junior subordinated convertible debentures
 
289

 
275

 
 
Stock options, warrants and awards
 
—

 
304

 
 
Diluted EPS
 
 
 
 
 
 
Income from continuing operations plus assumed conversions
 
14,753

 
 
 
$
0.13

Loss from discontinued operations
 
(120,573
)
 
 
 
(1.03
)
Net loss plus assumed conversions
 
$
(105,820
)
 
116,927

 
$
(0.91
)
 

68

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

The Company is required to include additional shares in its diluted share outstanding calculation based on the treasury stock method when the average Omnicare stock market price for the applicable period exceeds the following amounts:
Convertible Debt
 
Price
3.75% convertible senior subordinated notes, due 2025
 
$
27.19

4.00% junior subordinated convertible debentures, due 2033
 
$
40.82

3.25% convertible senior debentures, due 2035
 
$
78.74

3.75% convertible senior subordinated notes, due 2042
 
$
41.33


During the years ended December 31, 2012, 2011 and 2010, the anti-dilutive effect associated with certain stock options, warrants and stock 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 stock awards excluded from the computation of the diluted EPS for those years totaled approximately 2.1 million, 2.6 million and 4.6 million, respectively.  

Note 16 - Restructuring and Other Related Charges

Company-wide Reorganization Program:
During 2010, the Company initiated a “Company-wide Reorganization Program”, including a reshaping of the organization with the objective of deploying resources closer to the customers, allowing Omnicare to become more responsive to customer needs, better leveraging the Omnicare platform and better positioning the Company for potential growth.  The program was completed in the third quarter of 2012 with the completion of the relocation of the Corporate office. The Company recorded restructuring and other related charges for the CWR program of approximately $11 million in the third quarter of 2012 and $14 million cumulatively since 2010. The majority of the charges were recorded in the Corporate/Other segment.

Details of the Company-wide Reorganization Program restructuring related charges are as follows (pretax, in thousands):

 
2010
Provision/
Accrual
 
Utilized
during
2010
 
Balance at
December 31,
2010
 
Utilized
during
2011
Restructuring charges:
 
 
 
 
 
 
 
Employee severance
$
446

 
$
(141
)
 
$
305

 
$
(278
)
Employment agreement buy-outs
2,733

 
(933
)
 
1,800

 
(1,432
)
Lease terminations
91

 
(91
)
 
—

 
—

Other assets, fees and facility exit costs
—

 
—

 
—

 
—

Total restructuring charges
$
3,270

 
$
(1,165
)
 
$
2,105

 
$
(1,710
)
 
Balance at
December 31,
2011
 
2012 Provision/
Accrual
 
Utilized
during
2012
 
Balance at
December 31,
2012
Restructuring charges:
 
 
 
 
 
 
 
Employee severance
$
27

 
$
—

 
$
(27
)
 
$
—

Employment agreement buy-outs
368

 
—

 
(368
)
 
—

Lease terminations
—

 
10,034

 
(1,935
)
 
8,099

Other assets, fees and facility exit costs
—

 
731

 
(364
)
 
367

Total restructuring charges
$
395

 
10,765

 
$
(2,694
)
 
$
8,466

Other related charges
 
 
281

 
 
 
 
Total restructuring and other related charges
 
 
$
11,046

 
 
 



69

Omnicare Full Potential Plan:
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, which was substantially completed in 2010.  The Omnicare Full Potential Plan optimized resources across the entire organization through implementing best practices, including the realignment and right-sizing of functions, and a “hub-and-spoke” model, whereby certain key administrative and production functions were 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.  

The Company recorded restructuring and other related charges for the Omnicare Full Potential Program of approximately $14 million during the year ended December 31, 2010, or cumulative aggregate restructuring and other related charges of approximately $110 million through 2010.  The Company eliminated approximately 2,700 positions in completing the Omnicare Full Potential program.

The restructuring charges primarily included 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 were primarily comprised of professional fees.  Details of the Omnicare Full Potential Plan restructuring and other related charges are as follows (pretax, in thousands):

 
Balance at
December 31,
2009
 
2010
Provision/
Accrual
 
Utilized
during
2010
 
Balance at
December 31,
2010
Restructuring charges:
 
 
 
 
 
 
 
Employee severance
$
—

 
$
6,398

 
$
(5,688
)
 
$
710

Employment agreement buy-outs
—

 
—

 
—

 
—

Lease terminations
7,113

 
3,578

 
(4,119
)
 
6,572

Other assets, fees and facility exit costs
459

 
2,453

 
(2,531
)
 
381

Total restructuring charges
$
7,572

 
12,429

 
$
(12,338
)
 
$
7,663

Other related charges
 

 
1,466

 
 

 
 

Total restructuring and other related charges
 

 
$
13,895

 
 

 
 

 
Utilized
during
2011
 
Balance at
December 31,
2011
 
Utilized
during
2012
 
Balance at
December 31,
2012
Restructuring charges:
 
 
 
 
 
 
 
Employee severance
$
(486
)
 
$
224

 
$
(224
)
 
$
—

Employment agreement buy-outs
—

 
—

 
—

 
—

Lease terminations
(2,798
)
 
3,774

 
(1,739
)
 
2,035

Other assets, fees and facility exit costs
(359
)
 
22

 
(22
)
 
—

Total restructuring charges
$
(3,643
)
 
$
4,020

 
$
(1,985
)
 
$
2,035


As of December 31, 2012, the Company has made cumulative payments of approximately $25 million of severance and other employee-related costs for the Omnicare Full Potential Plan.  The remaining liabilities at December 31, 2012 represent amounts not yet paid relating to actions taken in connection with the program (primarily lease payments).  The provision/accrual and corresponding payment amounts relating to employee severance were accounted for 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 in accordance with the authoritative guidance regarding accounting for costs associated with exit or disposal activities.

Note 17 - 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

70

extent that resolution of contingencies results in amounts that vary from the Company's recorded liabilities, future earnings will be charged or credited accordingly.
On October 19, 2012, a qui tam complaint, entitled United States ex rel. Lesa Martino Whalen v. Omnicare, Inc., No. 8:11-cv-2297, was unsealed by the United States District Court for the Middle District of Florida, Tampa Division. The case had been filed on October 11, 2011 under seal in that court. The U.S. Department of Justice notified the court that it has declined to intervene in this action. The complaint was brought by Lesa Martino Whalen as a private party qui tam relator on behalf of the federal government. The action alleges civil violations of the False Claims Act based on allegations that the Company failed to comply with Florida pharmacy regulations. On February 14, 2013, this action was dismissed by the court based on Relator's notice of voluntary dismissal.
On October 5, 2011, a qui tam complaint, entitled United States ex rel. Donald Gale v. Omnicare, Inc., No. 1:10-cv-0127, was served on the Company. The case had been filed on January 19, 2010 under seal with the U.S. District Court for the Northern District of Ohio, Eastern Division. The complaint was unsealed by the Court on June 9, 2011 after the U.S. Department of Justice notified the court that it has declined to intervene in this action. The complaint was brought by Donald Gale as a private party qui tam relator on behalf of the federal government. The action alleges civil violations of the False Claims Act based on allegations that the Company provided certain customer facilities with discounts and other forms of remuneration in return for referrals of business in violation of the Anti-Kickback Statute, and offered pricing terms in violation of the "most favored customer" pricing laws of various state Medicaid plans. The Company filed a motion to dismiss on January 27, 2012. On September 26, 2012, the Court granted in part and denied in part the Company's motion to dismiss. Allegations concerning pricing and certain discounts remain in the case. The Company believes that the allegations are without merit and intends to vigorously defend itself in this action.
On August 4, 2011, a qui tam complaint, entitled United States of America ex rel. Fox Rx, Inc. v. Omnicare, Inc. and Neighborcare, Inc., No. 1:11-cv-0962, that was filed under seal with the U.S. District Court for the Northern District of Georgia, was unsealed by the Court. The U.S. Department of Justice has declined to intervene in this action. The Company was served with the complaint on November 23, 2011. The complaint was brought by Fox Rx, Inc. as a qui tam relator on behalf of the federal government. The action alleges civil violations of the False Claims Act based on allegations that the Company billed Medicare Part D for medically unnecessary antipsychotic drugs, increased the dispensing fees by artificially shortening the supply of prescribed medication, submitted claims for antipsychotic drugs without complying with Fox Rx, Inc.'s prior approval requirements, and waived or failed to collect copayments from patients to induce the use of prescription drugs. The Company filed a motion to dismiss on December 21, 2011. On August 29, 2012, the Court granted the Company's motion to dismiss, though granting leave to replead certain counts. On September 18, 2012, Relator filed its Third Amended Complaint reasserting its claims regarding copayments and antipsychotic drugs. On October 2 and 5, 2012, the Company filed motions to dismiss the Third Amended Complaint. The Company believes that the allegations are without merit and intends to vigorously defend itself in this action.
On August 24, 2011, a class action complaint entitled Ansfield v. Omnicare, Inc., et al. was filed on behalf of a putative class of all purchasers of the Company's common stock from January 10, 2007 through August 5, 2010 against the Company and certain of its current and former officers in the United States District Court for the Eastern District of Kentucky, alleging violations of federal securities law in connection with alleged false and misleading statements with respect to the Company's compliance with federal and state Medicare and Medicaid laws and regulations. On October 21, 2011, a class action complaint entitled Jacksonville Police & Fire Pension Fund v. Omnicare, Inc. et al. was filed on behalf of the same putative class of purchasers as is referenced in the Ansfield complaint, against the Company and certain of its current and former officers, in the U.S. District Court for the Eastern District of Kentucky. Plaintiffs allege substantially the same violations of federal securities law as are alleged in the Ansfield complaint. Both complaints seek unspecified money damages. The Court has appointed lead counsel and a consolidated amended complaint was filed on May 11, 2012. The Company filed a motion to dismiss on July 16, 2012. The Company believes that the claims asserted are without merit and intends to defend against them vigorously.
On September 15, 2010, Omnicare entered into settlement agreements, without any finding of wrongdoing or admission of liability, with the State of Michigan, the Commonwealth of Massachusetts and David M. Kammerer ("Relator"), relating to sealed qui tam litigation originally filed by Relator in Ohio federal court in August 2003.  The Company has paid $11.6 million pursuant to the Michigan settlement agreement and $9.45 million pursuant to the Massachusetts settlement agreement to resolve allegations of inappropriate billing, beginning in August 1997, under the states' usual and customary charge provisions.   The Company has paid Relator's expenses and attorneys' fees of $385 thousand.  The Company recorded provisions of $24.2 million for these payments, and a separate unrelated matter with another state which is still under review, in the quarter ended June 30, 2010.

On October 29, 2010, a qui tam complaint entitled United States ex rel. Banigan and Templin, et al. v. Organon USA, Inc., Omnicare, Inc. and Pharmerica, Inc., Civil No. 07-12153-RWZ, that had been filed under seal with the U.S. District Court in Boston, Massachusetts, was ordered unsealed by the court. The complaint was brought by James Banigan and Richard Templin, former employees of Organon, as private party qui tam relators on behalf of the federal government and several state and local governments.

