EX-99.3 4 exhibit99_3.htm EXHIBIT 99.3 exhibit99_3.htm
EXHIBIT 99.3

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                                                                                                                    
2
 
Consolidated Statements of Income                                                                                                                    
3
 
Consolidated Balance Sheets                                                                                                                    
4
 
Consolidated Statements of Cash Flows                                                                                                                    
5
 
Consolidated Statements of Stockholders' Equity                                                                                                                    
6
 
Notes to Consolidated Financial Statements                                                                                                                    
8

Financial Statement Schedule:

 
II - Valuation and Qualifying Accounts                                                                                                                    
60

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.
 
 
 
 
1

 
 
 
 
 
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, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 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, 2010 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 (not presented herein) appearing under Item 9A of the Annual Report on Form 10-K for the year ended December 31, 2010.  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.

As discussed in Note 4 to the consolidated financial statements the Company changed the manner in which it accounts for business combinations in 2009.

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 24, 2011, except with respect to our opinion on the consolidated financial statements and financial statement schedule insofar as it relates to the effects of discontinued operations discussed in Note 1, as to which the date is July 29, 2011.

 
 
 
2

 

 

CONSOLIDATED STATEMENTS OF INCOME
 
OMNICARE, INC. AND SUBSIDIARY COMPANIES
 
                   
(in thousands, except per share data)
                 
                   
   
For the years ended December 31,
 
   
2010 (a)
   
2009 (a)
   
2008 (a)
 
                   
Net sales
  $ 6,030,670     $ 6,001,053     $ 5,992,450  
Cost of sales
    4,694,440       4,566,837       4,518,645  
Gross profit
    1,336,230       1,434,216       1,473,805  
Selling, general and administrative expenses
    747,608       766,172       854,482  
Provision for doubtful accounts
    136,630       92,495       106,240  
Restructuring and other related charges
    17,165       19,814       34,089  
Settlement, litigation and other related charges
    113,709       77,449       99,267  
Goodwill and other asset impairment charges
    22,884       -       -  
Separation, benefit plan termination and related costs
    64,760       -       -  
Other miscellaneous charges
    44,320       8,535       914  
Operating income
    189,154       469,751       378,813  
Investment income
    9,610       9,670       9,782  
Interest expense
    (135,720 )     (119,893 )     (143,051 )
Amortization of discount on convertible notes
    (29,536 )     (27,977 )     (25,934 )
Income from continuing operations before income taxes
    33,508       331,551       219,610  
Income tax provision
    19,044       96,856       88,309  
Income from continuing operations
    14,464       234,695       131,301  
Income (loss) from discontinued operations
    (120,573 )     (22,772 )     9,172  
Net income (loss)
  $ (106,109 )   $ 211,923     $ 140,473  
Earnings (loss) per common share - Basic:
                       
Continuing operations
  $ 0.12     $ 2.00     $ 1.12  
Discontinued operations
    (1.04 )     (0.19 )     0.08  
Net income (loss)
  $ (0.91 )   $ 1.81     $ 1.20  
Earnings (loss) per common share - Diluted:
                       
Continuing operations
  $ 0.13     $ 2.00     $ 1.11  
Discontinued operations
    (1.03 )     (0.19 )     0.08  
Net income (loss)
  $ (0.91 )   $ 1.80     $ 1.19  
Weighted average number of common shares outstanding:
                       
Basic
    116,348       117,094       117,466  
Diluted
    116,927       117,777       118,313  
                         
(a) Certain amounts for all periods presented have been recast to present the Company's Contract Research Services
 
("CRO Services") and Tidewater Group Purchasing Organization ("Tidewater") businesses as discontinued operations.
 
                         
The Notes to Consolidated Financial Statements are an integral part of these statements.
         
 
 
 
 
3

 
 

 
CONSOLIDATED BALANCE SHEETS
 
OMNICARE, INC. AND SUBSIDIARY COMPANIES
 
             
(in thousands,  except share data)
 
December 31,
 
   
2010 (a)
   
2009 (a)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 494,484     $ 275,707  
Restricted cash
    2,019       15,264  
Accounts receivable, less allowances of $401,027 (2009-$332,541)
    1,011,823       1,183,144  
Inventories
    418,965       368,477  
Deferred income tax benefits
    150,644       112,906  
Rabbi trust assets
    85,741       -  
Other current assets
    246,866       182,579  
Current assets of discontinued operations
    47,254       81,530  
Total current assets
    2,457,796       2,219,607  
                 
Properties and equipment, at cost less accumulated depreciation of $284,533 (2009-$300,655)
    204,717       203,847  
Goodwill
    4,234,821       4,152,255  
Identifiable intangible assets, less accumulated amortization of $219,107 (2009-$184,216)
    259,809       293,831  
Rabbi trust assets
    -       133,040  
Other noncurrent assets
    156,941       147,037  
Noncurrent assets of discontinued operations
    49,329       174,487  
Total noncurrent assets
    4,905,617       5,104,497  
Total assets
  $ 7,363,413     $ 7,324,104  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  $ 233,396     $ 256,929  
Accrued employee compensation
    59,417       36,900  
Deferred revenue
    2,352       1,827  
Current debt
    3,537       127,069  
Other current liabilities
    273,191       172,922  
Current liabilities of discontinued operations
    22,361       22,170  
Total current liabilities
    594,254       617,817  
Long-term debt, notes and convertible debentures (Note 10)
    2,106,758       1,980,239  
Deferred income tax liabilities
    737,383       574,146  
Other noncurrent liabilities
    109,074       275,909  
Total noncurrent liabilities
    2,953,215       2,830,294  
Total liabilities
    3,547,469       3,448,111  
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, 129,634,300 shares issued (2009-127,824,800 shares issued)
    129,634       127,825  
Paid-in capital (Note 10)
    2,424,978       2,269,905  
Retained earnings
    1,579,672       1,698,620  
Treasury stock, at cost-13,011,700 shares (2009-7,545,000 shares)
    (333,554 )     (205,017 )
Accumulated other comprehensive (loss) income
    15,214       (15,340 )
Total stockholders' equity
    3,815,944       3,875,993  
Total liabilities and stockholders' equity
  $ 7,363,413     $ 7,324,104  
 
(a) Certain amounts for all periods presented have been recast to present the Company's CRO Services and Tidewater businesses as discontinued operations.
 
