NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1--
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BASIS OF PRESENTATION
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These Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements, including the notes thereto, and other information included in the Annual Report on Form 10-K of BioScrip, Inc. and its wholly-owned subsidiaries (the “Company”) for the year ended
December 31, 2011
(the “Form 10-K”) filed with the U.S. Securities and Exchange Commission. These Unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, and the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
The information furnished in these Unaudited Consolidated Financial Statements reflects all adjustments, including normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Operating results for the three and
nine
months ended
September 30, 2012
are not necessarily indicative of the results that may be expected for the full year ended
December 31, 2012
. The accounting policies followed for interim financial reporting are similar to those disclosed in Note 2 of the Audited Consolidated Financial Statements included in the Form 10-K.
The Unaudited Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidation.
In accordance with the applicable accounting guidance for the consolidation of variable interest entities, the Company analyzes its variable interests to determine if an entity in which it has a variable interest is a variable interest entity. The Company's analysis includes both quantitative and qualitative reviews. The Company bases its quantitative analysis on the forecasted cash flows of the entity, and its qualitative analysis on its review of the design of the entity, its organizational structure, including decision-making ability, and relevant financial agreements. The Company also uses its qualitative analysis to determine if it must consolidate a variable interest entity as its primary beneficiary.
The Company has an affiliate equity investment in a variable interest entity that has developed a platform that facilitates the flow, management and sharing of vital health and medical information with stakeholders across the healthcare ecosystem. The Company concluded that the entity is a variable interest entity because the equity investment at risk is not sufficient to permit the entity to finance its activities without additional support from other parties. The Company has determined that it is not the primary beneficiary as power to direct the activities that most significantly impact economic performance of the entity is held by another stakeholder, and therefore does not consolidate the entity. The Company recorded its net investment in the variable interest entity of
$6.9 million
and subsequent working capital contributions in the investments in and advances to unconsolidated affiliate line on the accompanying Consolidated Balance Sheets using the equity method of accounting. The Company cannot quantify its maximum exposure to loss as a result of its involvement with the variable interest entity.
As a result of the Company entering into a purchase agreement on February 1, 2012 with respect to the sale of its traditional and specialty pharmacy mail operations and community retail pharmacy stores (see Note 2), the Company reevaluated its segments in accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 280,
Segment Reporting
(“ASC 280”). Based on its review, the Company changed its operating and reportable segments from “Infusion/Home Health Services” and “Pharmacy Services” to its new operating and reportable segments: “Infusion Services", "Home Health Services” and “PBM Services”. These three new operating and reportable segments reflect how the Company's chief operating decision maker reviews the Company's results in terms of allocating resources and assessing performance. As a result, prior period disclosures reflect the change in operating and reportable segments. Refer to Note 10 for more information.
Acquisition, Integration and Transitional expenses include legal and financial advisory fees associated with acquisitions; integration costs to convert to common policies, procedures, and information systems; and, transitional costs such as training, redundant salaries, and retention bonuses for certain critical personnel. Certain prior period amounts have been reclassified to conform to this definition. During the three months ended September 30, 2012 the Company also recorded $0.8 million of state sales taxes associated with prior year sales. This amount is included in Acquisition, Integration and Transitional expenses.
Certain prior period amounts have been reclassified to conform to the current year presentation. Such reclassifications have no material effect on the Company's previously reported consolidated financial position, results of operations or cash flow.
The Company has evaluated events that occurred during the period subsequent to the balance sheet date through the filing date of this Form 10-Q. Refer to Note 14 for more information.
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NOTE 2--
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DISCONTINUED OPERATIONS
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On February 1, 2012, the Company entered into a Community Pharmacy and Mail Business Purchase Agreement (the “Asset Purchase Agreement”) by and among Walgreen Co. and certain subsidiaries (collectively, the "Buyers") and the Company and certain subsidiaries (collectively, the "Sellers") with respect to the sale of certain assets, rights and properties (the “Pharmacy Services Asset Sale”) relating to the Sellers' traditional and specialty pharmacy mail operations and community retail pharmacy stores.
On May 4, 2012, pursuant to the terms of the Asset Purchase Agreement, the Company received approximately
$158.8 million
at closing, including the value of inventories on hand attributable to the operations subject to the Pharmacy Services Asset Sale. Based on events related directly or indirectly to the Buyers' retention of certain business after the closing, the Company has also received approximately
$740,000
and may receive up to an additional
$15.0 million
in additional purchase price, within the 24 month period following the closing, or be required to refund up to approximately
$6.4 million
of cash received to the Buyers, within the 14 month period following the closing. Gain associated with contingent consideration in both cases has not been recorded in the results of discontinued operations as of September 30, 2012. The purchase price excluded all accounts receivable and working capital liabilities relating to the operations subject to the Pharmacy Services Asset Sale, which were retained by the Company. Approximately
$18.6 million
of these net assets remained at September 30, 2012, and the Company anticipates the collection of these balances during the remainder of the year.