71

The action alleges civil violations of the False Claims Act based on allegations that Organon USA, Inc. and its affiliates paid the Company and several other long-term care pharmacies rebates, post-purchase discounts and other forms of remuneration in return for purchasing pharmaceuticals from Organon and taking steps to increase the purchase of Organon's drugs in violation of the Anti-Kickback Statute. The U.S. Department of Justice has notified the court that it has declined to intervene in this action. The Court denied the Company's motion to dismiss on June 1, 2012, and the case is now in the discovery stage. The Company believes that the allegations are without merit and intends to vigorously defend itself in this action.
The Drug Enforcement Administration ("DEA") investigated alleged errors and deficiencies in paperwork requirements for controlled substance dispensing at several of the Company's pharmacies in Ohio and the United States Attorney's Office, Northern District of Ohio ("AUSA"), conducted an investigation relating to this matter. The AUSA conducted a criminal investigation of several current and former employees in connection with the DEA audits. The Company recorded a provision for this matter in the quarters ended December 31 and June 30, 2011 and December 31, 2010. On May 10, 2012, the Company agreed to a nationwide settlement of all matters subject to the DEA investigation in exchange for a payment of $50 million. The settlement included a release of all Omnicare owned pharmacies, all Omnicare joint venture pharmacies, and all present and former directors, officers, and employees from any civil penalty claim, or any administrative action, including denial, suspension, or revocation of any DEA registration, related to the subject matter of the investigation. The Company and current and former employees are no longer the subject of a criminal investigation by the AUSA in connection with the DEA audits.
The United States Department of Justice, through the United States Attorney's Office for the Western District of Virginia, is investigating whether the Company's activities in connection with agreements it had with the manufacturer of the pharmaceutical Depakote violated the False Claims Act or the Anti-Kickback Statute. The Company is cooperating with this investigation and believes that it has complied with applicable laws and regulations with respect to this matter.
The United States Department of Justice is investigating whether certain of the Company's practices relating to customer collections violated the False Claims Act or the Anti-Kickback Statute.  The Company is cooperating with this investigation and believes that it has complied with applicable laws and regulations with respect to this matter.

On April 14, 2010, a purported shareholder derivative action, entitled Manville Personal Injury Settlement Trust v. Gemunder, et al., Case No. 10-CI-01212, was filed in Kentucky State Court, against members of the Board and certain current and former officers of the Company, individually, purporting to assert claims for breach of fiduciary duty, unjust enrichment, gross mismanagement, and waste of corporate assets arising out of alleged violations of federal and state laws prohibiting the payment of illegal kickbacks and the submission of false claims in connection with the Medicare and Medicaid healthcare programs. Plaintiff alleges that the Board and senior management caused the company to violate these laws, which has resulted in over $100 million in fines and penalties paid by Omnicare and exposed the Company and certain individual defendants to potential civil and criminal liability. On April 27, 2011 the court entered an order denying defendants' motion to dismiss the complaint for failure to make a pre-suit demand and failure to state a claim. Defendants filed a notice of appeal from the decision in the Kentucky Court of Appeals, and plaintiff moved to dismiss that appeal on the grounds that the order denying defendants' motion to dismiss is not subject to an immediate appeal under Kentucky law. On October 6, 2011, the Kentucky Court of Appeals granted plaintiff's motion on the grounds that the appeal was premature. The case is now in the discovery stage. The individual defendants have denied all allegations of wrongdoing, believe the claims against them to be completely without merit and intend to vigorously defend themselves in this action.
On January 8, 2010, a qui tam complaint, entitled United States ex rel. Resnick and Nehls v. Omnicare, Inc., Morris Esformes, Phillip Esformes and Lancaster Ltd. d/b/a Lancaster Health Group, No. 1:07cv5777, that was filed under seal with the U.S. District Court in Chicago, Illinois was unsealed by the court. The U.S. Department of Justice and the State of Illinois have notified the court that they have declined to intervene in this action. The complaint was brought by Adam Resnick and Maureen Nehls as private party “qui tam relators” on behalf of the federal government and two state governments. The action alleges civil violations of the False Claims Act and certain state statutes based on allegations that Omnicare acquired certain institutional pharmacies at above-market rates in violation of the Anti-Kickback Statute and applicable state statutes. On December 1, 2010, Resnick filed a motion to withdraw as a relator, which the court granted on December 14, 2010. The Company recorded a provision for this matter in the quarter ended June 30, 2012.
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

72

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. Following the court's order dismissing some claims with prejudice, on September 15, 2011, Relator filed an Amended Complaint. He repeated his claim that the Company submitted false claims for certain ancillary services that did not conform with Medicare and Medicaid regulations. Relator also asserted a claim in the Amended Complaint that the Company submitted false claims to the Nevada Medicaid program for a particular drug. Relator repeated his retaliatory discharge claim. The Company filed a motion to dismiss the Amended Complaint on November 15, 2011. The Relator filed a response in opposition to that motion. On April 24, 2012, the court granted Omnicare's motion to dismiss without prejudice all claims except the retaliatory discharge claim. On May 29, 2012, Relator filed a Second Amended Complaint. The Company filed a motion to dismiss on June 28, 2012. On November 20, 2012, the court granted Omnicare's motion to dismiss with prejudice all claims except the retaliatory discharge claim. The Company filed its Answer to the remaining claim on December 11, 2012. The Company believes that the remaining allegation is without merit and intends to vigorously defend itself in this action.
On November 19, 2010, the Company was served with a second amended qui tam complaint entitled United States ex rel. Rostholder v. Omnicare, Inc. and Omnicare Distribution Center, LLC f/k/a Heartland Repack Services LLC, No. CCB-07-1283, that was filed under seal with the U.S. District Court in Baltimore, Maryland in May 2007. The U.S. Department of Justice notified the court on April 22, 2009 that it declined to intervene in this action. The complaint was brought by Barry Rostholder as a private party qui tam relator on behalf of the federal government and several state and local governments. The action, in general, alleges civil violations of the False Claims Act based on allegations that the Company submitted claims for reimbursement for drugs that were repackaged at its Heartland repackaging facility in violation of certain FDA regulations. These allegations arise from the previously disclosed issues experienced by the Company at its Heartland repackaging facility, which suspended operations in 2006. On September 30, 2011, the Company filed a motion to dismiss the lawsuit in its entirety. On August 14, 2012, the Court granted the Company's motion with prejudice as to the relator and without prejudice as to the United States. Relator filed an amended motion for reconsideration on September 10, 2012. On October 19, 2012, the Court denied relator's motion to reconsider. On November 16, 2012, relator filed a Notice of Appeal to the United States Court of Appeals for the Fourth Circuit from the District Court's denial of the motion to reconsider and granting of the Company's motion to dismiss. The Company believes that the claims in the complaint are without merit and intends to vigorously defend itself in this action if pursued.
As part of the previously disclosed civil settlement agreement entered into by the Company with the U.S. Attorney's Office, District of Massachusetts in November 2009, the Company also entered into an amended and restated corporate integrity agreement (“CIA”) with the Department of Health and Human Services Office of the Inspector General with a term of five years from November 2, 2009. Pursuant to the CIA, the Company is required, among other things, to (i) create procedures designed to ensure that each existing, new or renewed arrangement with any actual or potential source of health care business or referrals to Omnicare or any actual or potential recipient of health care business or referrals from Omnicare does not violate the Anti-Kickback Statute, 42 U.S.C. (§) 1320a-7b(b) or related regulations, directives and guidance, including creating and maintaining a database of such arrangements; (ii) retain an independent review organization to review the Company's compliance with the terms of the CIA and report to OIG regarding that compliance; and (iii) provide training for certain Company employees as to the Company's requirements under the CIA. The requirements of the Company's prior corporate integrity agreement obligating the Company to create and maintain procedures designed to ensure that all therapeutic interchange programs are developed and implemented by Omnicare consistent with the CIA and federal and state laws for obtaining prior authorization from the prescriber before making a therapeutic interchange of a drug and to maintain procedures for the accurate preparation and submission of claims for federal health care program beneficiaries in hospice programs, have been incorporated into the amended and restated CIA without modification. The requirements of the CIA have resulted in increased costs to maintain the Company's compliance program and greater scrutiny by federal regulatory authorities. Violations of the corporate integrity agreement could subject the Company to significant monetary penalties. Consistent with the CIA, the Company is reviewing its contracts to ensure compliance with applicable laws and regulations. As a result of this review, pricing under certain of its consultant pharmacist services contracts have been increased and will continue to be increased, and these price increases have resulted and may continue to result in the loss of certain contracts.
In February 2006, two substantially similar putative class action lawsuits were filed in the United States District Court for the Eastern District of Kentucky, and were consolidated and entitled Indiana State Dist. Council of Laborers & HOD Carriers Pension & Welfare Fund v. Omnicare, Inc., et al., No. 2:06cv26. The amended consolidated complaint was filed against Omnicare, three of its officers and two of its directors and purported to be brought on behalf of all open-market purchasers of Omnicare common stock from August 3, 2005 through July 27, 2006, as well as all purchasers who bought their shares in the Company's public offering in December 2005. The complaint contained claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (and Rule 10b-5) and Section 11 of the Securities Act of 1933 and sought, among other things, compensatory damages and injunctive relief. Plaintiffs alleged that Omnicare (i) artificially inflated its earnings (and failed to file GAAP-compliant financial statements) by engaging in improper generic drug substitution, improper revenue recognition and overvaluation of receivables and inventories; (ii) failed to timely disclose its contractual dispute with UnitedHealth Group Inc.; (iii) failed to timely record