                 
The Notes to Consolidated Financial Statements are an integral part of these statements.
         

 
 
 
4

 
 

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
OMNICARE, INC. AND SUBSIDIARY COMPANIES
 
                   
(in thousands)
                 
   
For the years ended December 31,
 
   
2010 (a)
   
2009 (a)
   
2008 (a)
 
Cash flows from operating activities:
                 
Net income (loss)
  $ (106,109 )   $ 211,923     $ 140,473  
Income (loss) from discontinued operations
    120,573       22,772       (9,172 )
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
                       
Depreciation
    46,096       47,919       46,385  
Amortization
    104,450       89,763       89,762  
Write-off of debt issuance costs
    6,636       -       -  
Debt redemption tender offer premium
    (7,591 )     -       -  
Goodwill and other asset impairment charges
    22,884       -       -  
Benefit plan termination and related costs
    25,187       -       -  
Loss on debt extinguishment
    25,552       -       -  
Deferred tax provision
    22,952       90,658       56,041  
Changes in assets and liabilities, net of effects from acquisition and divesture of businesses:
                       
Accounts receivable, net of provison for doubtful accounts
    198,338       135,320       43,327  
Inventories
    (34,676 )     84,469       3,887  
Current and noncurrent assets
    38,966       (14,891 )     71,912  
Accounts payable
    (44,638 )     (74,414 )     (47,713 )
Accrued employee compensation
    21,451       (6,436 )     22,028  
Deferred revenue
    525       (206 )     (581 )
Current and noncurrent liabilities
    (71,693 )     (106,162 )     17,240  
Net cash flows from operating activities of continuing operations
    368,903       480,715       433,589  
Net cash flows from (used in) operating activities of discontinued operations
    (288 )     3,079       4,608  
Net cash flows from operating activities
    368,615       483,794       438,197  
                         
Cash flows from investing activities:
                       
Acquisition of businesses, net of cash received
    (111,812 )     (92,889 )     (225,710 )
Capital expenditures
    (23,517 )     (29,231 )     (57,041 )
Transfer of cash to trusts for employee health and severance costs, net of payments out of the trust
    11,082        (10,547  )     847   
Disbursements for loans and investments
    (3,425 )     (6,800 )     -  
Other
    2,166       (3,179 )     683  
Net cash flows used in investing activities of continuing operations
    (125,506 )     (142,646 )     (281,221 )
Net cash flows used in investing activities of discontinued operations
    (546 )     (2,191 )     (4,072 )
Net cash flows used in investing activities
    (126,052 )     (144,837 )     (285,293 )
                         
Cash flows from financing activities:
                       
Borrowings on line of credit facilities
    -       -       396,000  
Payments on line of credit facilities, term A loan and notes payable
    (125,000 )     (275,000 )     (485,081 )
Proceeds from long-term borrowings and obligations
    975,000       -       -  
Payments on long-term borrowings and obligations
    (726,533 )     (1,592 )     (2,833 )
Fees paid for financing activities
    (33,249 )     -       -  
Increase (decrease) in cash overdraft balance
    18,221       (637 )     (5,449 )
Payments for Omnicare common stock repurchases (Note 2)
    (100,942 )     -       (100,165 )
Proceeds (payments) for stock awards and exercise of stock options, net of stock tendered in payment
    (13,989  )      9,666        (1,390 
Excess tax benefits from stock-based compensation
    679       2,367       963  
Dividends paid
    (12,839 )     (10,733 )     (10,751 )
Net cash flows used in financing activities of continuing operations
    (18,652 )     (275,929 )     (208,706 )
Net cash flows used in financing activities of discontinued operations
    -       (479 )     (360 )
Net cash flows used in financing activities
    (18,652 )     (276,408 )     (209,066 )
                         
Effect of exchange rate changes on cash
    (5,968 )     (1,099 )     (3,196 )
Net increase (decrease) in cash and cash equivalents
    217,943       61,450       (59,358 )
Less increase (decrease) in cash and cash equivalents of discontinued operations
    (834 )     409       176  
Increase (decrease) in cash and cash equivalents of continuing operations
    218,777       61,041       (59,534 )
Cash and cash equivalents at beginning of year
    275,707       214,666       274,200  
                         
Cash and cash equivalents at end of year
  $ 494,484     $ 275,707     $ 214,666  
                         
 
(a) Certain amounts for all periods presented have been recast to present the Company's CRO Services and Tidewater businesses as discontinued operations.
 
 
                       
The Notes to Consolidated Financial Statements are an integral part of these statements.
                       
 
 
 
 
5

 
 
 
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
OMNICARE, INC. AND SUBSIDIARY COMPANIES
(in thousands, except per share data)


                           
Accumulated
       
                           
Other
   
Total
 
   
Common
   
Paid-in
   
Retained
   
Treasury
   
Comprehensive
   
Stockholders'
 
   
Stock
   
Capital
   
Earnings
   
Stock
   
Income
   
Equity
 
Balance at January 1, 2008
  $ 124,599     $ 2,195,564     $ 1,368,449     $ (89,791 )   $ (57,998 )   $ 3,540,823  
Dividends paid ($0.09 per share)
    -       -       (10,751 )     -       -       (10,751 )
Stock acquired/issued for benefit plans
    -       (343 )     -       2,319       -       1,976  
Stock option exercises and amortization/forfeitures
    264       10,138       -       -       -       10,402  
Common stock repurchase
    -       -       -       (100,165 )     -       (100,165 )
Stock awards, net of amortization/forfeitures
    720       18,770       -       (5,541 )     -       13,949  
Subtotal
    125,583       2,224,129       1,357,698       (193,178 )     (57,998 )     3,456,234  
Net income
    -       -       140,473       -       -       140,473  
Other comprehensive income (loss), net of tax:
                                               