As a result of the Pharmacy Services Asset Sale, the Company recognized a pretax gain of
$100.0 million
, net of transaction costs of
$5.6 million
, during the three months ended June 30, 2012. The Company also recognized approximately
$0.3 million
and
$13.4 million
of impairment costs, employee severance and other benefit-related costs, facility-related costs, and other one-time charges as a result of the transaction in the three and nine months ended September 30, 2012, resulting in a net effect of approximately
$86.7 million
. See Note 7 - Property and Equipment, for further information on the impairment. The impairment costs, employee severance and other benefit-related costs, facility-related costs, and other one-time charges are included in income (loss) from discontinued operations, net of income taxes on the Unaudited Consolidated Statements of Operations. As of
September 30, 2012
, there are accruals of
$2.5 million
related to these costs in accrued expenses and other current liabilities and other non-current liabilities on the Unaudited Consolidated Balance Sheets. The accrual activity consisted of the following (in thousands):
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Impairment Costs
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Employee Severance
and Other Benefits
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Facility-Related Costs
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Other Costs
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Total
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Liability balance as of December 31, 2011
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$
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—
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$
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—
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$
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—
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|
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$
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—
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$
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—
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Expenses
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5,839
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5,349
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1,071
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1,110
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13,369
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Cash payments
|
|
—
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(3,885
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)
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—
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(3,134
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)
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(7,019
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)
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Non-cash charges
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$
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(5,839
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)
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$
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—
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|
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$
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—
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$
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2,024
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$
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(3,815
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)
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Liability balance as of September 30, 2012
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$
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—
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$
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1,464
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$
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1,071
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$
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—
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$
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2,535
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In addition, the Company and its subsidiaries and certain subsidiaries of the Buyers entered into an agreement concurrently with the Asset Purchase Agreement which provided that BioScrip ceased to be the sole fulfillment pharmacy for customers who came through the drugstore.com website. The agreement provided for a cash payment of
$3.0 million
to the Company and the payment of
$2.9 million
to the Buyers related to contingent consideration from the Company's 2010 acquisition of the prescription pharmacy business of DS Pharmacy, both of which occurred during the three months ended March 31, 2012.
The transaction included the sale of
27
community pharmacy locations and certain assets of
three
community pharmacy locations and
three
traditional and specialty mail service operations, which constituted all of the Company's operations in the community pharmacy and mail order lines of business.
Two
mail order locations which were not transferred as part of the Pharmacy Services Asset Sale have started providing infusion pharmacy services. The assets of the components of the businesses being transferred are included in discontinued operations on the accompanying Consolidated Balance Sheets at December 31, 2011. On May 4, 2012, the carrying value of the assets included in the Pharmacy Services Asset Sale was as follows (in thousands):
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Inventory
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$
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30,560
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Prepaid expenses and other current assets
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299
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Total current assets
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30,859
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Property and equipment, net
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1,592
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Goodwill
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11,754
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Intangible assets, net
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2,503
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Total assets
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$
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46,708
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During the three months ended June 30, 2012, as a result of the divestiture process, the Company's management commenced an assessment of the Company's continuing operations in order to align its corporate structure with its remaining operations. As part of these efforts, the Company has incurred and expects to incur additional charges such as the write down of certain long−lived assets, employee severance, other restructuring type charges, temporary redundant expenses, potential cash bonus payments and potential accelerated payments or terminated costs for certain of its contractual obligations, which may impact the Company's future Consolidated Financial Statements.
The operating results of the traditional and specialty pharmacy mail operations and community pharmacies for the three and
nine
months ended
September 30, 2012
and
2011
are summarized below. These results include costs directly attributable to the components of the businesses which were divested. Operating expense includes bad debt expense of
$4.6 million
and
$8.0 million
for the three and nine months ended September 30, 2012 associated with receivables retained from the divested business. This compares with
$0.6 million
and
$5.0 million
bad debt expense for the three and nine months ended September 30, 2011. It also includes
$2.2 million
and
$3.3 million
for the three and nine months ended September 30, 2012 associated with the cost of collecting the retained receivables. Income tax expense of
$2.1
million and
$2.2 million
for the three months ended September 30, 2012 and 2011, respectively, and income tax expense of
$7.2 million
and
$2.6 million
for the
nine
months ended
September 30, 2012
and
2011
, respectively, has also been allocated to discontinued operations. These adjustments have been made for all periods presented. Depreciation expense was no longer incurred on fixed assets included in the disposal group as of February 1, 2012, the date the Company entered into the Asset Purchase Agreement.
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Discontinued Operations Results
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(in thousands)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2012
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2011
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2012
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2011
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|
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Revenue
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$
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289
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$
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320,191
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$
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466,828
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$
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938,480
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Gross profit
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$
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315
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$
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23,429
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$
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30,353
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$
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73,726
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Operating expense
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$
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9,163
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$
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19,834
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$
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57,800
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$
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64,829
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Gain on sale, before income taxes
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$
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—
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$
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—
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$
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100,012
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$
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—
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(Loss) income from discontinued operations, net of income taxes
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$
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(10,931
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)
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$
|
882
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|
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$
|
64,448
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|
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$
|
4,152
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NOTE 3--
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BUSINESS COMBINATION
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Description of the Transaction
On July 31, 2012, the Company acquired 100% of InfuScience, Inc. (“InfuScience”) for a cash payment of $
38.3 million
. The purchase price could increase to
$41.3 million
based on the results of operations during the 24 month period following the closing. InfuScience acquires, develops and operates businesses providing alternate site infusion pharmacy services. Through this acquisition, BioScrip has added
five
infusion centers located in Eagan, Minnesota; Omaha, Nebraska; Chantilly, Virginia; Charleston, South Carolina; and Savannah, Georgia.
Assets Acquired and Liabilities Assumed
The transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. Due to the timing of this acquisition, these amounts are provisional and subject to change. The Company will finalize these amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recognized at the acquisition date. These changes could be significant. The Company will finalize these amounts no later than one year from the acquisition date.
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Amounts
Recognized as of
Acquisition Date
(in thousands)
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Cash
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$
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23
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Accounts receivable
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4,973
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Inventories
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586
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Other current assets
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371
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Property and equipment
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785
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Identifiable intangible assets
(a)
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400
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Other non-current assets
|
369
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Current liabilities
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(4,300
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)
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Other non-current liabilities
|
(3,116
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)
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Total identifiable net assets
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91
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Goodwill
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38,213
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Total fair value of consideration transferred
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$
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38,304
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______________________
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(a)
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The following table summarizes the provisional amounts and useful lives assigned to identifiable intangible assets:
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Weighted-
Average
Useful Lives
(Months)
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Amounts
Recognized as of
Acquisition Date
(in thousands)
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InfuScience customer relationships
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5
|
400
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Total identifiable intangible assets acquired
|
5
|
$
|
400
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Revenue and Net Income of InfuScience
The revenues of InfuScience for the period from the acquisition date to September 30, 2012 were
$6.6 million
, and the net loss was
$0.0 million
. The net loss includes the effects of
$(0.6) million
of acquisition-related costs, included in acquisition, integration and transitional expenses.