73

certain special litigation reserves; and (iv) made other allegedly false and misleading statements about the Company's business, prospects and compliance with applicable laws and regulations. The defendants filed a motion to dismiss the amended complaint on March 12, 2007, and on October 12, 2007, the court dismissed the case. On November 9, 2007, plaintiffs appealed the dismissal to the United States Court of Appeals for the Sixth Circuit. On October 21, 2009, the Sixth Circuit Court of Appeals generally affirmed the district court's dismissal, dismissing plaintiff's claims for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. However, the appellate court reversed the dismissal for the claim brought for violation of Section 11 of the Securities Act of 1933, and returned the case to the district court for further proceedings. On July 14, 2011, the court granted plaintiffs' motion to file a third amended complaint. This complaint asserts a claim under Section 11 of the Securities Act of 1933 on behalf of all purchasers of Omnicare common stock in the December 2005 public offering. The new complaint alleges that the 2005 registration statement contained false and misleading statements regarding Omnicare's policy of compliance with all applicable laws and regulations with particular emphasis on allegations of violation of the federal anti-kickback law in connection with three of Omnicare's acquisitions, Omnicare's contracts with two of its suppliers and its provision of pharmacist consultant services. On August 19, 2011, the defendants filed a motion to dismiss plaintiffs' most recent complaint and on February 13, 2012 the court dismissed the case and struck the case from the docket. On March 12, 2012, plaintiffs filed a notice of appeal in the United States Court of Appeals for the Sixth Circuit.
On February 13, 2006, two substantially similar shareholder derivative actions, entitled Isak v. Gemunder, et al., Case No. 06-CI-390, and Fragnoli v. Hutton, et al., Case No. 06-CI-389, were filed in Kentucky State Circuit Court, Kenton Circuit, against the members of Omnicare's board of directors, individually, purporting to assert claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment arising out of the Company's alleged violations of federal and state health care laws based upon the same purportedly improper generic drug substitution that is the subject of the federal purported class action lawsuits. The complaints seek, among other things, damages, restitution and injunctive relief. The Isak and Fragnoli actions were later consolidated by agreement of the parties. The Company believes that the allegations are without merit and intends to vigorously defend itself in this action.
During 2006, the Company experienced certain quality control and product recall issues, as well as fire damage, at one of its repackaging facilities.  In connection with the resolution of these matters (the “Repack Matters”) the Company decided not to reopen this facility.  The Company has been cooperating with federal and state officials who have been conducting investigations relating to the Repack Matters and certain billing issues. The Company believes all investigations into the Repack Matters have been closed.  The Company received insurance recoveries, net of increased costs in the 2010 period, of approximately $(10.5) million and $(1.2) million for the years ended December 31, 2011 and 2010, respectively.
The years ended December 31, 2012, 2011 and 2010 included a $49.4 million, $55.7 million and $113.7 million charge, respectively, reflected in “Settlement, litigation and other related charges” on the Consolidated Statements of Comprehensive Income, primarily for estimated litigation and other related settlements and associated professional expenses for resolution of certain regulatory matters with the federal government and various states and a qui tam lawsuit, certain large customer disputes, the investigation by the federal government and certain states relating to drug substitutions and costs associated with the purported class and derivative actions against the Company.  In connection with Omnicare's participation in Medicare, Medicaid and other healthcare programs, the Company is subject to various inspections, audits, inquiries and investigations by governmental/regulatory authorities responsible for enforcing the laws and regulations to which the Company is subject.  Further, the Company maintains a compliance program which establishes certain routine periodic monitoring of the accuracy of the Company's billing systems and other regulatory compliance matters and encourages the reporting of errors and inaccuracies.  As a result of the compliance program, Omnicare has made, and will continue to make, disclosures to the applicable governmental agencies of amounts, if any, determined to represent over-payments from the respective programs and, where applicable, those amounts, as well as any amounts relating to certain inspections, audits, inquiries and investigations activity are included in “Settlement, litigation and other related charges” on the Consolidated Statements of Comprehensive Income.

Although the Company cannot know 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 other billing matters, that these matters will be resolved in an amount that would not exceed the amount of the pretax charges previously 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. Further, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the government. Some states have adopted similar state whistleblower and false claims provisions. The Company from time to time receives government inquiries from federal and state agencies regarding compliance with various healthcare laws. In addition, 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

74

of discussions on these matters. Omnicare records accruals for such contingencies to the extent that the Company concludes that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These matters are continuously being evaluated and, in many cases, are being contested by the Company and the outcome is not predictable. The inherently unpredictable nature of legal proceedings may be exacerbated by various factors from time to time, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes. Consequently, unless otherwise stated, no estimate of the possible loss or range of loss in excess of the amounts accrued, if any, can be made at this time regarding the matters described above. Further, 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 are unknown and not currently predictable.  Accordingly, no liabilities have been recorded for the indemnifications.

Note 18 - Segment Information

The Company is organized in two operating segments, Long-Term Care Group ("LTC") and Specialty Care Group ("SCG"). These segments are based on the operations of the underlying businesses and the customers they serve. The Company's larger reportable segment is LTC, which primarily provides distribution of pharmaceuticals, related pharmacy consulting and other ancillary services and medical supplies. LTC's customers are primarily skilled nursing, assisted living and other providers of healthcare services. The Company’s other reportable segment is SCG, which provides specialty pharmacy, key commercialization services for the biopharmaceutical industry and end-of-life pharmaceutical care management for hospice care agencies. The primary components of the "Corporate/Other" segment are the Company's corporate management oversight and administration, including its information technology and data management services, as well as other consolidating and eliminating entries, which have not been charged to reportable segments. The Company evaluates the performance of its segments based on revenue and operating income, and does not include segment assets or nonoperating income/expense items for management reporting purposes.


75

The table below presents information about the segments as of and for the years ended December 31, 2012, 2011 and 2010 (in thousands):

 
 
For the years ended December 31,
2012:
 
LTC
 
SCG
 
Corporate/Other
 
Consolidated
Totals
Net sales
 
$
4,848,341

 
$
1,301,761

 
$
10,286

 
$
6,160,388

Depreciation and amortization expense
 
(69,818
)
 
(15,595
)
 
(50,528
)
 
(135,941
)
Settlement, litigation and other related charges
 
(49,175
)
 
(200
)
 
—

 
(49,375
)
Other charges, net
 
(2,568
)
 
(2,090
)
 
(63,145
)
 
(67,803
)
Operating income (loss) from continuing operations
 
562,675

 
129,218

 
(244,715
)
 
447,178

2011:
 
 

 
 

 
 

 
 

Net sales
 
$
5,123,477

 
$
1,044,191

 
$
15,254

 
$
6,182,922

Depreciation and amortization expense
 
(64,484
)
 
(16,221
)
 
(52,427
)
 
(133,132
)
Settlement, litigation and other related charges
 
(55,031
)
 
(643
)
 
—

 
(55,674
)
Other charges, net
 
(15,049
)
 
—

 
(1,044
)
 
(16,093
)
Operating income (loss) from continuing operations
 
476,800

 
98,938

 
(142,795
)
 
432,943

2010:
 
 

 
 

 
 

 
 

Net sales
 
$
5,175,730

 
$
838,790

 
$
16,150

 
$
6,030,670

Depreciation and amortization expense
 
(58,271
)
 
(17,094
)
 
(75,181
)
 
(150,546
)
Settlement, litigation and other related charges
 
(113,279
)
 
(430
)
 
—

 
(113,709
)
Other charges, net
 
(13,745
)
 
(14,173
)
 
(119,313
)
 
(147,231
)
Operating income (loss) from continuing operations
 
374,110

 
75,039

 
(259,995
)
 
189,154


The Company's continuing operations were primarily located in the United States with one pharmacy located in Canada which was not material to the consolidated sales or total assets of Omnicare and was disposed of in the third quarter of 2012.


76


Note 19 - Summary of Quarterly Results

The following table presents the Company's unaudited quarterly financial information for 2012 and 2011 (in thousands, except per share data):

 
First
 
Second
 
Third
 
Fourth
 
Full
2012
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Year
Net sales
$
1,593,068

 
$
1,536,027

 
$
1,501,348

 
$
1,529,945

 
$
6,160,388

Cost of sales
1,224,968

 
1,168,681

 
1,130,053

 
1,153,281

 
4,676,983

Gross profit
368,100

 
367,346

 
371,295

 
376,664

 
1,483,405

Selling, general and administrative expenses
200,124

 
201,878

 
203,550

 
214,090

 
819,642

Provision for doubtful accounts
24,431

 
24,078

 
24,047

 
26,851

 
99,407

Settlement, litigation and other related charges
7,203

 
26,093

 
4,931

 
11,148

 
49,375

Other charges
11,512

 
49,209

 
5,036

 
2,046

 
67,803

Operating income
124,830

 
66,088

 
133,731

 
122,529

 
447,178

Interest expense, net of investment income
(30,834
)
 
(35,574
)
 
(39,036
)
 
(29,659
)
 
(135,103
)
Income from continuing operations before income taxes
93,996

 
30,514

 
94,695

 
92,870

 
312,075

Income tax provision
38,257

 
11,822

 
33,270

 
33,852

 
117,201

Income from continuing operations
55,739

 
18,692

 
61,425

 
59,018

 
194,874

Loss from discontinued operations


 
—

 
—

 
—

 
—

Net income
$
55,739

 
$
18,692

 
$
61,425

 
$
59,018

 
$
194,874

Earnings per common share - Basic:(a)
 

 
 

 
 

 
 

 
 

Continuing operations
$
0.50

 
$
0.17

 
$
0.56

 
$
0.55

 
$
1.78

Discontinued operations
—

 
—

 
—

 
—

 
—

Net income
$
0.50

 
$
0.17

 
$
0.56

 
$
0.55

 
$
1.78

Earnings per common share - Diluted:(a)
 

 
 

 
 

 
 

 
 

Continuing operations
$
0.48

 
$
0.17

 
$
0.55

 
$
0.54

 
$
1.73

Discontinued operations
—

 
—

 
—

 
—

 
—

Net income
$
0.48

 
$
0.17

 
$
0.55

 
$
0.54

 
$
1.73

Dividends per common share
$
0.0700

 
$
0.0700

 
$
0.1400

 
$
0.1400

 
$
0.4200

Weighted average number of common shares outstanding:
 

 
 

 
 

 
 

 
 

Basic
111,487

 
110,580

 
109,315

 
106,773

 
109,531

Diluted
116,500

 
113,472

 
111,951

 
110,074

 
112,988

Comprehensive income
$
56,161

 
$
17,003

 
$
63,354

 
$
58,226

 
$
194,744



77

 
First
 
Second
 
Third
 
Fourth
 
Full
2011
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Year
Net sales
$
1,525,571

 
$
1,555,906

 
$
1,544,360

 
$
1,557,085

 
$
6,182,922

Cost of sales
1,190,612

 
1,219,513

 
1,198,299

 
1,197,401

 
4,805,825

Gross profit
334,959

 
336,393

 
346,061

 
359,684

 
1,377,097

Selling, general and administrative expenses
190,166

 
192,474

 
191,293

 
199,902

 
773,835

Provision for doubtful accounts
24,530

 
24,357

 
24,255

 
25,410

 
98,552

Settlement, litigation and other related charges
6,013

 
19,816

 
6,742

 
23,103

 
55,674

Other charges
1,889

 
2,332

 
6,718

 
5,154

 
16,093

Operating income
112,361

 
97,414

 
117,053

 
106,115

 
432,943

Interest expense, net of investment income
(34,382
)
 
(33,730
)
 
(55,926
)
 
(36,080
)
 
(160,118
)
Income from continuing operations before income taxes
77,979

 
63,684

 
61,127

 
70,035

 
272,825

Income tax provision
28,824

 
27,403

 
23,343

 
31,723

 
111,293

Income from continuing operations
49,155

 
36,281

 
37,784

 
38,312

 
161,532

Loss from discontinued operations
(19,851
)
 
(37,728
)
 
(9,900
)
 
(7,129
)
 
(74,608
)
Net income (loss)
$
29,304

 
$
(1,447
)
 
$
27,884

 
$
31,183

 
$
86,924

Earnings (loss) per common share - Basic:(a)
 

 
 

 
 

 
 

 
 

Continuing operations
$
0.43

 
$
0.32

 
$
0.34

 
$
0.34

 
$
1.43

Discontinued operations
(0.17
)
 
(0.33
)
 
(0.09
)
 
(0.06
)
 
(0.66
)
Net income (loss)
$
0.26

 
$
(0.01
)
 
$
0.25

 
$
0.28

 
$
0.77

Earnings (loss) per common share - Diluted:(a)
 

 
 

 
 

 
 

 
 

Continuing operations
$
0.43

 
$
0.32

 
$
0.33

 
$
0.34

 
$
1.41

Discontinued operations
(0.17
)
 
(0.33
)
 
(0.09
)
 
(0.06
)
 
(0.65
)
Net income (loss)
$
0.26

 
$
(0.01
)
 
$
0.24

 
$
0.27

 
$
0.76

Dividends per common share
$
0.0325

 
$
0.0400

 
$
0.0400

 
$
0.0400

 
$
0.1525

Weighted average number of common shares outstanding:
 

 
 

 
 

 
 

 
 

Basic
114,129

 
113,487

 
112,729

 
111,687

 
113,000

Diluted
115,064

 
114,701

 
114,644

 
114,344

 
114,781

Comprehensive income (loss)
$
25,925

 
$
(981
)
 
$
24,002

 
$
32,006

 
$
80,952


Notes to Summary of Quarterly Results:

(a)
Earnings per share is calculated independently for each separately reported quarterly and full year period.  Accordingly, the sum of the separately reported quarters may not necessarily be equal to the per share amount for the corresponding full year period, as independently calculated.