Cumulative translation adjustment
    -       -       -       -       224       224  
Unrealized appreciation in fair value of investments
    -       -       -       -       4,940       4,940  
Amortization of pension benefit costs
    -       -       -       -       9,292       9,292  
Actuarial gain on pension obligations
    -       -       -       -       43,706       43,706  
Comprehensive income
    -       -       140,473       -       58,162       198,635  
Balance at December 31, 2008
    125,583       2,224,129       1,498,171       (193,178 )     164       3,654,869  
Dividends paid ($0.09 per share)
    -       -       (10,733 )     -       -       (10,733 )
Stock acquired/issued for benefit plans
    -       23       -       569       -       592  
Stock option exercises and amortization/forfeitures
    1,079       24,619       -       -       -       25,698  
Stock awards/issuance, net of amortization/forfeitures
    1,163       21,883       -       (12,408 )     -       10,638  
Adjustment to deferred tax convertible debt adjustment
    -       (749 )     (741 )     -       -       (1,490 )
Subtotal
    127,825       2,269,905       1,486,697       (205,017 )     164       3,679,574  
Net income
    -       -       211,923       -       -       211,923  
Other comprehensive income (loss), net of tax:
                                               
Cumulative translation adjustment
    -       -       -       -       14,934       14,934  
Unrealized depreciation in fair value of investments
    -       -       -       -       (7,267 )     (7,267 )
Amortization of pension benefit costs
    -       -       -       -       2,045       2,045  
Actuarial loss on pension obligations
    -       -       -       -       (25,216 )     (25,216 )
Comprehensive income
    -       -       211,923       -       (15,504 )     196,419  
Balance at December 31, 2009
    127,825       2,269,905       1,698,620       (205,017 )     (15,340 )     3,875,993  
 
 
 
 
6

 
 

 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
OMNICARE, INC. AND SUBSIDIARY COMPANIES
(in thousands, except per share data)


                           
Accumulated
       
                           
Other
   
Total
 
   
Common
   
Paid-in
   
Retained
   
Treasury
   
Comprehensive
   
Stockholders'
 
   
Stock
   
Capital
   
Earnings
   
Stock
   
Income
   
Equity
 
Balance at December 31, 2009
    127,825       2,269,905       1,698,620       (205,017 )     (15,340 )     3,875,993  
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  
Subtotal
    129,634       2,424,978       1,685,781       (333,554 )     (15,340 )     3,891,499  
Net loss
    -       -       (106,109 )     -       -       (106,109 )
Other comprehensive income (loss), net of tax:
                                               
Cumulative translation adjustment
    -       -       -       -       (3,807 )     (3,807 )
Unrealized appreciation in fair value of investments
    -       -       -       -       924       924  
Amortization of pension benefit costs
    -       -       -       -       3,458       3,458  
Actuarial gain on pension obligations
    -       -       -       -       29,979       29,979  
Comprehensive income
    -       -       (106,109 )     -       30,554       (75,555 )
Balance at December 31, 2010
  $ 129,634     $ 2,424,978     $ 1,579,672     $ (333,554 )   $ 15,214     $ 3,815,944  
                                                 
                                                 
The Notes to Consolidated Financial Statements are an integral part of these statements.
                                         

 
 
 
7

 
 
 
 
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 geriatric pharmaceutical services company.  Omnicare is the nation’s largest provider of pharmaceuticals and related ancillary pharmacy services to long-term healthcare institutions.  Omnicare’s clients include primarily skilled nursing facilities (“SNFs”), assisted living facilities (“ALFs”), retirement centers, independent living communities, hospitals, hospice, and other healthcare settings and service providers.  At December 31, 2010, Omnicare served long-term care facilities as well as chronic care and other settings comprising approximately 1,385,000 beds, including approximately 86,000 patients served by the patient assistance programs of its specialty pharmacy services business.  The comparable number at December 31, 2009 was approximately 1,377,000 beds (including approximately 68,000 patients served by patient assistance programs).  Omnicare provides its long-term care pharmacy services in 47 states in the United States (“U.S.”), the District of Columbia and Canada at December 31, 2010.  Omnicare’s pharmacy services also include distribution and product support services for specialty pharmaceuticals.

Discontinued Operations
In March 2011, Omnicare committed to a plan to divest its Contract Research Services organization (“CRO Services”).  The sale of CRO Services was completed in April 2011. Also, in April 2011, the Company divested of its Tidewater Group Purchasing Organization (“Tidewater”).  In accordance with the accounting standard addressing the accounting for the impairment or disposal of long-lived assets, CRO Services and Tidewater are presented as discontinued operations in the Consolidated Statements of Income, Consolidated Balance Sheets, Consolidated Statements of Cash Flows, and the Notes to Consolidated Financial Statements herein for all periods presented.  See the “Discontinued Operations” note of the Notes to Consolidated Financial Statements for further discussion of discontinued operations.  Following the discontinuance of CRO Services, Omnicare now operates in one segment, the Pharmacy Services Segment.  Accordingly, operating segment data is no longer provided.

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 are translated at the year-end rate of exchange, and the income statements are translated at average rates of exchange.  Gains or losses from translating foreign currency financial statements are accumulated in a separate component of stockholders’ equity.

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.
 
 
 
 
8

 
 

 
Fair Value of Financial Instruments

The Company applies the authoritative guidance for fair value measurements, which defines a hierarchy which prioritizes the inputs in fair value measurements.  “Level 1” measurements are measurements using quoted prices in active markets for identical assets or liabilities.  “Level 2” measurements use significant observable inputs.  “Level 3” measurements are measurements using significant unobservable inputs which require a company to develop its own assumptions.  In recording the fair value of assets and liabilities, companies must use the most reliable measurement available.