Pro Forma Impact of Business Combinations
The following table presents unaudited pro forma consolidated results of operations for the three-month and nine-month periods ended September 30, 2012 and 2011, as if the InfuScience acquisition had occurred as of January 1, 2011 (in thousands):
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
|
|
2012
|
|
2011
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|
2012
|
|
2011
|
Revenues
|
173,539
|
|
|
142,893
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|
|
504,558
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|
|
421,455
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|
Total net income (loss)
|
(11,859
|
)
|
|
592
|
|
|
56,837
|
|
|
(106
|
)
|
Basic income (loss) per share
|
(0.21
|
)
|
|
0.01
|
|
|
1.01
|
|
|
—
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Diluted income (loss) per share
|
(0.21
|
)
|
|
0.01
|
|
|
1.01
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|
|
—
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The unaudited pro forma consolidated results of operations were prepared using the acquisition method of accounting and are based on the historical financial information of the Company and InfuScience. Except to the extent realized in the three-month period ended September 30, 2012, the unaudited pro forma information does not reflect any cost savings, operating synergies and other benefits that the Company may achieve as a result of these acquisitions, or the expenses to be incurred to achieve these savings, operating synergies and other benefits. In addition, except to the extent recognized in the three-month period ended September 30, 2012, the unaudited pro forma information does not reflect the costs to integrate the operations of the Company with InfuScience.
The unaudited pro forma information is not necessarily indicative of what the Company's consolidated results of operations actually would have been had the InfuScience acquisition been completed on January 1, 2011. In addition, the unaudited pro forma information does not purport to project the future results of operations of the Company. The unaudited pro forma information reflects primarily adjustments consistent with the unaudited pro forma information reflects primarily the following adjustments related to the acquisition (in thousands):
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|
|
|
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|
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Interest expense elimination
|
$
|
43
|
|
|
$
|
231
|
|
|
$458
|
|
$
|
649
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|
Expenses incurred to integrate InfuScience and other acquisitions are recorded in “acquisitions, integration and transitional expenses.” These costs include legal and financial advisory fees associated with acquisitions; integration costs to convert to common policies, procedures, and information systems; and, transitional costs such as training, redundant salaries, and retention bonuses for certain critical personnel.
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NOTE 4--
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Income (Loss) Per Share
The following table sets forth the computation of basic and diluted income (loss) per common share (in thousands, except for per share amounts):
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|
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|
|
|
|
|
|
Three Months Ended
September 30,
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Nine Months Ended
September 30,
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|
2012
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|
2011
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|
2012
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|
2011
|
Numerator:
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|
|
|
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|
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Loss from continuing operations, net of income taxes
|
$
|
(605
|
)
|
|
$
|
(334
|
)
|
|
$
|
(6,921
|
)
|
|
$
|
(2,989
|
)
|
(Loss) income from discontinued operations, net of income taxes
|
(10,931
|
)
|
|
882
|
|
|
64,448
|
|
|
4,152
|
|
Net income (loss)
|
$
|
(11,536
|
)
|
|
$
|
548
|
|
|
$
|
57,527
|
|
|
$
|
1,163
|
|
|
|
|
|
|
|
|
|
Denominator - Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
56,640
|
|
|
54,607
|
|
|
56,019
|
|
|
54,348
|
|
|
|
|
|
|
|
|
|
Basic loss from continuing operations
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.06
|
)
|
Basic (loss) income from discontinued operations
|
(0.19
|
)
|
|
0.02
|
|
|
1.15
|
|
|
0.08
|
|
Basic (loss) income
|
$
|
(0.20
|
)
|
|
$
|
0.01
|
|
|
$
|
1.03
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
Denominator - Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
56,640
|
|
|
54,607
|
|
|
56,019
|
|
|
54,348
|
|
Common share equivalents of outstanding stock options and restricted awards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total diluted shares outstanding
|
56,640
|
|
|
54,607
|
|
|
56,019
|
|
|
54,348
|
|
|
|
|
|
|
|
|
|
Diluted loss from continuing operations
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.06
|
)
|
Diluted income (loss) from discontinued operations
|
(0.19
|
)
|
|
0.02
|
|
|
1.15
|
|
|
0.08
|
|
Diluted income (loss)
|
$
|
(0.20
|
)
|
|
$
|
0.01
|
|
|
$
|
1.03
|
|
|
$
|
0.02
|
|
The computation of diluted shares for the three and
nine
months ended
September 30, 2012
and
2011
excludes the effect of
3.4 million
warrants with an exercise price of
$10
issued in connection with the acquisition of Critical Homecare Solutions Holdings, Inc. ("CHS") in 2010. In addition to the warrants, the computation of diluted shares for the three months ended
September 30, 2012
and
2011
excludes the effect of
5.4 million
and
4.5 million
, respectively, of other common stock equivalents as their inclusion would be anti-dilutive. The computation of diluted shares for the
nine
months ended
September 30, 2012
and
2011
excludes the effect of
5.4 million
and
4.6 million
, respectively, of other common stock equivalents as their inclusion would be anti-dilutive.
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board ("FASB") issued ASU 2011-08,
Testing Goodwill for Impairment
(“ASU 2011-08”). ASU 2011-08 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The Company adopted ASU 2011-08 on January 1, 2012. The adoption of this statement did not have a material effect on the Company's Unaudited Consolidated Financial Statements.