Note 20 - Guarantor Subsidiaries
The Company’s 7.75% Senior Subordinated Notes due 2020, the 3.75% Convertible Notes due 2025 and the 3.75% Convertible Notes due 2042 are fully and unconditionally guaranteed subject to certain customary release provisions 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 December 31, 2012 and 2011 for the balance sheets, as well as the statements of comprehensive income and the statements of cash flows for each of the three years in the period ended December 31, 2012.  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.  No consolidating/eliminating adjustments column is presented for the condensed consolidating statements of cash flows since there were no significant consolidating/eliminating adjustment amounts during the periods presented.

78

Note 20 - Guarantor Subsidiaries - Continued
Summary Consolidating Statements of Comprehensive Income
(in thousands)
 
For the years ended December 31,
2012:
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating / 
Eliminating Adjustments
 
Omnicare, Inc. and Subsidiaries
Net sales
 
$
—

 
$
6,023,153

 
$
137,235

 
$
—

 
$
6,160,388

Cost of sales
 
—

 
4,589,932

 
87,051

 
—

 
4,676,983

Gross profit
 
—

 
1,433,221

 
50,184

 
—

 
1,483,405

Selling, general and administrative expenses
 
4,816

 
793,205

 
21,621

 
—

 
819,642

Provision for doubtful accounts
 
—

 
97,862

 
1,545

 
—

 
99,407

Settlement, litigation and other related charges
 
—

 
49,375

 
—

 
—

 
49,375

Other charges
 
35,092

 
36,723

 
(4,012
)
 
—

 
67,803

Operating (loss) income
 
(39,908
)
 
456,056

 
31,030

 
—

 
447,178

Interest expense, net of investment income
 
(133,368
)
 
(1,089
)
 
(646
)
 
—

 
(135,103
)
(Loss) income from continuing operations before income taxes
 
(173,276
)
 
454,967

 
30,384

 
—

 
312,075

Income tax (benefit) expense
 
(66,763
)
 
173,729

 
10,235

 
—

 
117,201

(Loss) income from continuing operations
 
(106,513
)
 
281,238

 
20,149

 
—

 
194,874

Equity in net income of subsidiaries
 
301,387

 
—

 
—

 
(301,387
)
 
—

Net income
 
$
194,874

 
$
281,238

 
$
20,149

 
$
(301,387
)
 
$
194,874

Comprehensive income
 
$
194,744

 
$
281,238

 
$
21,533

 
$
(302,771
)
 
$
194,744

2011:
 
 

 
 

 
 

 
 

 
 

Net sales
 
$
—

 
$
6,057,114

 
$
125,808

 
$
—

 
$
6,182,922

Cost of sales
 
—

 
4,720,920

 
84,905

 
—

 
4,805,825

Gross profit
 
—

 
1,336,194

 
40,903

 
—

 
1,377,097

Selling, general and administrative expenses
 
15,579

 
746,579

 
11,677

 
—

 
773,835

Provision for doubtful accounts
 
—

 
96,623

 
1,929

 
—

 
98,552

Settlement, litigation and other related charges
 
—

 
55,674

 
—

 
—

 
55,674

Other charges
 
—

 
16,093

 
—

 
—

 
16,093

Operating (loss) income
 
(15,579
)
 
421,225

 
27,297

 
—

 
432,943

Interest expense, net of investment income
 
(158,621
)
 
(1,491
)
 
(6
)
 
—

 
(160,118
)
(Loss) income from continuing operations before income taxes
 
(174,200
)
 
419,734

 
27,291

 
—

 
272,825

Income tax (benefit) expense
 
(66,753
)
 
167,588

 
10,458

 
—

 
111,293

(Loss) income from continuing operations
 
(107,447
)
 
252,146

 
16,833

 
—

 
161,532

Loss from discontinued operations
 
—

 
(71,425
)
 
(3,183
)
 
—

 
(74,608
)
Equity in net income of subsidiaries
 
194,371

 
—

 
—

 
(194,371
)
 
—

Net income
 
$
86,924

 
$
180,721

 
$
13,650

 
$
(194,371
)
 
$
86,924

Comprehensive income
 
$
80,952

 
$
180,721

$
—

$
8,959

 
$
(189,680
)
 
$
80,952

2010:
 
 

 
 

 
 

 
 

 
 

Net sales
 
$
—

 
$
5,891,219

 
$
139,451

 
$
—

 
$
6,030,670

Cost of sales
 
—

 
4,590,118

 
104,322

 
—

 
4,694,440

Gross profit
 
—

 
1,301,101

 
35,129

 
—

 
1,336,230

Selling, general and administrative expenses
 
9,569

 
722,789

 
15,250

 
—

 
747,608

Provision for doubtful accounts
 
—

 
134,391

 
2,239

 
—

 
136,630

Settlement, litigation and other related charges
 
—

 
113,709

 
—

 
—

 
113,709

Other charges
 
—

 
149,129

 
—

 
—

 
149,129

Operating (loss) income
 
(9,569
)
 
181,083

 
17,640

 
—

 
189,154

Interest expense, net of investment income
 
(162,925
)
 
7,279

 
—

 
—

 
(155,646
)
(Loss) income from continuing operations before income taxes
 
(172,494
)
 
188,362

 
17,640

 
—

 
33,508

Income tax (benefit) expense
 
(64,478
)
 
82,225

 
1,297

 
—

 
19,044

(Loss) income from continuing operations
 
(108,016
)
 
106,137

 
16,343

 
—

 
14,464

Loss from discontinued operations
 
—

 
(85,684
)
 
(34,889
)
 
—

 
(120,573
)
Equity in net income of subsidiaries
 
1,907

 
—

 
—

 
(1,907
)
 
—

Net income (loss)
 
$
(106,109
)
 
$
20,453

 
$
(18,546
)
 
$
(1,907
)
 
$
(106,109
)
Comprehensive income (loss)
 
$
(75,555
)
 
$
20,453

 
$
(22,353
)
 
$
1,900

 
$
(75,555
)

79

Note 20 - Guarantor Subsidiaries - Continued

Condensed Consolidating Balance Sheets
(in thousands)
As of December 31, 2012:
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating / 
Eliminating Adjustments
 
Omnicare, Inc. and Subsidiaries
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
383,674

 
$
58,312

 
$
12,227

 
$
—

 
$
454,213

Restricted cash
 
—

 
1,066

 
—

 
—

 
1,066

Accounts receivable, net (including intercompany)
 
—

 
849,753

 
197,370

 
(190,071
)
 
857,052

Inventories
 
—

 
379,448

 
6,250

 
—

 
385,698

Deferred income tax benefits, net-current
 
—

 
137,736

 
—

 
(1,550
)
 
136,186

Other current assets
 
1,765

 
248,833

 
14,871

 
(10,825
)
 
254,644

Total current assets
 
385,439

 
1,675,148

 
230,718

 
(202,446
)
 
2,088,859

Properties and equipment, net
 
—

 
276,056

 
6,604

 
—

 
282,660

Goodwill
 
—

 
4,219,900

 
37,059

 
—

 
4,256,959

Identifiable intangible assets, net
 
—

 
193,852

 
3,021

 
—

 
196,873

Other noncurrent assets
 
75,336

 
93,508

 
11,382

 
(16,313
)
 
163,913

Investment in subsidiaries
 
5,453,702

 
—

 
—

 
(5,453,702
)
 
—

Total assets
 
$
5,914,477

 
$
6,458,464

 
$
288,784

 
$
(5,672,461
)
 
$
6,989,264

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

 
 

 
 

 


Current liabilities (including intercompany)
 
$
60,454

 
$
587,025

 
$
35,431

 
$
(200,896
)
 
$
482,014

Long-term debt, notes and convertible debentures
 
2,012,807

 
17,223

 
5,000

 
(5,000
)
 
2,030,030

Deferred income tax liabilities, net-noncurrent
 
335,504

 
559,405

 
21,301

 
(1,550
)
 
914,660

Other noncurrent liabilities
 
—

 
68,161

 
—

 
(11,313
)
 
56,848

Stockholders’ equity
 
3,505,712

 
5,226,650

 
227,052

 
(5,453,702
)
 
3,505,712

Total liabilities and stockholders’ equity
 
$
5,914,477

 
$
6,458,464

 
$
288,784

 
$
(5,672,461
)
 
$
6,989,264

As of December 31, 2011:
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
460,253

 
$
101,786

 
$
18,223

 
$
—

 
$
580,262

Restricted cash
 
—

 
2,336

 
—

 
—

 
2,336

Accounts receivable, net (including intercompany)
 
—

 
920,829

 
119,614

 
(109,129
)
 
931,314

Inventories
 
—

 
412,081

 
7,297

 
—

 
419,378

Deferred income tax benefits, net-current
 
—

 
156,139

 
—

 
(2,695
)
 
153,444

Other current assets
 
3,865

 
193,079

 
13,693

 
—

 
210,637

Total current assets
 
464,118

 
1,786,250

 
158,827

 
(111,824
)
 
2,297,371

Properties and equipment, net
 
—

 
220,066

 
5,191

 
—

 
225,257

Goodwill
 
—

 
4,171,328

 
79,251

 
—

 
4,250,579

Identifiable intangible assets, net
 
—

 
229,051

 
6,219

 
—

 
235,270

Other noncurrent assets
 
77,485

 
100,725

 
6,423

 
—

 
184,633

Investment in subsidiaries
 
5,593,155

 
—

 
—

 
(5,593,155
)
 
—

Total assets
 
$
6,134,758

 
$
6,507,420

 
$
255,911

 
$
(5,704,979
)
 
$
7,193,110

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities (including intercompany)
 
$
59,596

 
$
569,623

 
$
19,977

 
$
(109,129
)
 
$
540,067

Long-term debt, notes and convertible debentures
 
1,957,167

 
11,107

 
—

 
—

 
1,968,274

Deferred income tax liabilities, net-noncurrent
 
322,559

 
500,242

 
18,751

 
(2,695
)
 
838,857

Other noncurrent liabilities
 
—

 
50,476

 
—

 
—

 
50,476

Stockholders’ equity
 
3,795,436

 
5,375,972

 
217,183

 
(5,593,155
)
 
3,795,436

Total liabilities and stockholders’ equity
 
$
6,134,758

 
$
6,507,420

 
$
255,911

 
$
(5,704,979
)
 