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, assets invested for settlement of the Company’s employee benefit obligations, accounts receivable and fixed to floating interest rate swap agreements.

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, 2010, 2009 and 2008, 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 2010, 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,:


   
2010
 
2009
 
2008
 
Private pay, third-party and facilities (a)
 
42%
 
43%
 
45%
 
Federal Medicare program (Part D & Part B)
 
46%
 
45%
 
43%
 
State Medicaid programs
 
9%
 
10%
 
10%
 
Other sources
 
3%
 
2%
 
2%
 
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.

 
 
 
9

 
 
 
Accounts Receivable

The following table is an aging of the Company’s December 31, 2010 and 2009 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 three primary overall types of accounts receivable characteristics (in thousands):

   
December 31, 2010
 
   
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
  $ 260,788     $ 185,934     $ 446,722  
Facility payors
    389,887       312,996       702,883  
Private Pay payors
    96,047       167,198       263,245  
 Total gross accounts receivable (net of contractual allowance adjustments)
  $ 746,722     $ 666,128     $ 1,412,850  
                         
   
December 31, 2009
 
   
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
  $ 324,942     $ 177,054     $ 501,996  
Facility payors
    404,134       360,752       764,886  
Private Pay payors
    106,321       142,482       248,803  
Total gross accounts receivable (net of contractual allowance adjustments)
  $ 835,397     $ 680,288     $ 1,515,685  

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 its long term care pharmacy divisions 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 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, where possible.  As a result of this change in approach, the Company believes it will have reduced opportunity to monetize disputed receivables through litigation, increasing risk of uncollectible accounts receivable.

Notes Receivable

The Company periodically enters into notes receivable from its customers in the normal course of business.  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, and is estimated when a physical inventory is not performed in a particular month.

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.
 
 
 
 
10

 

 
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 five 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 five 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 would be 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.

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.  Goodwill is reviewed at the reporting unit level for impairment using a fair value based approach at least annually or between annual tests if events occur or circumstances indicate there may be an impairment.  Intangible assets that are being amortized under the authoritative guidance are amortized over their useful lives, ranging from five to 15 years.  Indefinite-lived intangible assets are reviewed annually for impairment, which resulted in a write-off of approximately $13.3 million during 2010, as further discussed 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 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 book carrying amount of the Company’s property and casualty accrual available for self-insured retentions and deductibles, at December 31, 2010 and 2009, was $21.2 million and $21.4 million, respectively.  The discount rate utilized in the computation of the property and casualty accrual balance at December 31, 2010 and 2009, was 2.3% and 2.4%, respectively.

 
 
 
11

 
 
 
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.

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).

 
 
 
12

 
 
 
 
Delivery Expenses

Omnicare incurred expenses totaling approximately $177 million, $181 million and $192 million for the years ended December 31, 2010, 2009 and 2008, 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 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 require disclosure.

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 is 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)

The accumulated other comprehensive income (loss) at December 31, 2010 and 2009, by component and in the aggregate, follow (in thousands):


   
December 31,
 
   
2010
   
2009
 
Cumulative foreign currency translation adjustments
  $ 15,239     $ 19,046  
Unrealized gain on fair value of investments
    997       73  
Pension and postemployment benefits
    (1,022 )     (34,459 )
Total accumulated other comprehensive income (loss), net
  $ 15,214     $ (15,340 )

The amounts are net of applicable tax benefits of approximately $21.5 million in 2009.  The tax benefit amounts for 2010 were inconsequential.

 
 
13

 
 
 
Other Miscellaneous Charges

Other miscellaneous charges consist of the following (in thousands):

   
December 31,
 
   
2010
   
2009
   
2008
 
Acquisition and other related costs (1)
  $ 5,319     $ 1,399     $ -  
Stock option expense (2)
    4,207       5,633       -  
Repack matters - SG&A (3)
    663       1,503       914  
Loss on plane lease (4)
    6,785       -       -  
Debt redemption loss and costs (5)
    27,346       -       -  
Subtotal - other miscellaneous charges
    44,320       8,535       914  
Repack matters - COS (3)
    (1,898 )     (2,642 )     5,531  
Total - other miscellaneous charges, net
  $ 42,422     $ 5,893     $ 6,445  

(1)  
See further discussion at the “Acquisitions” note of the Notes to Consolidated Financial Statements.
(2)  
See further discussion at the “Stock-Based Compensation” note of the Notes to Consolidated Financial Statements.
(3)  
See further discussion at the “Commitments and Contingencies” note of the Notes to Consolidated Financial Statements.
(4)  
The year ended December 31, 2010 includes a charge relating to the termination of the Company’s prior aircraft lease.
(5)  
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; employee benefit plan assumptions and reserves; stock-based compensation; various other operating allowances and accruals (including employee health, property and casualty insurance accruals and related assumptions); fair value determinations; 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; currency fluctuations between the U.S. dollar and other currencies; 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 employee benefit plan assumptions and reserves; 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 assessments; variations in costs or expenses; and changes in accounting rules and standards.

 
 
 
14

 
 
 
Recently Issued Accounting Standards

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

In December 2010, the FASB amended the authoritative guidance for goodwill to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts.  The new guidance requires those reporting units to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists.  The Company does not anticipate the effect of this recently issued guidance to be material to its consolidated results of operations, financial position and cash flows.

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

On May 3, 2010, Omnicare announced that the Company’s Board of Directors authorized a new two-year program to repurchase, from time to time, shares of Omnicare’s outstanding common stock having an aggregate value of up to $200 million.  In the year ended December 31, 2010, the Company repurchased approximately 4.4 million shares at an aggregate cost of approximately $101 million.  Accordingly, the Company had approximately $99 million of share repurchase authority remaining as of December 31, 2010.  Additionally, during the second quarter of 2008, the Company repurchased approximately 4.1 million shares of Omnicare’s common stock at a cost of approximately $100 million under a stock buyback program authorized by its Board of Directors.