In May 2011, the FASB issued ASU 2011-04,
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS
(“ASU 2011-04”). ASU 2011-04 generally aligns the principles for fair value measurements and the related disclosure requirements under U.S. GAAP and International Financial Reporting Standards. From a U.S. GAAP perspective, the amendments are largely clarifications, but some could have a significant effect on certain companies. A number of new disclosures also are required. Except for certain disclosures, the guidance applies to public and nonpublic companies and is to be applied prospectively. The Company adopted ASU 2011-04 on January 1, 2012. The adoption of this statement is not expected to have a material effect on the Company's Unaudited Consolidated Financial Statements.
In July 2012, the FASB issued ASU 2012-02,
Testing Indefinite-Lived Intangible Assets for Impairment
(“ASU 2012-02”). ASU 2012-02 allows an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. Under this amendment, an entity would not be required to calculate the fair value of the indefinite-lived intangible
asset unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2012-02 on its Unaudited Consolidated Financial Statements.
|
|
NOTE 5--
|
GOODWILL AND INTANGIBLE ASSETS
|
As a result of the Company entering into the Asset Purchase Agreement with respect to the Pharmacy Services Asset Sale, the Company reevaluated its operating and reportable segments. Based on its review, the Company changed its operating and reportable segments from “Infusion/Home Health Services” and “Pharmacy Services” to its new operating and reportable segments: “Infusion Services", "Home Health Services” and “PBM Services”. The Company has assigned goodwill to the new segments based on relative fair market value of the segment assets as measured by discounted future cash flows .
Goodwill consisted of the following as of
September 30, 2012
and
December 31, 2011
(in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
December 31, 2011
|
Infusion
|
$
|
304,071
|
|
|
$
|
265,859
|
|
Home Health Services
|
33,784
|
|
|
33,784
|
|
PBM Services
|
12,744
|
|
|
12,744
|
|
Total
|
$
|
350,599
|
|
|
$
|
312,387
|
|
Intangible assets consisted of the following as of
September 30, 2012
and
December 31, 2011
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
Estimated
Useful Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Indefinite Lived Assets
|
|
|
|
|
|
|
|
Certificates of need
|
indefinite
|
|
$
|
9,600
|
|
|
$
|
—
|
|
|
$
|
9,600
|
|
Nursing trademarks
|
indefinite
|
|
5,800
|
|
|
—
|
|
|
5,800
|
|
|
|
|
15,400
|
|
|
—
|
|
|
15,400
|
|
Definite Lived Assets
|
|
|
|
|
|
|
|
|
|
|
Infusion customer relationships
|
5 months --3 years
|
|
8,112
|
|
|
(6,551
|
)
|
|
1,561
|
|
Infusion trademarks
|
3 years
|
|
2,600
|
|
|
(2,190
|
)
|
|
410
|
|
|
|
|
10,712
|
|
|
(8,741
|
)
|
|
1,971
|
|
|
|
|
$
|
26,112
|
|
|
$
|
(8,741
|
)
|
|
$
|
17,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Estimated
Useful Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Indefinite Lived Assets
|
|
|
|
|
|
|
|
Certificates of need
|
indefinite
|
|
$
|
9,600
|
|
|
$
|
—
|
|
|
$
|
9,600
|
|
Nursing trademarks
|
indefinite
|
|
5,800
|
|
|
—
|
|
|
5,800
|
|
|
|
|
15,400
|
|
|
—
|
|
|
15,400
|
|
Definite Lived Assets
|
|
|
|
|
|
|
|
Infusion customer relationships
|
6 months--3 years
|
|
7,519
|
|
|
(4,359
|
)
|
|
3,160
|
|
Infusion trademarks
|
3 years
|
|
2,600
|
|
|
(1,538
|
)
|
|
1,062
|
|
|
|
|
10,119
|
|
|
(5,897
|
)
|
|
4,222
|
|
|
|
|
$
|
25,519
|
|
|
$
|
(5,897
|
)
|
|
$
|
19,622
|
|
The Company had
$5.6 million
of intangible assets related to customer lists, a transitional services contract and license and marketing related intangibles included within the non-current assets from discontinued operations line on the accompanying Consolidated Balance Sheet as of
December 31, 2011
.
Total amortization of intangible assets was
$1.1 million
and
$0.9 million
for the three months ended
September 30, 2012
and
2011
, respectively. Total amortization of intangible assets was
$2.8 million
and
$2.5 million
for the
nine
months ended
September 30, 2012
and
2011
, respectively. Amortization expense is expected to be the following (in thousands):
|
|
|
|
|
2012 (six months)
|
$
|
1,135
|
|
2013
|
836
|
|
Total
|
$
|
1,971
|
|
|
|
NOTE 6--
|
RESTRUCTURING EXPENSE
|
In the fourth quarter of 2010, the Company commenced a strategic assessment of its business and operations ("Restructuring Phase I"). This assessment focused on expanding revenue opportunities and lowering corporate overhead, including workforce and benefit reductions and facility rationalization. In addition to addressing corporate overhead, the strategic assessment examined the Company's market strengths and opportunities and compared the Company's position to that of its competitors. As a result of the assessment, the Company focused its growth on investments in the Infusion and Home Health Services segments and elected to pursue offers for its traditional and specialty pharmacy mail operations and community retail pharmacy stores. Accordingly, the Company consummated the Pharmacy Services Asset Sale relating to its traditional and specialty pharmacy mail operations and community retail pharmacy stores.
During the three months ended June 30, 2012, as a result of the divestiture process, the Company's management team commenced an assessment of the Company's continuing operations in order to align its corporate structure with its remaining operations ("Restructuring Phase II"). As part of these efforts, the Company may incur significant charges such as the write down of certain long−lived assets, employee severance, other restructuring type charges, temporary redundant expenses, potential cash bonus payments and potential accelerated payments or termination costs for certain of its contractual obligations, which may impact the Company's future Consolidated Financial Statements.