$
7,193,110


80

Note 20 - Guarantor Subsidiaries - Continued

Condensed Consolidating Statements of Cash Flows
(in thousands)

 
 
For the year ended December 31,
2012:
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Omnicare, Inc. and Subsidiaries
Cash flows from operating activities:
 
 
 
 
 
 
 
 
Net cash flows (used in) / from operating activities
 
$
(88,461
)
 
$
636,402

 
$
(3,457
)
 
$
544,484

Cash flows from investing activities:
 
 

 
 

 
 

 
 

Acquisition of businesses, net of cash received
 
—

 
(34,873
)
 
—

 
(34,873
)
Divestiture of businesses, net
 
—

 
19,207

 
—

 
19,207

Capital expenditures
 
—

 
(97,579
)
 
(2,341
)
 
(99,920
)
Marketable securities
 
(25,514
)
 
—

 
496

 
(25,018
)
Transfer of cash to trusts for employee health and severance costs, net of payments out of the trusts
 
—

 
1,326

 
—

 
1,326

Other
 
—

 
(56
)
 
—

 
(56
)
Net cash flows used in investing activities
 
(25,514
)
 
(111,975
)
 
(1,845
)
 
(139,334
)
Cash flows from financing activities:
 
 

 
 

 
 

 
 

Payments on term loans
 
(24,688
)
 
—

 
—

 
(24,688
)
Proceeds from long-term borrowings and obligations
 
425,000

 
—

 
—

 
425,000

Payments on long-term borrowings and obligations
 
(453,573
)
 
—

 
—

 
(453,573
)
Capped Call transaction
 
(48,126
)
 
—

 
—

 
(48,126
)
Fees paid for financing activities
 
(7,566
)
 
—

 
—

 
(7,566
)
Decrease in cash overdraft balance
 
(12
)
 
(14,915
)
 
—

 
(14,927
)
Payments for Omnicare common stock repurchases
 
(388,968
)
 
—

 
—

 
(388,968
)
Proceeds for stock awards and exercise of stock options, net of stock tendered in payment
 
24,951

 
—

 
—

 
24,951

Dividends paid
 
(45,214
)
 
—

 
—

 
(45,214
)
Other
 
555,592

 
(552,986
)
 
(694
)
 
1,912

Net cash flows from  / (used in) financing activities
 
37,396

 
(567,901
)
 
(694
)
 
(531,199
)
Net decrease in cash and cash equivalents
 
(76,579
)
 
(43,474
)
 
(5,996
)
 
(126,049
)
Cash and cash equivalents at beginning of year
 
460,253

 
101,786

 
18,223

 
580,262

Cash and cash equivalents at end of year
 
$
383,674

 
$
58,312

 
$
12,227

 
$
454,213



81

Note 20 - Guarantor Subsidiaries - Continued

Condensed Consolidating Statements of Cash Flows - Continued
(in thousands)

 
 
For the year ended December 31,
2011:
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Omnicare, Inc. and Subsidiaries
Cash flows from operating activities:
 
 
 
 
 
 
 
 
Net cash flows (used in) / from operating activities
 
$
(118,642
)
 
$
665,702

 
$
2,962

 
$
550,022

Cash flows from investing activities:
 
 

 
 

 
 

 


Acquisition of businesses, net of cash received
 
—

 
(101,933
)
 
—

 
(101,933
)
Divestiture of businesses, net
 
—

 
13,099

 
—

 
13,099

Capital expenditures
 
—

 
(60,396
)
 
(2,410
)
 
(62,806
)
Transfer of cash to trusts for employee health and severance costs, net of payments out of the trusts
 
—

 
(275
)
 
—

 
(275
)
Other
 
—

 
(3,486
)
 
(10
)
 
(3,496
)
Net cash flows used in investing activities
 
—

 
(152,991
)
 
(2,420
)
 
(155,411
)
Cash flows from financing activities:
 
 

 
 

 
 

 
 

Payments on term loans
 
(5,625
)
 
—

 
—

 
(5,625
)
Proceeds from long-term borrowings and obligations
 
600,000

 
—

 
—

 
600,000

Payments on long-term borrowings and obligations
 
(777,609
)
 
—

 
—

 
(777,609
)
Fees paid for financing activities
 
(13,780
)
 
—

 
—

 
(13,780
)
Increase in cash overdraft balance
 
5,921

 
5,753

 
—

 
11,674

Payments for Omnicare common stock repurchases
 
(140,127
)
 
—

 
—

 
(140,127
)
Proceeds for stock awards and exercise of stock options, net of stock tendered in payment
 
30,712

 
—

 
—

 
30,712

Dividends paid
 
(17,217
)
 
—

 
—

 
(17,217
)
Other
 
435,842

 
(434,276
)
 
1,574

 
3,140

Net cash flows from  / (used in) financing activities
 
118,117

 
(428,523
)
 
1,574

 
(308,832
)
Net (decrease) increase in cash and cash equivalents
 
(525
)
 
84,188

 
2,116

 
85,779

Less increase in cash and cash equivalents of discontinued operations
 
—

 
—

 
1

 
1

(Decrease) increase in cash and cash equivalents of continuing operations
 
(525
)
 
84,188

 
2,115

 
85,778

Cash and cash equivalents at beginning of year
 
460,778

 
17,598

 
16,108

 
494,484

Cash and cash equivalents at end of year
 
$
460,253

 
$
101,786

 
$
18,223

 
$
580,262


82

Note 20 - Guarantor Subsidiaries - Continued

Condensed Consolidating Statements of Cash Flows - Continued
(in thousands)

 
 
For the year ended December 31,
2010:
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Omnicare, Inc. and Subsidiaries
Cash flows from operating activities:
 
 
 
 
 
 
 
 
Net cash flows (used in) / from operating activities
 
$
(86,774
)
 
$
443,924

 
$
11,465

 
$
368,615

Cash flows from investing activities:
 
 

 
 

 
 

 
 

Acquisition of businesses, net of cash received
 
—

 
(111,812
)
 
—

 
(111,812
)
Divestiture of businesses, net
 
—

 
—

 
—

 
—

Capital expenditures
 
—

 
(22,496
)
 
(1,021
)
 
(23,517
)
Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust
 
—

 
11,082

 
—

 
11,082

Other
 
—

 
(1,791
)
 
(14
)
 
(1,805
)
Net cash flows used in investing activities
 
—

 
(125,017
)
 
(1,035
)
 
(126,052
)
Cash flows from financing activities:
 
 

 
 

 
 

 
 

Payments on term loans
 
(125,000
)
 
—

 
—

 
(125,000
)
Proceeds from long-term borrowings and obligations
 
975,000

 
—

 
—

 
975,000

Payments on long-term borrowings and obligations
 
(726,533
)
 
—

 
—

 
(726,533
)
Fees paid for financing activities
 
(33,249
)
 


 


 
(33,249
)
Increase in cash overdraft balance
 
9,744

 
8,477

 
—

 
18,221

Payments for Omnicare common stock repurchases
 
(100,942
)
 
—

 
—

 
(100,942
)
Payments for stock awards and exercise of stock options, net of stock tendered in payment
 
(13,989
)
 
—

 
—

 
(13,989
)
Dividends paid
 
(12,839
)
 
—

 
—

 
(12,839
)
Other
 
344,494

 
(342,826
)
 
(6,957
)
 
(5,289
)
Net cash flows from  / (used in) financing activities
 
316,686

 
(334,349
)
 
(6,957
)
 
(24,620
)
Net increase (decrease) in cash and cash equivalents
 
229,912

 
(15,442
)
 
3,473

 
217,943

Less increase (decrease) in cash and cash equivalents of discontinued operations
 
—

 
(838
)
 
4

 
(834
)
Increase (decrease) in cash and cash equivalents of continuing operations
 
229,912

 
(14,604
)
 
3,469

 
218,777

Cash and cash equivalents at beginning of year
 
230,866

 
32,202

 
12,639

 
275,707

Cash and cash equivalents at end of year
 
$
460,778

 
$
17,598

 
$
16,108

 
$
494,484


83

Note 20 - Guarantor Subsidiaries - Continued

The Company’s 3.25% Convertible Debentures due 2035 are fully and unconditionally guaranteed subject to certain customary release provisions on an unsecured basis by Omnicare Purchasing Company, LP, a wholly-owned subsidiary of the Company (the “Guarantor Subsidiary”).  The following condensed consolidating financial data illustrates the composition of Omnicare, Inc. (“Parent”), the Guarantor Subsidiary and the Non-Guarantor Subsidiaries as of December 31, 2012 and 2011 for the balance sheets, as well as the statements of comprehensive income and the statements of cash flows for each of the three years in the period ended December 31, 2012.  Management believes separate complete financial statements of the Guarantor Subsidiary would not provide information that would be necessary for evaluating the sufficiency of the Guarantor Subsidiary, and thus are not presented.  The Guarantor Subsidiary does not have any material net cash flows in the condensed consolidating statements of cash flows.  No consolidating/eliminating adjustments column is presented for the condensed consolidating statements of cash flows since there were no significant consolidating/eliminating adjustment amounts during the periods presented.

84

Note 20 - Guarantor Subsidiaries - Continued

Summary Consolidating Statements of Comprehensive Income
(in thousands)
 
 
For the years ended December 31,
2012:
 
Parent
 
Guarantor Subsidiary
 
Non-Guarantor Subsidiaries
 
Consolidating/ 
Eliminating Adjustments
 
Omnicare, Inc. and Subsidiaries
Net sales
 
$
—

 
$
—

 
$
6,160,388

 
$
—

 
$
6,160,388

Cost of sales
 
—

 
—

 
4,676,983

 
—

 
4,676,983

Gross profit
 
—

 
—

 
1,483,405

 
—

 
1,483,405

Selling, general and administrative expenses
 
4,816

 
1,438

 
813,388

 
—

 
819,642

Provision for doubtful accounts
 
—

 
—

 
99,407

 
—

 
99,407

Settlement, litigation and other related charges
 
—

 
—

 
49,375

 
—

 
49,375

Other charges
 
35,092

 
—

 
32,711

 
—

 
67,803

Operating (loss) income
 
(39,908
)
 
(1,438
)
 
488,524

 
—

 
447,178

Interest expense, net of investment income
 
(133,368
)
 
—

 
(1,735
)
 
—

 
(135,103
)
(Loss) income from continuing operations before income taxes
 
(173,276
)
 
(1,438
)
 
486,789

 
—

 
312,075

Income tax (benefit) expense
 
(66,763
)
 
(557
)
 
184,521

 
—

 
117,201

(Loss) income from continuing operations
 
(106,513
)
 
(881
)
 
302,268

 
—

 
194,874

Loss from discontinued operations
 
—

 
—

 
—

 
—

 
—

Equity in net income of subsidiaries
 
301,387

 
—

 
—

 
(301,387
)
 
—

Net income (loss)
 
$
194,874

 
$
(881
)
 
$
302,268

 
$
(301,387
)
 
$
194,874

Comprehensive income (loss)
 
$
194,744

 
$
(881
)
 
$
303,652

 
$
(302,771
)
 
$
194,744

2011:
 
 

 
 

 
 

 
 

 
 