Note 3 – Discontinued Operations

Non-Core Disposal Group
In mid-2009, the Company commenced activities to divest certain home healthcare and related ancillary businesses (“the Disposal Group”) that are non-strategic in nature.  In the quarter ended September 30, 2010, Omnicare reached an agreement to acquire substantially all of the assets of Walgreens’ long-term care pharmacy business.  In exchange, Walgreens acquired substantially all of the assets of Omnicare’s home infusion business, part of the Disposal Group.  This transaction closed in the fourth quarter of 2010.  Also, in 2010, the Company entered into a letter of intent regarding its disposition of the durable medical equipment (“DME”) portion of the Disposal Group.  The Company currently intends to close the DME transaction as soon as practicable, subject to certain conditions and applicable approvals.  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 2010 and 2009, the Non-Core Disposal Group recorded an impairment charge of approximately $10.3 million and $14.5 million, respectively, to reduce the carrying value of the Disposal Group to fair value as of December 31, 2010 and 2009.  The net assets held for sale of the Non-Core Disposal Group are required to be measured at the lower of cost or fair value less costs to sell.  The fair values were based on a market approach utilizing both selected guideline public companies and comparable industry transactions, which would be considered “Level 3” inputs within the fair value hierarchy.  The fair value amount is estimated, is reviewed quarterly and will be finalized upon disposition of the Non-Core Disposal Group.

CRO Services
Adverse conditions in the contract research organization (“CRO Services”) market led to lower than anticipated levels of new business being added as well as early project terminations by clients and client-driven delays in the commencement of certain projects resulting in lower than expected operating profits and cash flows for this business.  Management anticipated a turnaround in its CRO Services business in the third quarter of 2010 based on various restructuring activities enacted in late 2009 and during the first half of 2010 (e.g., reductions-in-force, location consolidation, etc.).  Based on the unanticipated continuation of the decline in operating performance during the third quarter of 2010, coupled with the revised outlook, the Company’s earnings outlook for the CRO business was reduced.  As a result, the Company determined it was required to perform 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 charge in CRO Services of approximately $91 million in the third quarter of 2010.

The Company determined that the 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 the divestiture was completed in April 2011.

 
 
 
15

 
 
 
The results from operations for all periods presented have been recast to reflect the results of the Non-Core Disposal Group and CRO Services as discontinued operations, including certain expenses of the Company related to the divestiture.  Selected financial information related to the discontinued operations of the Non-Core Disposal Group and CRO Services for the years ended December 31, 2010, 2009 and 2008 follows (in thousands):


   
For the years ended December 31,
 
   
2010
   
2009
   
2008
 
Net sales - Non-Core Disposal Group ("NCDG")
  $ 59,656     $ 84,903     $ 114,837  
Net sales - CRO Services
    109,176       156,707       203,320  
Net sales - total discontinued
    168,832       241,610       318,157  
                         
(Loss) from operations of NCDG, pretax
    (14,025 )     (13,645 )     (307 )
(Loss) income from operations of CRO Services, pretax
    (19,269 )     (3,581 )     15,886  
(Loss) income from operations - total discontinued, pretax
    (33,294 )     (17,226 )     15,579  
                         
Income tax benefit - NCDG
    3,614       5,468       96  
Income tax benefit (expense) - CRO Services
    8,116       1,051       (6,503 )
Income tax benefit (expense) - total discontinued
    11,730       6,519       (6,407 )
                         
Loss from operations of NCDG, aftertax
    (10,411 )     (8,177 )     (211 )
(Loss) income from operations of CRO Services, aftertax
    (11,153 )     (2,530 )     9,383  
(Loss) income from operations - total discontinued, aftertax
    (21,564 )     (10,707 )     9,172  
                         
Impairment loss on NCDG, pretax
    (10,343 )     (14,492 )     -  
Impairment loss on CRO Services, pretax
    (90,628 )     -       -  
Income tax benefit of impairment loss on NCDG
    1,859       2,427       -  
Income tax benefit of impairment loss on CRO Services
    103       -       -  
Impairment loss on total discontinued, aftertax
    (99,009 )     (12,065 )     -  
                         
Loss from discontinued operations of NCDG
    (18,895 )     (20,242 )     (211 )
(Loss) income from discontinued operations of CRO Services
    (101,678 )     (2,530 )     9,383  
(Loss) income from discontinued operations - total
    (120,573 )     (22,772 )     9,172  

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 2010 and 2009, the Company incurred acquisition and other related costs of approximately $5.3 million and $1.4 million, respectively, which were primarily related to professional fees and acquisition related restructuring costs for acquisitions completed during 2010 and 2009, which were partially offset by a reduction of the Company’s original estimate of contingent consideration payable for certain acquisitions.

 
 
 
16

 
 
 
During the years ended December 31, 2010, 2009 and 2008, the Company completed four, nine and 12 acquisitions of businesses, respectively, none of which were, individually or in the aggregate, significant to the Company.  Acquisitions of businesses required cash payments of approximately $112 million, $93 million and $226 million (including amounts payable pursuant to acquisition agreements relating to prior-period acquisitions) in 2010, 2009 and 2008, 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 Company continues to evaluate the tax effects, identifiable intangible assets and other pre-acquisition contingencies relating to certain acquisitions. Omnicare is in the process of completing its allocation of the purchase price for certain acquisitions, and accordingly, the goodwill and other identifiable intangible assets balances are preliminary and subject to change.  The net assets and operating results of acquisitions have been included in the Company’s consolidated financial statements from their respective dates of acquisition.

Amounts contingently payable through 2011, primarily representing payments originating from earnout provisions of acquisitions which were completed prior to January 1, 2009, total approximately $16 million as of December 31, 2010.