Restructuring Phase I
As a result of Restructuring Phase I, the Company incurred restructuring expenses of approximately
$1.7
million during the three months ended September 30,
2011
, and
$0.3 million
and
$6.5
million during the
nine
months ended
September 30, 2012
and
2011
, respectively. The Company did not incur restructuring expense related to Phase I during the three months ended September 30, 2012. Restructuring expenses during the three months ended
September 30, 2011
consisted of approximately
$0.2 million
of third-party consulting costs,
$0.4 million
of employee severance and other benefit-related costs related to workforce reductions and
$1.1 million
of other costs, such as lease termination costs. Restructuring expenses during the
nine
months ended
September 30, 2012
consisted of approximately
$0.3 million
of third-party consulting costs. Restructuring expenses during the
nine
months ended
September 30, 2011
consisted of approximately
$2.9 million
of third-party consulting costs,
$1.9 million
of employee severance and other benefit-related costs related to workforce reductions and
$1.7 million
of other costs.
Since inception of the strategic assessment and related restructuring plan, the Company has incurred approximately
$10.2 million
in total expenses, consisting of
$4.4 million
of third-party consulting costs,
$4.2 million
of employee severance and other benefit-related costs related to workforce reductions and
$1.6 million
of facility-related costs.
The restructuring costs are included in restructuring expense on the Unaudited Consolidated Statements of Operations and, along with other temporary redundant expenses and termination costs, as part of the calculation of Segment Adjusted EBITDA, as defined in Note 10. As of
September 30, 2012
, there are restructuring accruals of
$1.9 million
related to Phase I included in accrued expenses and other current liabilities and other non-current liabilities on the Unaudited Consolidated Balance Sheets. The restructuring accrual activity consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance
and Other Benefits
|
|
Consulting
Costs
|
|
Facility-Related Costs
|
|
Other Costs
|
|
Total
|
Liability balance as of December 31, 2011
|
|
$
|
2,109
|
|
|
$
|
50
|
|
|
$
|
1,289
|
|
|
$
|
—
|
|
|
$
|
3,448
|
|
Expenses
|
|
—
|
|
|
300
|
|
|
—
|
|
|
—
|
|
|
300
|
|
Cash payments
|
|
(1,234
|
)
|
|
(350
|
)
|
|
(223
|
)
|
|
—
|
|
|
(1,807
|
)
|
Liability balance as of September 30, 2012
|
|
$
|
875
|
|
|
$
|
—
|
|
|
$
|
1,066
|
|
|
$
|
—
|
|
|
$
|
1,941
|
|
Restructuring Phase II
As a result of Restructuring Phase II, the Company incurred restructuring expenses of approximately
$0.4 million
and
0.6 million
during the three and six months ended September 30, 2012. The Company did not incur restructuring expense related to Phase II during 2011. Restructuring expenses during the three and nine months ended
September 30, 2012
consisted of approximately
$0.3 million
and
0.6 million
of employee severance and other benefit-related costs related to workforce reductions and
0.1 million
and
0.1 million
in third-party consulting costs.
Since inception of the divestiture related strategic assessment and related restructuring plan, the Company has incurred approximately
$0.6 million
in total expenses, consisting of
$0.5 million
of employee severance and other benefit-related costs related to workforce reductions and
0.1 million
in third party consulting costs.
The restructuring costs are included in restructuring expense on the Unaudited Consolidated Statements of Operations and, along with other temporary redundant expenses and termination costs, as part of the calculation of Segment Adjusted EBITDA, as defined in Note 10. As of
September 30, 2012
, there are restructuring accruals of
$0.5 million
related to Phase II included in accrued expenses and other current liabilities and other non-current liabilities on the Unaudited Consolidated Balance Sheets. The restructuring accrual activity consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance
and Other Benefits
|
|
Consulting
Costs
|
|
Facility-Related Costs
|
|
Other Costs
|
|
Total
|
Liability balance as of December 31, 2011
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Expenses
|
|
554
|
|
|
86
|
|
|
—
|
|
|
—
|
|
|
640
|
|
Cash payments
|
|
(7
|
)
|
|
(86
|
)
|
|
—
|
|
|
—
|
|
|
(93
|
)
|
Liability balance as of September 30, 2012
|
|
$
|
547
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
547
|
|
|
|
NOTE 7--
|
PROPERTY AND EQUIPMENT
|
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
December 31,
2011
|
Computer and office equipment, including equipment acquired under capital leases
|
$
|
14,201
|
|
|
$
|
15,684
|
|
Software capitalized for internal use
|
9,877
|
|
|
15,520
|
|
Vehicles, including equipment acquired under capital leases
|
1,743
|
|
|
1,701
|
|
Medical equipment
|
15,768
|
|
|
14,698
|
|
Work in progress
|
1,583
|
|
|
2,813
|
|
Furniture and fixtures
|
3,272
|
|
|
3,626
|
|
Leasehold improvements
|
7,207
|
|
|
6,507
|
|
|
53,651
|
|
|
60,549
|
|
Less: Accumulated depreciation
|
(32,529
|
)
|
|
(33,598
|
)
|
Property and equipment, net
|
$
|
21,122
|
|
|
$
|
26,951
|
|
The Company had an insignificant amount of vehicles under capital lease as of
September 30, 2012
and
December 31, 2011
.
Depreciation Expense
Depreciation expense, including expense related to assets under capital lease, for the three months ended
September 30, 2012
and
2011
was
$2.1 million
and
$1.8 million
, respectively. Depreciation expense, including expense related to assets under capital lease, for the
nine
months ended
September 30, 2012
and
2011
was
$6.1 million
and
$4.8 million
, respectively. Depreciation expense for the three months ended
September 30, 2012
and
2011
included
$0.4 million
and
$0.2 million
, respectively, for costs related to software capitalized for internal use. Depreciation expense for the
nine
months ended
September 30, 2012
and
2011
included
$1.0 million
and
$0.7 million
, respectively, for costs related to software capitalized for internal use.
Impairment
The Company assesses the impairment of its assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. As a result of the Pharmacy Services Asset Sale (see Note 2 - Discontinued Operations), the Company evaluated certain facilities that were retained by the Company following the divestiture of our generics business.