Net sales
 
$
—

 
$
—

 
$
6,182,922

 
$
—

 
$
6,182,922

Cost of sales
 
—

 
—

 
4,805,825

 
—

 
4,805,825

Gross profit
 
—

 
—

 
1,377,097

 
—

 
1,377,097

Selling, general and administrative expenses
 
15,579

 
1,467

 
756,789

 
—

 
773,835

Provision for doubtful accounts
 
—

 
—

 
98,552

 
—

 
98,552

Settlement, litigation and other related charges
 
—

 
—

 
55,674

 
—

 
55,674

Other charges
 
—

 
—

 
16,093

 
—

 
16,093

Operating (loss) income
 
(15,579
)
 
(1,467
)
 
449,989

 
—

 
432,943

Interest expense, net of interest income
 
(158,621
)
 
—

 
(1,497
)
 
—

 
(160,118
)
(Loss) income from continuing operations before income taxes
 
(174,200
)
 
(1,467
)
 
448,492

 
—

 
272,825

Income tax (benefit) expense
 
(66,753
)
 
(562
)
 
178,608

 
—

 
111,293

(Loss) income from continuing operations
 
(107,447
)
 
(905
)
 
269,884

 
—

 
161,532

Loss from discontinued operations
 
—

 
—

 
(74,608
)
 
—

 
(74,608
)
Equity in net income of subsidiaries
 
194,371

 
—

 
—

 
(194,371
)
 
—

Net income (loss)
 
$
86,924

 
$
(905
)
 
$
195,276

 
$
(194,371
)
 
$
86,924

Comprehensive income (loss)
 
$
80,952

 
$
(905
)
 
$
190,585

 
$
(189,680
)
 
$
80,952

2010:
 
 

 
 

 
 

 
 

 
 

Net sales
 
$
—

 
$
—

 
$
6,030,670

 
$
—

 
$
6,030,670

Cost of sales
 
—

 
—

 
4,694,440

 
—

 
4,694,440

Gross profit
 
—

 
—

 
1,336,230

 
—

 
1,336,230

Selling, general and administrative expenses
 
9,569

 
1,403

 
736,636

 
—

 
747,608

Provision for doubtful accounts
 
—

 
—

 
136,630

 
—

 
136,630

Settlement, litigation and other related charges
 
—

 
—

 
113,709

 
—

 
113,709

Other charges
 
—

 
—

 
149,129

 
—

 
149,129

Operating (loss) income
 
(9,569
)
 
(1,403
)
 
200,126

 
—

 
189,154

Interest expense, net of investment income
 
(162,925
)
 
—

 
7,279

 
—

 
(155,646
)
(Loss) income from continuing operations before income taxes
 
(172,494
)
 
(1,403
)
 
207,405

 
—

 
33,508

Income tax (benefit) expense
 
(64,478
)
 
(524
)
 
84,046

 
—

 
19,044

(Loss) income from continuing operations
 
(108,016
)
 
(879
)
 
123,359

 
—

 
14,464

Loss from discontinued operations
 
—

 
—

 
(120,573
)
 
—

 
(120,573
)
Equity in net income of subsidiaries
 
1,907

 
—

 
—

 
(1,907
)
 
—

Net income (loss)
 
$
(106,109
)
 
$
(879
)
 
$
2,786

 
$
(1,907
)
 
$
(106,109
)
Comprehensive income (loss)
 
$
(75,555
)
 
$
(879
)
 
$
(1,021
)
 
$
1,900

 
$
(75,555
)

85

Note 20 - Guarantor Subsidiaries - Continued

Condensed Consolidating Balance Sheets
(in thousands)
As of December 31, 2012:
 
Parent
 
Guarantor Subsidiary
 
Non-Guarantor Subsidiaries
 
Consolidating/ 
Eliminating Adjustments
 
Omnicare, Inc. and Subsidiaries
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
383,674

 
$
—

 
$
70,539

 
$
—

 
$
454,213

Restricted cash
 
—

 
—

 
1,066

 
—

 
1,066

Accounts receivable, net (including intercompany)
 
—

 
204

 
857,052

 
(204
)
 
857,052

Inventories
 
—

 
—

 
385,698

 
—

 
385,698

Deferred income tax benefits, net-current
 
—

 
—

 
137,736

 
(1,550
)
 
136,186

Other current assets
 
1,765

 
—

 
252,879

 
—

 
254,644

Total current assets
 
385,439

 
204

 
1,704,970

 
(1,754
)
 
2,088,859

Properties and equipment, net
 
—

 
22

 
282,638

 
—

 
282,660

Goodwill
 
—

 
—

 
4,256,959

 
—

 
4,256,959

Identifiable intangible assets, net
 
—

 
—

 
196,873

 
—

 
196,873

Other noncurrent assets
 
75,336

 
19

 
88,558

 
—

 
163,913

Investment in subsidiaries
 
5,453,702

 
—

 
—

 
(5,453,702
)
 
—

Total assets
 
$
5,914,477

 
$
245

 
$
6,529,998

 
$
(5,455,456
)
 
$
6,989,264

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities (including intercompany)
 
$
60,454

 
$
54

 
$
421,710

 
$
(204
)
 
$
482,014

Long-term debt, notes and convertible debentures
 
2,012,807

 
—

 
17,223

 
—

 
2,030,030

Deferred income tax liabilities, net-noncurrent
 
335,504

 
—

 
580,706

 
(1,550
)
 
914,660

Other noncurrent liabilities
 
—

 
—

 
56,848

 
—

 
56,848

Stockholders’ equity
 
3,505,712

 
191

 
5,453,511

 
(5,453,702
)
 
3,505,712

Total liabilities and stockholders’ equity
 
$
5,914,477

 
$
245

 
$
6,529,998

 
$
(5,455,456
)
 
$
6,989,264


As of December 31, 2011:
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
460,253

 
$
—

 
$
120,009

 
$
—

 
$
580,262

Restricted cash
 
—

 
—

 
2,336

 
—

 
2,336

Accounts receivable, net (including intercompany)
 
—

 
177

 
931,314

 
(177
)
 
931,314

Inventories
 
—

 
—

 
419,378

 
—

 
419,378

Deferred income tax benefits, net-current
 
—

 
—

 
153,989

 
(545
)
 
153,444

Other current assets
 
3,865

 
—

 
206,772

 
—

 
210,637

Total current assets
 
464,118

 
177

 
1,833,798

 
(722
)
 
2,297,371

Properties and equipment, net
 
—

 
17

 
225,240

 
—

 
225,257

Goodwill
 
—

 
19

 
4,250,560

 
—

 
4,250,579

Identifiable intangible assets, net
 
—

 
—

 
235,270

 
—

 
235,270

Other noncurrent assets
 
77,485

 
—

 
107,148

 
—

 
184,633

Investment in subsidiaries
 
5,593,155

 
—

 
—

 
(5,593,155
)
 
—

Total assets
 
$
6,134,758

 
$
213

 
$
6,652,016

 
$
(5,593,877
)
 
$
7,193,110

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 

Current liabilities (including intercompany)
 
$
59,596

 
$
82

 
$
480,566

 
$
(177
)
 
$
540,067

Long-term debt, notes and convertible debentures
 
1,957,167

 
—

 
11,107

 
—

 
1,968,274

Deferred income tax liabilities, net-noncurrent
 
322,559

 
—

 
516,843

 
(545
)
 
838,857

Other noncurrent liabilities
 
—

 
—

 
50,476

 
—

 
50,476

Stockholders’ equity
 
3,795,436

 
131

 
5,593,024

 
(5,593,155
)
 
3,795,436

Total liabilities and stockholders’ equity
 
$
6,134,758

 
$
213

 
$
6,652,016

 
$
(5,593,877
)
 
$
7,193,110


86

Note 20 - Guarantor Subsidiaries - Continued

Condensed Consolidating Statements of Cash Flows
(in thousands)

 
 
For the year ended December 31,
2012:
 
Parent
 
Guarantor Subsidiary
 
Non-Guarantor Subsidiaries
 
Omnicare, Inc. and Subsidiaries
Cash flows from operating activities:
 
 
 
 
 
 
 
 
Net cash flows (used in) / from operating activities
 
$
(88,461
)
 
$
—

 
$
632,945

 
$
544,484

Cash flows from investing activities:
 
 

 
 

 
 

 
 

Acquisition of businesses, net of cash received
 
—

 
—

 
(34,873
)
 
(34,873
)
Divestitures of businesses, net
 
—

 
—

 
19,207

 
19,207

Capital expenditures
 
—

 
—

 
(99,920
)
 
(99,920
)
Marketable securities
 
(25,514
)
 
—

 
496

 
(25,018
)
Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust
 
—

 
—

 
1,326

 
1,326

Other
 
—

 
—

 
(56
)
 
(56
)
Net cash flows used in investing activities
 
(25,514
)
 
—

 
(113,820
)
 
(139,334
)
Cash flows from financing activities:
 
 

 
 

 
 

 
 

Payments on term loans
 
(24,688
)
 
—

 
—

 
(24,688
)
Proceeds from long-term borrowings and obligations
 
425,000

 
—

 
—

 
425,000

Payments on long-term borrowings and obligations
 
(453,573
)
 
—

 
—

 
(453,573
)
Capped Call transaction
 
(48,126
)
 
—

 
—

 
(48,126
)
Fees paid for financing activities
 
(7,566
)
 
—

 
—

 
(7,566
)
Decrease in cash overdraft balance
 
(12
)
 
—

 
(14,915
)
 
(14,927
)
Payments for Omnicare common stock repurchases
 
(388,968
)
 
—

 
—

 
(388,968
)
Proceeds for stock awards and exercise of stock options, net of stock tendered in payment
 
24,951

 
—

 
—

 
24,951

Dividends paid
 
(45,214
)
 
—

 
—

 
(45,214
)
Other
 
555,592

 
—

 
(553,680
)
 
1,912

Net cash flows from  / (used in) financing activities
 
37,396

 
—

 
(568,595
)
 
(531,199
)
Net decrease in cash and cash equivalents
 
(76,579
)
 
—

 
(49,470
)
 
(126,049
)
Cash and cash equivalents at beginning of year
 
460,253

 
—

 
120,009

 
580,262

Cash and cash equivalents at end of year
 
$
383,674

 
$
—

 
$
70,539

 
$
454,213






















87

Note 20 - Guarantor Subsidiaries - Continued

Condensed Consolidating Statements of Cash Flows

(in thousands)

 
 
For the year ended December 31,
2011:
 
Parent
 
Guarantor Subsidiary
 
Non-Guarantor Subsidiaries
 
Omnicare, Inc. and Subsidiaries
Cash flows from operating activities:
 
 
 
 
 
 
 
 
Net cash flows (used in) / from operating activities
 
$
(118,642
)
 
$
—

 
$
668,664

 
$
550,022

Cash flows from investing activities:
 
 

 
 

 
 

 
 

Acquisition of businesses, net of cash received
 
—

 
—

 
(101,933
)
 
(101,933
)
Divestitures of businesses, net
 
—

 
—

 
13,099

 
13,099

Capital expenditures
 
—

 
—

 
(62,806
)
 
(62,806
)
Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust
 
—

 
—

 
(275
)
 
(275
)
Other
 
—

 
—

 
(3,496
)
 
(3,496
)
Net cash flows used in investing activities
 
—

 
—

 
(155,411
)
 