Note 5 – Cash and Cash Equivalents

A summary of cash and cash equivalents follows (in thousands):


   
December 31,
 
   
2010
   
2009
 
             
Cash
  $ 46,639     $ 67,079  
Money market funds
    686       108,628  
U.S. government-backed repurchase agreements
    447,159       100,000  
    $ 494,484     $ 275,707  


Repurchase agreements represent investments in U.S. government-backed treasury issues at December 31, 2010 and 2009, under agreements to resell the securities to the counterparty.  The amounts in the money market funds are shown at fair value based on the quoted market prices of the investments.  The term of the repurchase agreements usually span overnight, but in no case is longer than 30 days.  The Company has a collateralized interest in the underlying securities of repurchase agreements, which are segregated in the accounts of the counterparty.

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.

 
 
17

 
 
Note 6 – Properties and Equipment

A summary of properties and equipment follows (in thousands):


   
December 31,
 
   
2010
   
2009
 
Land
  $ 3,646     $ 3,646  
Buildings and building improvements
    15,957       15,419  
Computer equipment and software
    247,168       249,122  
Machinery and equipment
    117,232       124,608  
Furniture, fixtures and leasehold improvements
    105,247       111,707  
      489,250       504,502  
Accumulated depreciation
    (284,533 )     (300,655 )
    $ 204,717     $ 203,847  

Note 7 – Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the years ended December 31, 2010 and 2009 are as follows (in thousands):


   
Total
 
Goodwill balance as of January 1, 2009
  $ 4,091,971  
         
Goodwill acquired in the year ended December 31, 2009
    38,495  
Other
    21,789  
         
Goodwill balance as of December 31, 2009
    4,152,255  
         
Goodwill acquired in the year ended December 31, 2010
    80,596  
Other
    1,970  
         
Goodwill balance as of December 31, 2010
  $ 4,234,821  

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

The Company performed its annual goodwill impairment analysis for the years ended December 31, 2010 and 2009 and, except for the CRO goodwill impairment charge in 2010 disclosed in the “Discontinued Operations” note of the Notes to Consolidated Financial Statements, Omnicare concluded that goodwill had not been impaired.

 
 
 
18

 
 
 
The table below presents the Company’s other identifiable intangible assets at December 31, 2010 and 2009, all of which are subject to amortization, except trademark and trade names as described below (in thousands):


             
December 31, 2010
 
   
Original Amortization Life (in years)
   
Gross Carrying Amount
   
Accumulated Amortization and Impairment Losses
   
Net Carrying Amount
 
Customer relationship assets
    8.5 - 15     $ 392,281     $ (186,467 )   $ 205,814  
Trademark and trade names
      -         39,672       (13,300 )     26,372  
Non-compete agreements
    4.5 - 15       48,036       (24,545 )     23,491  
Technology assets
    8 - 11.4       11,899       (7,859 )     4,040  
Other
    10 - 15       328       (236 )     92  
Total
              $ 492,216     $ (232,407 )   $ 259,809  
                                     
               
December 31, 2009
 
               
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying Amount
 
Customer relationship assets
              $ 372,661     $ (152,063 )   $ 220,598  
Trademark and trade names
                37,709       -       37,709  
Non-compete agreements
                49,139       (23,447 )     25,692  
Technology assets
                18,178       (8,424 )     9,754  
Other
                360       (282 )     78  
Total
              $ 478,047     $ (184,216 )   $ 293,831  
 
Amortization expense related to identifiable intangible assets was $38.9 million, $39.2 million and $36.8 million for the years ended December 31, 2010, 2009 and 2008, respectively.  Omnicare’s trademark and trade names constitute identifiable intangible assets with indefinite useful lives based upon their expected useful lives and the anticipated effects of obsolescence, demand, competition and other factors per the requirements of the authoritative guidance regarding goodwill and other intangible assets.  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, 2010, and concluded that certain trade names of the business were impaired and, accordingly, recorded an impairment loss of approximately $13.3 million in the fourth quarter of 2010, due to revisions in forecasted cash flows associated with those trade name intangible assets.  The fair value at December 31, 2010 was determined using projected revenue and cash flows developed by the Company (Level 3 inputs).

The Company also recorded other asset impairment charges of approximately $10 million in the three months and year ended December 31, 2010, primarily to write-off certain technology assets that were abandoned, and related non–compete agreement assets.  The fair value at December 31, 2010 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, 2010 for the next five fiscal years is as follows (in thousands):


Year ended
 
Amortization
 
December 31,
 
Expense
 
2011
  $ 41,542  
2012
    40,209  
2013
    35,209  
2014
    33,782  
2015
    26,512  

 
 
 
19

 
 
Note 8 – Fair Value

 
The Company’s assets and (liabilities) measured at fair value as of December 31, 2010 and 2009 were as follows (in thousands):


         
Based on
 
         
Quoted Prices
   
Other
       
   
Fair Value
   
in Active
   
Observable
   
Unobservable
 
   
at December 31,
   
Markets
   
Inputs
   
Inputs
 
   
2010
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets and (Liabilities) Measured at Fair Value on a Recurring Basis: (1)
                       
Rabbi trust assets (2)
  $ 85,741     $ 85,741     $ -     $ -  
7.75% interest rate swap agreement - fair value hedge (3)
  $ (829 )   $ -     $ (829 )   $ -  
6.875% interest rate swap agreement - fair value hedge (3)
    (3,461 )     -       (3,461 )     -  
Derivatives (4)
    -       -       -       -  
     Total
  $ (4,290 )   $ -     $ (4,290 )   $ -  


         
Based on
 
         
Quoted Prices
   
Other
       
   
Fair Value
   
in Active
   
Observable
   
Unobservable
 
   
at December 31,
   
Markets
   
Inputs
   
Inputs
 
   
2009
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets and (Liabilities) Measured at Fair Value on a Recurring Basis: (1)
                       