As a result of the evaluation, the Company determined that a triggering event occurred during the three months ended June 30, 2012, giving rise to the need to assess the recoverability of certain of our assets previously used in the specialty pharmacy mail operations and community retail pharmacy operations, which consisted primarily of software capitalized for internal use, leasehold improvements and work in progress. Based on our analysis, we recorded a
$5.8
million impairment charge in income (loss) from discontinued operations, net of income taxes.
As of
September 30, 2012
the Company’s long-term debt consisted of the following obligations (in thousands):
|
|
|
|
|
Senior unsecured notes
|
$
|
225,000
|
|
Capital leases
|
1,447
|
|
|
226,447
|
|
Less - obligations maturing within one year
|
967
|
|
Long term debt - net of current portion
|
$
|
225,480
|
|
On July 3, 2012, the Company entered into a Third Amendment to the Second Amended and Restated Credit Agreement, by and among the Company, as borrower, all of its subsidiaries as guarantors thereto, the lenders, Healthcare Finance Group, LLC,
an administrative agent, and the other parties thereto. The amendment reduced revolving commitments from
$150 million
to
$125 million
; eliminated the minimum revolving balance requirement; increased the basket limitation for loans and advances to third parties and investments in permitted joint ventures to
$60 million
; removed the dollar limitation on permitted acquisitions so long as the proposed acquisition meets the pro forma and other conditions; lowered the LIBOR floor to
1.00%
from
1.25%
; and modified the definition of the term “Consolidated EBITDA”. As of September 30, 2012, there were no borrowings under the senior secured revolving credit facility.
As of
September 30, 2012
, the carrying amount of the Company's senior unsecured notes was
$225.0 million
, and the estimate of the fair value of the senior unsecured notes, based on current market rates for debt of the same risk and maturities, was
$260.6 million
. The estimated fair value was calculated using level 3 inputs and was based on current market rates for debt of the same risk and maturities.
|
|
NOTE 9--
|
COMMITMENTS AND CONTINGENCIES
|
Legal Proceedings
On June 30, 2009, Professional Home Care Services, Inc., or PHCS, one of the subsidiaries the Company acquired through its acquisition of CHS, was sued by Alexander Infusion, LLC, a New York-based home infusion company, in the Supreme Court of the State of New York. The complaint alleges principally breach of contract arising in connection with PHCS's failure to consummate an acquisition of Alexander Infusion after failing to satisfy the conditions to PHCS's obligation to close. Alexander Infusion has sued for $3.5 million in damages. The Company believes Alexander Infusion's claims to be without merit and intends to continue to defend against the allegations vigorously. Furthermore, under the merger agreement, subject to certain limits, the former CHS stockholders agreed to indemnify the Company in connection with any losses arising from claims made in respect of the acquisition agreement entered into between PHCS and Alexander Infusion. As of
September 30, 2012
, no liability or indemnification reimbursement has been accrued in the Unaudited Consolidated Financial Statements as a loss is not considered probable.
Government Regulation
Various Federal and state laws and regulations affecting the healthcare industry do or may impact the Company's current and planned operations, including, without limitation, Federal and state laws prohibiting kickbacks in government health programs, Federal and state antitrust and drug distribution laws, and a wide variety of consumer protection, insurance and other state laws and regulations. Management strives to maintain the Company in substantial compliance with all existing laws and regulations material to the operation of its business. However, such laws and regulations are subject to rapid change and often are uncertain in their application. As controversies continue to arise in the healthcare industry (for example, the efforts of Plan Sponsors and pharmacy benefit managers to limit formularies, alter drug choice and establish limited networks of participating pharmacies), Federal and state regulation and enforcement priorities in this area can be expected to increase, the impact of which on the Company cannot be predicted.
From time to time, the Company responds to subpoenas and requests for information from governmental agencies. The Company cannot predict with certainty what the outcome of any of the foregoing might be. There can be no assurance that the Company will not be subject to scrutiny or challenge under one or more existing laws or that any such challenge would not be successful. Any such challenge, whether or not successful, could have a material effect upon the Company's Consolidated Financial Statements. A violation of the Federal anti-kickback statute, for example, may result in substantial criminal penalties, as well as suspension or exclusion from the Medicare and Medicaid programs. Moreover, the costs and expenses associated with defending these actions, even where successful, can be significant.
Further, there can be no assurance the Company will be able to maintain any of the regulatory approvals that may be required to operate its business, and the failure to do so could have a material effect on the Company's Unaudited Consolidated Financial Statements.
Legal Settlements
Following responses to government subpoenas and discussions with the government, in May 2011, the Company was advised of a qui tam lawsuit filed under seal in federal court in Minnesota in 2006 and naming the Company as defendant. The complaint alleged violations of healthcare statutes and regulations by the Company and predecessor companies dating back to 2000. The Company negotiated a settlement with the Minneapolis office of the United States Attorney, which is part of the US Department of Justice (“DOJ”) and relevant State governments, under which the Company paid the states
$0.6 million
and the federal government
$4.4 million
in September and October 2012, respectively, in exchange for releases, and denied wrongdoing and
liability. Remaining to be resolved are the qui tam relator's employment termination claim and her lawyer's statutory legal fee claim. During the year ended December 31, 2011, the Company recorded a legal settlement expense of
$4.8 million
related to the proposed settlement with the DOJ and State governments. During the three months and nine months ended September 30, 2012, the Company recorded additional legal settlement expense of
$(0.1) million
and
$0.2 million
to account for the final settlement amount. The legal settlement expenses were included in income (loss) from discontinued operations, net of income taxes in the accompanying Unaudited Consolidated Statements of Operations. As of
September 30, 2012
and December 31, 2011, there was a liability of
$4.4 million
and
$4.8 million
, respectively, included in accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets related to the settlement.