(155,411
)
Cash flows from financing activities:
 
 

 
 

 
 

 
 
Payments on term loans
 
(5,625
)
 
—

 
—

 
(5,625
)
Proceeds from long-term borrowings and obligations
 
600,000

 
—

 
—

 
600,000

Payments on long-term borrowings and obligations
 
(777,609
)
 
—

 
—

 
(777,609
)
Fees paid for financing activities
 
(13,780
)
 
—

 
—

 
(13,780
)
Increase in cash overdraft balance
 
5,921

 
—

 
5,753

 
11,674

Payments for Omnicare common stock repurchases
 
(140,127
)
 
—

 
—

 
(140,127
)
Payments for stock awards and exercise of stock options, net of stock tendered in payment
 
30,712

 
—

 
—

 
30,712

Dividends paid
 
(17,217
)
 
—

 
—

 
(17,217
)
Other
 
435,842

 


 
(432,702
)
 
3,140

Net cash flows from  / (used in) financing activities
 
118,117

 
—

 
(426,949
)
 
(308,832
)
Net (decrease) increase in cash and cash equivalents
 
(525
)
 
—

 
86,304

 
85,779

Less increase in cash and cash equivalents of discontinued operations
 
—

 
—

 
1

 
1

(Decrease) increase in cash and cash equivalents of continuing operations
 
(525
)
 
—

 
86,303

 
85,778

Cash and cash equivalents at beginning of year
 
460,778

 
—

 
33,706

 
494,484

Cash and cash equivalents at end of year
 
$
460,253

 
$
—

 
$
120,009

 
$
580,262


88

Note 20 - Guarantor Subsidiaries - Continued

Condensed Consolidating Statements of Cash Flows

(in thousands)
 
 
For the year ended December 31,
2010:
 
Parent
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Omnicare, Inc. and Subsidiaries
Cash flows from operating activities:
 
 
 
 
 
 
 
 
Net cash flows (used in) / from operating activities
 
$
(86,774
)
 
$
—

 
$
455,389

 
$
368,615

Cash flows from investing activities:
 
 

 
 

 
 

 
 

Acquisition of businesses, net of cash received
 
—

 
—

 
(111,812
)
 
(111,812
)
Divestitures of businesses, net
 
—

 
—

 
—

 
—

Capital expenditures
 
—

 
—

 
(23,517
)
 
(23,517
)
Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust
 
—

 
—

 
11,082

 
11,082

Other
 
—

 
—

 
(1,805
)
 
(1,805
)
Net cash flows used in investing activities
 
—

 
—

 
(126,052
)
 
(126,052
)
Cash flows used in financing activities:
 
 
 
 
 
 
 
 
Payments on term loans
 
(125,000
)
 
—

 
—

 
(125,000
)
Proceeds from long-term borrowings and obligations
 
975,000

 
—

 
—

 
975,000

Payments on long-term borrowings and obligations
 
(726,533
)
 
—

 
—

 
(726,533
)
Fees paid for financing activities
 
(33,249
)
 


 
—

 
(33,249
)
Increase in cash overdraft balance
 
9,744

 
—

 
8,477

 
18,221

Payments for Omnicare common stock repurchases
 
(100,942
)
 
—

 
—

 
(100,942
)
Payments for stock awards and exercise of stock options, net of stock tendered in payment
 
(13,989
)
 
—

 
—

 
(13,989
)
Dividends paid
 
(12,839
)
 
—

 
—

 
(12,839
)
Other
 
344,494

 
—

 
(349,783
)
 
(5,289
)
Net cash flows from  / (used in) financing activities
 
316,686

 
—

 
(341,306
)
 
(24,620
)
Net increase (decrease) in cash and cash equivalents
 
229,912

 
—

 
(11,969
)
 
217,943

Less decrease in cash and cash equivalents of discontinued operations
 
—

 
—

 
(834
)
 
(834
)
Increase (decrease) in cash and cash equivalents of continuing operations
 
229,912

 
—

 
(11,135
)
 
218,777

Cash and cash equivalents at beginning of year
 
230,866

 
—

 
44,841

 
275,707

Cash and cash equivalents at end of year
 
$
460,778

 
$
—

 
$
33,706

 
$
494,484





 










89

ITEM 9. – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.  Based on an evaluation, as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in the Exchange Act Rule 13a-15(e)) are effective to ensure that information required to be disclosed in the reports that the Company files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and are also effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control.  There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fourth quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).  The Company’s internal control over financial reporting is a process that is designed under the supervision of the Chief Executive Officer and the Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.  Our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our assessment under the framework in Internal Control – Integrated Framework, our management concluded that, as of December 31, 2012, our internal control over financial reporting was effective.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.


90

ITEM 9B. – OTHER INFORMATION

None.

PART III

ITEM 10. – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item 10 regarding our directors and executive officers, our audit committee and Section 16(a) compliance is included under the captions “Election of Directors,” “Governance of the Company and Board Matters” and “Section 16(A) Beneficial Ownership Reporting Compliance” in our proxy statement for our 2013 annual meeting of stockholders and is incorporated herein by reference.  Information concerning our executive officers is also included under the caption “Executive Officers of the Company” in Part I of this Report.  There have been no material changes to the procedures by which stockholders may recommend nominees to the board of directors as described in the Company's Proxy Statement dated April 19, 2012.

Audit Committee Financial Expert.  The information required by this Item 10 disclosure requirement is included in our proxy statement for our 2013 annual meeting of stockholders and is incorporated herein by reference.

Codes of Ethics.  We expect all of our employees to act in accordance with and to abide by the Omnicare “Code of Business Conduct and Ethics – It’s About Integrity” (the “Omnicare Integrity Code”).  The Omnicare Integrity Code is a set of business values and procedures that provides guidance to Omnicare employees with respect to compliance with the law in all of their business dealings and decisions on behalf of Omnicare and with respect to the maintenance of ethical standards, which are a vital and integral part of Omnicare’s business.

The Omnicare Integrity Code applies to all employees including the Chief Executive Officer, the Chief Financial Officer, the Principal Accounting Officer and other senior financial officers (the “Covered Officers”).  In addition to being bound by the Omnicare Integrity Code’s provisions about ethical conduct, conflicts of interest and compliance with law, Omnicare has adopted a Code of Ethics for the Covered Officers.  The Company will furnish any person, without charge, a copy of the Code of Ethics for the Covered Officers upon written request addressed to Omnicare, Inc., 900 Omnicare Center, 201 East Fourth Street, Cincinnati, OH 45202, Attn.:  Corporate Secretary.  A copy of the Code of Ethics for the Covered Officers can also be found on our Web site at www.omnicare.com.  Any waiver of any provision of the Code granted to a Covered Officer may only be granted by our Board of Directors or its Audit Committee.  If a waiver is granted, information concerning the waiver will be posted on our Web site at www.omnicare.com for a period of 12 months.

ITEM 11. – EXECUTIVE COMPENSATION

The information required by this Item 11 is included in our proxy statement for our 2013 annual meeting of stockholders and is incorporated herein by reference.

ITEM 12. – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information

The following table sets forth certain information regarding our equity compensation plans as of December 31, 2012 (in thousands, except exercise price data):

Plan Category
 
Number of Securities to be issued Upon Exercise of Outstanding Options and Warrants
 
Weighted Average Exercise Price of Outstanding Options and Warrants
 
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans(c)
Equity compensation plans
 
 
 
 
 
 
  approved by stockholders(a)
 
1,972

 
$
41.24

 
2,436

Equity compensation plans
 
 
 
 
 
 

  not approved by stockholders(b)
 
138

 
38.41

 
—

 Total
 
2,110

 
$
41.05

 
2,436


91


(a)
Includes the 1992 Long-Term Stock Incentive Plan and the 2004 Stock and Incentive Plan.
(b)
Includes the 1998 Long-Term Employee Incentive Plan as further discussed in the "Stock-Based Employee Compensation" note of the Notes to Consolidated Financial Statements included at Item 8 of this Filing.  Additionally, at December 31, 2012, the outstanding amount includes 10 compensation related warrants issued in 2003 at an exercise price of $33.08 per share.
(c)
Excludes securities listed in the first column of the table.

The remaining information required by this Item 12 is included in our proxy statement for our 2013 annual meeting of stockholders and is incorporated herein by reference.

ITEM 13. – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item 13 is included in our proxy statement for our 2013 annual meeting of stockholders and is incorporated herein by reference.

ITEM 14. – PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item 14 is included in our proxy statement for our 2013 annual meeting of stockholders and is incorporated herein by reference.

PART IV

ITEM 15. – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)               Financial Statements

Our 2012 Consolidated Financial Statements are included in Part II, Item 8, of this Filing.

(a)(2)               Financial Statement Schedule

See Index to Financial Statements and Financial Statement Schedule at Part II, Item 8, of this Filing.

(a)(3)               Exhibits

See Index of Exhibits.






92

SIGNATURES


Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on this 19th day of February 2013.

 
OMNICARE, INC.
 
/s/Robert O. Kraft
 
 
Robert O. Kraft
Senior Vice President and Chief Financial Officer
 


Pursuant to the requirements of the Securities Exchange Act of l934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

Signature
 
Title
 
Date
 
/s/John L. Workman
 
 
Chief Executive Officer and Director
 
February 19, 2013
John L. Workman
 
(Principal Executive Officer)
 
 
 
/s/Robert O. Kraft
 
 
Senior Vice President and Chief Financial Officer
 
 
Robert O. Kraft
 
(Principal Financial and Accounting Officer)
 
 
  
James D. Shelton, Director*
Mark A. Emmert, Director*
Steven J. Heyer, Director*
Sam R. Leno, Director*
Andrea R. Lindell, DNSc, RN, Director*
Barry Schochet, Director*
Amy Wallman, Director*

*Alexander M. Kayne, by signing his name hereto, signs this document on behalf of each person indicated above pursuant to a power of attorney duly executed by such person and filed with the Securities and Exchange Commission.

 
/s/Alexander M. Kayne
 
 
Alexander M. Kayne
(Attorney-in-Fact)
 



S-1


SCHEDULE II

OMNICARE, INC. AND SUBSIDIARY COMPANIES
Valuation and Qualifying Accounts
(in thousands)

Year ended
December 31,
 
Balance at
beginning of
period
 
Additions
charged
to cost
and expenses
 
Write-offs,
(net of recoveries) and other
 
Balance
at end
of period
Allowance for uncollectible accounts receivable:
 
 
 
 
2012
 
$
358,713

 
$
99,407

 
$
(188,704
)
 
$
269,416

2011
 
401,027

 
98,552

 
(140,866
)
 
358,713

2010
 
332,541

 
136,630

 
(68,144
)
 
401,027

Tax valuation allowance:
 
 

 
 

 
 

2012
 
$
20,502

 
$
3,765

 
$
(3,230
)
 
$
21,037

2011
 
18,418

 
4,151

 
(2,067
)
 
20,502

2010
 
22,594

 
(3,723
)
 
(453
)
 
18,418


S-2



INDEX OF EXHIBITS

Number and Description of Exhibit
(Numbers Coincide with Item 601 of Regulation S-K)
 
Document Incorporated by Reference from a Previous Filing, Filed Herewith or Furnished Herewith, as Indicated Below
(3.1)
Restated Certificate of Incorporation of Omnicare, Inc. (as amended)
 
Form 10-K
March 27, 2003
(3.2)
 Fourth Amended and Restated By-Laws of Omnicare, Inc.
 