Rabbi trust assets (2)
  $ 133,040     $ 133,040     $ -     $ -  
6.125% interest rate swap agreement - fair value hedge (3)
    3,595       -       3,595       -  
Derivatives (4)
    -       -       -       -  
     Total
  $ 136,635     $ 133,040     $ 3,595     $ -  

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) 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.  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 not recorded on the Consolidated Balance Sheets and thus excluded from the fair value table above, are included in the table below.
(2) The fair value of restricted funds held in trust (rabbi trust assets) for settlement of the Company’s pension obligations are based on quoted market prices in an active market of the investments held by the trustee.
(3) The fair value of the Company’s interest rate swap agreements 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 swap agreements are discussed in further detail at the “Debt” note of the Notes to Consolidated Financial Statements.
(4) The Company’s derivative instruments are discussed in further detail at the “Debt” note of the Notes to Consolidated Financial Statements.
 
 
 
 
20

 
 

 
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, 2010
   
December 31, 2009
 
Financial Instrument:
 
Book Value
   
Market Value
   
Book Value
   
Market Value
 
                         
6.125% senior subordinated notes, due 2013, gross
  $ 250,000     $ 251,300     $ 250,000     $ 248,000  
6.75% senior subordinated notes, due 2013
    -       -       225,000       219,500  
6.875% senior subordinated notes, due 2015
    525,000       535,500       525,000       528,500  
7.75% senior subordinated notes, due 2020, gross
    400,000       415,000       -       -  
                                 
3.75% convertible senior subordinated notes, due 2025
                               
       Carrying value
    353,505       -       -       -  
       Unamortized debt discount
    221,495       -       -       -  
       Principal amount
    575,000       636,400       -       -  
                                 
4.00% junior subordinated convertible debentures, due 2033
                               
       Carrying value
    201,282       -       199,071       -  
       Unamortized debt discount
    143,718       -       145,929       -  
       Principal amount
    345,000       266,900       345,000       254,400  
                                 
3.25% convertible senior debentures, due 2035
                               
       Carrying value
    370,837       -       773,120       -  
       Unamortized debt discount
    81,663       -       204,380       -  
       Principal amount
    452,500       427,600       977,500       801,600  

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.

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, 2010 (in thousands):


Year ended
     
December 31,
     
2011
  $ 29,975  
2012
    26,921  
2013
    23,430  
2014
    19,991  
2015
    12,683  
      Later years
    16,454  
      Total minimum
       
        payments required
  $ 129,454  


The Company has approximately $1 million in aggregate minimum rentals scheduled to be received in the future under non-cancelable subleases as of December 31, 2010, which would serve to partially reduce the total minimum payments required as presented in the table above.

Total rent expense under operating leases for the years ended December 31, 2010, 2009 and 2008 were $56.7 million, $61.4 million and $69.8 million, respectively.

 
 
 
21

 
 
 
Note 10 – Debt

A summary of debt follows (in thousands):


   
December 31,
 
   
2010
   
2009
 
Revolving loans, due 2015
  $ -     $ -  
Senior term A loan, due 2010
    -       125,000  
6.125% senior subordinated notes, due 2013
    250,000       250,000  
6.75% senior subordinated notes, due 2013
    -       225,000  
6.875% senior subordinated notes, due 2015
    525,000       525,000  
7.75% senior subordinated notes, due 2020
    400,000       -  
3.75% convertible senior subordinated notes, due 2025
    575,000       -  
4.00% junior subordinated convertible debentures, due 2033
    345,000       345,000  
3.25% convertible senior debentures, due 2035
    452,500       977,500  
Capitalized lease and other debt obligations
    13,961       6,524  
Subtotal
    2,561,461       2,454,024  
Add (subtract) interest rate swap agreements
    (4,290 )     3,595  
(Subtract) unamortized debt discount
    (446,876 )     (350,309 )
(Subtract) current portion of debt
    (3,537 )     (127,071 )
Total long-term debt, net
  $ 2,106,758     $ 1,980,239  

The following is a schedule of required debt payments due during each of the next five years and thereafter, as of December 31, 2010 (in thousands):


Year ended
     
December 31,
     
2011
  $ 3,537  
2012
    3,210  
2013
    253,210  
2014
    2,974  
2015
    526,017  
Later years
    1,772,513  
Total debt payments
  $ 2,561,461  


Total cash interest payments made for the years ended December 31, 2010, 2009 and 2008 were $110.3 million, $115.6 million and $135.1 million, excluding early redemption and tender premium payments.  As of December 31, 2010, the Company had approximately $20 million outstanding relating to standby letters of credit, substantially all of which are subject to automatic annual renewals.

Revolving Loans
On May 18, 2010, the Company entered into a $400 million senior secured revolving credit facility, maturing on May 18, 2015 (the “Revolving Credit Facility”).  The Revolving Credit Facility includes letter of credit and swingline sublimits and is available up to the lesser of $400 million or a borrowing base of 50% of the Company’s accounts receivable, subject to certain eligibility criteria.  There were approximately $20 million of letters of credit outstanding as of December 31, 2010 which have been deemed to be letters of credit issued under the Revolving Credit Facility.  The interest rate applicable to the Revolving Credit Facility will be, at the Company’s option, a floating base rate, plus an applicable margin, or the London interbank offered rate (or LIBOR), plus an applicable margin.  As of December 31, 2010, the applicable margins were set at 2.00% with respect to floating base rate loans and 3.00% with respect to LIBOR loans.  The applicable margins for the Revolving Credit Facility may increase or decrease based on the Company’s consolidated total leverage ratio as specified in the Revolving Credit Facility.  The Revolving Credit Facility is guaranteed by the Company’s subsidiaries, subject to certain exceptions, and secured by substantially all of the Company’s and the guarantors’ accounts receivable.  The Revolving Credit Facility contains certain financial covenants requiring maintenance of certain fixed charge coverage and leverage ratios, and customary affirmative and negative covenants.  In connection with entering into the Revolving Credit Facility, the Company deferred $8.9 million in debt issuance costs, of which approximately $1.1 million was amortized to expense in the year ended December 31, 2010.
 