PBM Services Payment Delay
A large PBM Services customer has become approximately two months behind payment terms as of September 30, 2012. The total amount owed to the Company is
$7.8
million, of which $0.3 million is due to the Company for PBM services rendered. The payments from the customer are the source from which the Company remits payments to participating network pharmacies. The Company is in discussions with the customer to address its disputes and this outstanding balance. As of
September 30, 2012
, no liability or reserve against the outstanding PBM service fees has been recorded in the Unaudited Consolidated Financial Statements as the probability of loss is not known.
Leases
The Company leases its facilities and certain equipment under various operating leases with third parties. The majority of these leases contain escalation clauses that increase base rent payments based upon either the Consumer Price Index or an agreed upon schedule.
In addition, the Company utilizes capital leases agreements with third parties to obtain certain assets such as vehicles. Interest rates on capital leases are both fixed and variable and range from
3%
to
7%
.
As of
September 30, 2012
, future minimum lease payments, including interest, under operating and capital leases are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
Capital Leases
|
Total
|
2012 (three months)
|
$
|
1,531
|
|
$
|
72
|
|
$
|
1,603
|
|
2013
|
4,620
|
|
1,018
|
|
5,638
|
|
2014
|
3,307
|
|
225
|
|
3,532
|
|
2015
|
2,686
|
|
192
|
|
2,878
|
|
2016
|
2,188
|
|
23
|
|
2,211
|
|
2017 and thereafter
|
3,770
|
|
—
|
|
3,770
|
|
Total
|
$
|
18,102
|
|
$
|
1,530
|
|
$
|
19,632
|
|
Rent expense for leased facilities and equipment was approximately
$1.7 million
and
$1.4 million
for the three months ended
September 30, 2012
and
2011
, respectively. Rent expense for leased facilities and equipment was approximately
$4.6 million
and
$4.2 million
for the
nine
months ended
September 30, 2012
and
2011
, respectively.
Purchase Commitments
As of
September 30, 2012
, the Company had commitments to purchase prescription drugs from drug manufacturers of approximately
$6.3 million
during the remainder of
2012
. These purchase commitments are made at levels expected to be used in the normal course of business.
|
|
NOTE 10--
|
OPERATING AND REPORTABLE SEGMENTS
|
As a result of the Company entering into the Asset Purchase Agreement on February 1, 2012 with respect to the sale of its traditional and specialty pharmacy mail operations and community retail pharmacy stores, the Company reevaluated its operating and reportable segments in accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 280,
Segment Reporting
(“ASC 280”). Based on its review, the Company changed its operating and reportable segments from “Infusion/Home Health Services” and “Pharmacy Services” to its new operating and reportable segments: “Infusion Services", "Home Health Services” and “PBM Services”. These three new operating and reportable segments reflect how the Company's chief operating decision maker reviews the Company's results in terms of allocating resources and assessing performance. Prior period disclosures reflect the change in reportable segments.
The Infusion Services operating and reportable segment provides services consisting of home infusion therapy, respiratory therapy and the provision of durable medical equipment, products and services. Infusion services include the dispensing and administering of infusion-based drugs, which typically require additional nursing and clinical management services, equipment to administer the correct dosage and patient training designed to improve patient outcomes. Home infusion services also include the dispensing of self-injectable therapies.
The Home Health Services operating and reportable segment provides services including the provision of skilled nursing services and therapy visits, private duty nursing services, hospice services, rehabilitation services and medical social services to patients primarily in their home.
The PBM Services operating and reportable segment consists of integrated pharmacy benefit management ("PBM") services, which primarily consists of discount cash card programs. The discount cash card programs provide a cost effective alternative for individuals who may be uninsured, underinsured or may have restrictive coverage that disallows reimbursement for certain medications. Under these discount programs, individuals who present a discount card at one of the Company's participating network pharmacies or who order medications through one of the Company's participating mail service pharmacies receive prescription medications at a discounted price compared to the retail or "cash" price. In addition, in the Company's capacity as a pharmacy benefit manager, it has fully funded prescription benefit programs where the Company reimburses its network pharmacies and third party payors in turn reimburse the Company based on Medi-Span reported pricing for those claims fulfilled for their plan participants.
The Company's chief operating decision maker evaluates segment performance and allocates resources based on Segment Adjusted EBITDA. Segment Adjusted EBITDA is defined as income (loss) from continuing operations, net of income taxes adjusted for net interest expense, income tax expense (benefit), depreciation, amortization of intangibles and stock-based compensation expense and prior to the allocation of certain corporate expenses. Segment Adjusted EBITDA excludes acquisition, integration, and transitional expenses; restructuring expense; and other expenses related to the Company's strategic assessment. Segment Adjusted EBITDA is a measure of earnings that management monitors as an important indicator of operating and financial performance. The accounting policies of the operating and reportable segments are consistent with those described in the Company's summary of significant accounting policies.