Form 8-K
February 22, 2011
(4.1)
Subordinated Debt Securities Indenture, dated as of June 13, 2003, between Omnicare, Inc. and SunTrust Bank, as Trustee
 
Form 8-K
June 16, 2003
(4.2)
Second Supplemental Indenture, dated as of June 13, 2003, between Omnicare, Inc. and SunTrust Bank, as Trustee
 
Form 8-K
June 16, 2003
(4.3)
Third Supplemental Indenture, dated as of March 8, 2005, between Omnicare, Inc. & SunTrust Bank, as Trustee
 
Form 8-K
March 9, 2005
(4.4)
Indenture, dated as of December 15, 2005, by and among the Company, Omnicare Purchasing Company, LP, as guarantor and the Trustee (including the Form of 3.25% Convertible Senior Debenture due 2035)
 
Form 8-K
December 16, 2005
(4.5)
Guarantee Agreement of Omnicare, Inc. relating to the Trust Preferred Income Equity Redeemable Securities of Omnicare Capital Trust I, dated as of June 13, 2003
 
Form 8-K
June 16, 2003
(4.6)
Amended and Restated Trust Agreement of Omnicare Capital Trust II, dated as of March 8, 2005
 
Form 8-K
March 9, 2005
(4.7)
Guarantee Agreement of Omnicare, Inc. relating to the Series B 4.00% Trust Preferred Income Equity Redeemable Securities of Omnicare Capital Trust II, dated as of March 8, 2005
 
Form 8-K
March 9, 2005
 
(4.8)
Sixth Supplemental Indenture, dated as of May 18, 2010, by and among the Company, the Guarantors named therein and the Trustee (including the form of 7.75% Senior Subordinated Notes due 2020)
 
Form 8-K
May 21, 2010
 
(4.9)
Seventh Supplemental Indenture, dated as of December 7, 2010, by and among the Company, the Guarantors named therein and U.S. Bank National Association, as Trustee (including the form of 3.75% Convertible Senior Subordinated Notes due 2025).
 
Form 8-K
December 7, 2010
 
(4.10)
Eighth Supplemental Indenture among Omnicare, Inc., the guarantors party thereto and U.S. Bank National Association (as successor to SunTrust Bank), as Trustee (including the form of 3.75% Convertible Senior Subordinated Note due 2042)
 
Form 8-K
March 29, 2012
(10.1)
Annual Incentive Plan for Senior Executive Officers*
 
Appendix A to Proxy Statement for 2009 Annual Meeting of Stockholders dated April 21, 2009
(10.2)
1998 Long-Term Employee Incentive Plan*
 
Form 10-K
March 30, 1999


S-3


INDEX OF EXHIBITS

Number and Description of Exhibit
(Numbers Coincide with Item 601 of Regulation S-K)
 
Document Incorporated by Reference from a Previous Filing, Filed Herewith or Furnished Herewith, as Indicated Below
(10.3)
Amendment to 1998 Long-Term Employee Incentive Plan, effective November 26, 2002*
 
Form 10-K
March 27, 2003
(10.4)
Omnicare, Inc. 2004 Stock and Incentive Plan*
 
Appendix B to the Company’s Definitive Proxy Statement for 2004 Annual Meeting of Stockholders, filed on April 9, 2004
(10.5)
Form of Indemnification Agreement with Directors and Officers*
 
Form 10-K
March 30, 1999
(10.6)
Split Dollar Agreement, dated June 1, 1995 (Agreements in the same form exist with J.F. Gemunder, C.D. Hodges, P.E. Keefe and J.M. Stamps)*
 
Form 10-K
March 25, 1996
(10.7)
Employment Agreement with J.M. Stamps, dated as of June 1, 1999*
 
Form 10-K
February 26, 2009
(10.8)
Amendment to Employment Agreement with J.M. Stamps, dated as of December 29, 2008*
 
Form 10-K
February 26, 2009
(10.9)
Amendment to Employment Agreement with Jeffrey M. Stamps, dated as of December 7, 2010*
 
Form 10-K
February 24, 2011
(10.10)
Separation Agreement, dated as of September 21, 2012 between Omnicare, Inc. and J.M. Stamps*
 
Filed Herewith
(10.11)
Employment Agreement with J.L. Workman, dated as of October 21, 2009*
 
Form 10-K
February 25, 2010
(10.12)
Amendment to Employment Agreement with John L. Workman, dated as of December 7, 2010*
 
Form 10-K
February 24, 2011
(10.13)
Second Amendment to Employment Agreement with John L. Workman, dated June 11, 2012*
 
Form 10-Q
July 25, 2012
(10.14)
Form of Stock Option Award Agreement *
 
Form 10-Q
April 26, 2012
(10.15)
Form of Restricted Stock Award Agreement (Officers) *
 
Form 10-Q
April 26, 2012
(10.16)
Form of Restricted Stock Award Agreement (Employees other than Officers) *
 
Form 10-Q
April 26, 2012
(10.17)
Prime Vendor Agreement for Pharmaceuticals with McKesson Corporation, dated as of July 27, 2010**
 
Form 10-Q
October 28, 2010
(10.18)
Credit Agreement, dated as of August 24, 2011, by and among Omnicare, Inc., as the Borrower, the lenders named therein, SunTrust Bank, as Administrative Agent, JP Morgan Chase Bank, N.A., as Syndication Agent and Barclays Bank PLC, Goldman Sachs Bank USA and Bank of America, N.A., as Co-Documentation Agents.

 
Form 8-K
August 25, 2011
(10.19)
Amendment to Split Dollar Agreement with J.F. Gemunder, dated December 22, 2008*
 
Form 10-K
February 26, 2009
(10.20)
Amendment to Split Dollar Agreement dated December 22, 2008 (Agreements in the same form exist with C.D. Hodges and J.M. Stamps)*
 
Form 10-K
February 26, 2009
(10.21)
Employment Agreement with John G. Figueroa,
dated as of December 7, 2010*
 
Form 10-K
February 24, 2011

S-4


INDEX OF EXHIBITS
 
 
 
Number and Description of Exhibit
(Numbers Coincide with Item 601 of Regulation S-K)
 
 
 
Document Incorporated by Reference from a Previous Filing, Filed Herewith or Furnished Herewith, as Indicated Below
(10.22)
Employment Agreement with Nitin Sahney, dated as of October 28, 2010*
 
Form 10-K
February 24, 2011
(10.23)
Amendment to Employment Agreement with Nitin Sahney, dated February 17, 2011*
 
Form 10-K
February 24, 2011
(10.24)
Second Amendment to Employment Agreement with Nitin Sahney, dated June 11, 2012*
 
Form 10-Q
July 25, 2012
(10.25)
Employment Agreement with Alexander M. Kayne, dated April 1, 2011.*
 
Form 10-Q
April 28, 2011
(10.26)
Employment Agreement with Priscilla Stewart-Jones, dated as of July 22, 2011.*
 
Form 10-Q
October 25, 2011
(10.27)
Separation Agreement, effective July 31, 2010, among Omnicare, Inc. and Joel F. Gemunder*
 
Form 10-Q
October 28, 2010
(10.28)
Separation Agreement, effective July 31, 2010, among Omnicare, Inc. and Cheryl D. Hodges*
 
Form 10-Q
October 28, 2010
(10.29)
Form of Exchange Agreement relating to the exchange of the Company's 3.75% Convertible Senior Subordinated Notes due 2025 for 3.75% Convertible Senior Subordinated Notes due 2042
 
Form 8-K
March 29, 2012
(10.30)
Form of Performance Restricted Stock Unit Award Agreement I *
 
Form 10-Q
April 26, 2012
(10.31)
Form of Performance Restricted Stock Unit Award Agreement 2013 II *
 
Filed Herewith
(10.32)
Separation Agreement, dated as of June 10, 2012, between Omnicare, Inc. and John Figueroa*
 
Form 10-Q
July 25, 2012
(10.33)
Separation Agreement, dated as of August 9, 2012, between Omnicare, Inc. and Priscilla Stewart-Jones*
 
Form 10-Q
October 31, 2012
(10.34)
Employment Agreement with L.P. Finn III, dated as of August 21, 1997*
 
Form 10-K
March 1, 2007
(10.35)
Amendment to Employment Agreement with L.P. Finn III, dated as of December 22, 2008*
 
Form 10-K
February 26, 2009
(10.36)
Separation Agreement, dated as of February 3, 2012, among Omnicare, Inc., Omnicare Management Company and L.P. Finn, III*
 
Form 10-K
February 23, 2012
(10.37)
Omnicare, Inc. Senior Executive Severance Plan *
 
Filed Herewith
(10.38)
Omnicare, Inc. Executive Severance Plan *
 
Filed Herewith
(10.39)
Omnicare, Inc. Deferred Compensation Plan *
 
Filed Herewith
(10.40)
Confirmation relating to Accelerated Share Repurchase, dated November 29, 2012, between Omnicare, Inc. and Goldman, Sachs & Co.
 
Filed Herewith


S-5


INDEX OF EXHIBITS

Number and Description of Exhibit
(Numbers Coincide with Item 601 of Regulation S-K)
 
Document Incorporated by Reference from a Previous Filing, Filed Herewith or Furnished Herewith, as Indicated Below
(10.41)
Amended and Restated Credit Agreement, dated as of September 28, 2012, by and among Omnicare, Inc., as the Borrower, the lenders named therein, SunTrust Bank, as Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent and Barclays Bank PLC, Goldman Sachs Bank USA and Bank of America, N.A., as Co-Documentation Agents.
 
Form 8-K
October 4, 2012
(12)
Statement of Computation of Ratio of Earnings to Fixed Charges
 
Filed Herewith
(21)
Subsidiaries of Omnicare, Inc.
 
Filed Herewith
(23)
Consent of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP)
 
Filed Herewith
(24)
Powers of Attorney
 
Filed Herewith 
(31.1)
Rule 13a-14(a) Certification of Chief Executive Officer of Omnicare, Inc. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 
 
Filed Herewith
(31.2)
Rule 13a-14(a) Certification of Chief Financial Officer of Omnicare, Inc. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed Herewith
(32.1)
Section 1350 Certification of Chief Executive Officer of Omnicare, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002***
 
Furnished Herewith
(32.2)
Section 1350 Certification of Chief Financial Officer of Omnicare, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002***
 
Furnished Herewith
(101)
The following materials from the Omnicare, Inc. Annual Report on Form 10-K for the year ended December 31,   2012 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Comprehensive Income, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statement of Cash Flows (iv) Consolidated Statements of Stockholders' Equity and (v) the Notes to Consolidated Financial Statements
 
As provided in Rule 406T of Regulation S-T, this information is furnished herewith and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934
 *      Indicates management contract or compensatory arrangement.
**
Confidential treatment granted as to certain portions, which portions have been filed separately with the Securities and Exchange Commission.
***
A signed original of this written statement required by Section 906 has been provided to Omnicare, Inc. and will be retained by Omnicare, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.


S-6