 
 
 
22

 

 
On May 18, 2010, in connection with entering into the new Revolving Credit Facility, the Company’s existing credit agreement, dated as of July 28, 2005, (the “2005 Credit Facility”), was terminated.  All amounts outstanding under the senior term A loan component of the 2005 Credit Facility were paid off on May 18, 2010, and the $800 million revolving credit facility component of the 2005 Credit Facility was terminated.  In connection with the termination of the 2005 Credit Facility, the Company wrote off the remaining debt issuance costs to interest expense, which amount was not significant.  The Company amortized to expense approximately $1 million and $3 million of these deferred debt issuance costs during the years ended December 31, 2009 and 2008, respectively.

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 $0.7 million was amortized to expense in each of the three years ended December 31, 2010.  The 6.125% Notes contain certain affirmative and negative covenants and events of default customary for such instruments.

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 is being amortized as a reduction to interest expense over the remaining term of the 6.125% Notes.  As such, the Company began paying interest at the 6.125% stated rate effective June 1, 2010.  Under the 6.125% Swap Agreement, which hedged against exposure to long-term U.S. dollar interest rates, the Company received a fixed rate of 6.125% and paid a floating rate based on LIBOR with an interest period of six months, plus a spread of 2.27%.  The floating rate was determined semi-annually, in arrears, two London Banking Days prior to the first of each December and June.

On January 10, 2011, Omnicare redeemed $75 million aggregate principal amount of its outstanding 6.125% Notes.

6.75% Senior Subordinated Notes
On December 15, 2005, Omnicare completed its offering of $225 million aggregate principal amount of 6.75% senior subordinated notes due 2013 (the “6.75% Notes”).  In connection with the issuance of the 6.75% Notes, the Company deferred $4.6 million in debt issuance costs, of which approximately $0.3 million was amortized to expense in the year ended December 31, 2010 and $0.6 million was amortized to expense in each of the years ended December 31, 2009 and 2008, respectively.  The 6.75% Notes contained certain affirmative and negative covenants and events of default customary for such instruments.

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

In connection with the purchase of the 6.75% 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.

 
 
23

 
 
 
 
7.75% Senior Subordinated Notes
On May 18, 2010, Omnicare, Inc. completed its offering of $400 million aggregate principal amount of 7.75% Senior Subordinated Notes due 2020, (the “7.75% Notes”).  In connection with the issuance of the 7.75% Notes, the Company deferred $9.6 million in debt issuance costs, of which approximately $0.6 million was amortized to expense in the year ended December 31, 2010.  The 7.75% Notes contain certain restrictive covenants and events of default customary for such instruments.  The 7.75% Notes are guaranteed by the Company’s subsidiaries, subject to certain exceptions.

In connection with its offering of the 7.75% Notes, the Company entered into the 7.75% Swap Agreement.  Under the 7.75% Swap Agreement, which hedges against exposure to long-term U.S. dollar interest rates, the Company receives a fixed rate of 7.75% and pays a floating rate based on LIBOR with an interest period of six months, plus a spread of 3.87%.  The floating rate is determined semi-annually, in arrears, two London Banking Days prior to the first of each December and June.  The Company records interest expense on the 7.75% Notes at the floating rate.  The estimated LIBOR-based floating rate (including the 3.87% spread) was 4.32% as of December 31, 2010.  The 7.75% Swap Agreement, which matches the terms of the 7.75% Notes, is designated and accounted for as a fair value hedge.  Accordingly, changes in the fair value of the 7.75% Swap Agreement are offset by changes in the recorded carrying value of the related 7.75% Notes.  The fair value of the 7.75% Swap Agreement, approximately $(0.8) million at December 31, 2010, is recorded in “Other noncurrent assets” or “Other noncurrent liabilities” on the Consolidated Balance Sheets, as applicable, and as an adjustment to the book carrying value of the related 7.75% Notes.

6.875% 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, 2010, 2009 and 2008, respectively.  The 6.875% Notes contain certain affirmative and negative covenants and events of default customary for such instruments.

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”).  Under the 6.875% Swap Agreement, which hedges against exposure to long-term U.S. dollar interest rates, the Company receives a fixed rate of 6.875% and pays a floating rate based on LIBOR with an interest period of six months, plus a spread of 4.128%.  The 6.875% Swap Agreement is designated and accounted for as a fair value hedge.  Accordingly, changes in the fair value of the 6.875% Swap Agreement are offset by changes in the recorded carrying value of the related 6.875% Notes.  The fair value of the 6.875% Swap Agreement, approximately $(3.5) million at December 31, 2010, is recorded in “Other noncurrent assets” or “Other noncurrent liabilities” on the Consolidated Balance Sheets, as applicable, and as an adjustment to the book carrying value of the related 6.875% Notes.

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 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.

 
 
 
24

 
 
 
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, 2010 and 2009, 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, 2010 and 2009 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, 2010, 2009 and 2008.

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 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 $2 million was amortized to expense for the years ended December 31, 2010, 2009 and 2008.

 
 
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On November 17, 2010, Omnicare commenced a tender offer (the “3.25% Tender Offer”) for cash to purchase up to $525 million of its outstanding 3.25% Convertible Debentures.  On December 16, 2010, Omnicare purchased $525 million aggregate principal amount of its outstanding 3.25% Convertible Debentures pursuant to the 3.25% Tender Offer.  Total consideration required to complete the purchase, including accrued and unpaid interest, was approximately $498.8 million.  After giving effect to the purchase of the tendered debentures, $452.5 million aggregate principal amount of the 3.25% Convertible Debentures remain outstanding.  In connection with the purchase of the 3.25% Convertible Debentures, the Company incurred the write-off of debt