Segment Reporting Information
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Results of Operations:
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
Infusion Services - product revenue
|
$
|
123,361
|
|
|
$
|
87,869
|
|
|
$
|
338,721
|
|
|
$
|
265,368
|
|
Infusion Services - service revenue
|
2,575
|
|
|
2,376
|
|
|
7,242
|
|
|
6,455
|
|
Total Infusion Services revenue
|
125,936
|
|
|
90,245
|
|
|
345,963
|
|
|
271,823
|
|
|
|
|
|
|
|
|
|
Home Health Services - service revenue
|
17,299
|
|
|
17,548
|
|
|
50,870
|
|
|
52,429
|
|
|
|
|
|
|
|
|
|
PBM Services - service revenue
|
27,130
|
|
|
26,036
|
|
|
85,066
|
|
|
71,989
|
|
|
|
|
|
|
|
|
|
Total revenue
|
$
|
170,365
|
|
|
$
|
133,829
|
|
|
$
|
481,899
|
|
|
$
|
396,241
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA by Segment before corporate overhead:
|
|
|
|
|
|
|
|
|
|
Infusion Services
|
$
|
9,931
|
|
|
$
|
7,557
|
|
|
$
|
25,740
|
|
|
$
|
25,181
|
|
Home Health Services
|
1,402
|
|
|
1,663
|
|
|
3,557
|
|
|
4,456
|
|
PBM Services
|
6,905
|
|
|
7,961
|
|
|
19,367
|
|
|
20,848
|
|
Total Segment Adjusted EBITDA
|
18,238
|
|
|
17,181
|
|
|
48,664
|
|
|
50,485
|
|
|
|
|
|
|
|
|
|
Corporate overhead
|
(6,625
|
)
|
|
(5,442
|
)
|
|
(19,665
|
)
|
|
(17,454
|
)
|
|
|
|
|
|
|
|
|
Interest expense, net
|
(6,497
|
)
|
|
(6,528
|
)
|
|
(19,705
|
)
|
|
(19,375
|
)
|
Income tax benefit
|
2,506
|
|
|
1,862
|
|
|
2,644
|
|
|
2,406
|
|
Depreciation
|
(2,134
|
)
|
|
(1,784
|
)
|
|
(6,115
|
)
|
|
(4,764
|
)
|
Amortization of intangibles
|
(1,087
|
)
|
|
(858
|
)
|
|
(2,844
|
)
|
|
(2,496
|
)
|
Stock-based compensation expense
|
(1,687
|
)
|
|
(1,731
|
)
|
|
(4,398
|
)
|
|
(3,983
|
)
|
Acquisition, integration and transitional expense
|
(2,881
|
)
|
|
(1,284
|
)
|
|
(4,562
|
)
|
|
(1,284
|
)
|
Restructuring expense
|
(438
|
)
|
|
(1,750
|
)
|
|
(940
|
)
|
|
(6,524
|
)
|
Loss from continuing operations, net of income taxes
|
$
|
(605
|
)
|
|
$
|
(334
|
)
|
|
$
|
(6,921
|
)
|
|
$
|
(2,989
|
)
|
|
|
|
|
|
|
|
|
Supplemental Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
December 31,
2011
|
Total Assets
|
|
|
|
|
|
|
|
|
|
Infusion Services
|
|
|
|
|
$
|
427,437
|
|
|
$
|
353,999
|
|
Home Health Services
|
|
|
|
|
68,270
|
|
|
64,672
|
|
PBM Services
|
|
|
|
|
40,982
|
|
|
40,418
|
|
Corporate unallocated, including cash and cash equivalents
|
|
|
|
|
101,501
|
|
|
24,348
|
|
Assets from discontinued operations
|
|
|
|
|
—
|
|
|
59,005
|
|
Assets associated with discontinued operations, not sold
|
|
|
|
|
18,630
|
|
|
134,660
|
|
Total
|
|
|
|
|
$
|
656,820
|
|
|
$
|
677,102
|
|
|
|
NOTE 11--
|
CONCENTRATION OF RISK
|
Customer and Credit Risk
The Company provides trade credit to its customers in the normal course of business.
One payor accounted for approximately
20%
and
13%
of revenue during the three months ended
September 30, 2012
and
2011
, respectively, and approximately
18%
and
13%
of revenue during the
nine
months ended
September 30, 2012
and
2011
, respectively. The majority of the revenue is related to the Infusion Services segment.
Therapy Revenue Risk
The Company sells products related to the Immune Globulin (IVIG) therapy, which represented
18%
and
25%
of revenue during the three months ended
September 30, 2012
and
2011
, respectively and
20%
and
26%
of revenue during the
nine
months ended
September 30, 2012
and
2011
, respectively. The revenue is related to the Infusion Services segment.
The Company’s Federal and state income tax expense (benefit) from continuing operations is summarized in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Current
|
|
|
|
|
|
|
|
Federal
|
$
|
(2,933
|
)
|
|
$
|
(44
|
)
|
|
$
|
(3,082
|
)
|
|
$
|
(317
|
)
|
State
|
(38
|
)
|
|
(679
|
)
|
|
(27
|
)
|
|
(807
|
)
|
Total Current
|
(2,971
|
)
|
|
(723
|
)
|
|
(3,109
|
)
|
|
(1,124
|
)
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
496
|
|
|
(996
|
)
|
|
496
|
|
|
(1,121
|
)
|
State
|
(31
|
)
|
|
(143
|
)
|
|
(31
|
)
|
|
(161
|
)
|
Total deferred
|
465
|
|
|
(1,139
|
)
|
|
465
|
|
|
(1,282
|
)
|
Total income tax expense (benefit)
|
$
|
(2,506
|
)
|
|
$
|
(1,862
|
)
|
|
$
|
(2,644
|
)
|
|
$
|
(2,406
|
)
|
The Company’s reconciliation of the statutory rate from continuing operations to the effective income tax rate is as follows for the three and
nine
months ended
September 30, 2012
and
2011
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Tax benefit at statutory rate
|
$
|
(1,090
|
)
|
|
$
|
(768
|
)
|
|
$
|
(3,348
|
)
|
|
$
|
(1,889
|
)
|
State tax benefit, net of Federal taxes
|
357
|
|
|
(120
|
)
|
|
(7
|
)
|
|
(284
|
)
|
Change in tax contingencies
|
6
|
|
|
8
|
|
|
17
|
|
|
21
|
|
Valuation allowance changes affecting income tax expense
|
(2,484
|
)
|
|
(1,029
|
)
|
|
465
|
|
|
(422
|
)
|
Other
|
705
|
|
|
47
|
|
|
229
|
|
|
168
|
|
Income tax expense (benefit)
|
$
|
(2,506
|
)
|
|
$
|
(1,862
|
)
|
|
$
|
(2,644
|
)
|
|
$
|
(2,406
|
)
|
|
|
NOTE 13--
|
STOCK-BASED COMPENSATION
|
BioScrip Equity Incentive Plans
Under the Company's Amended and Restated 2008 Equity Incentive Plan (as amended and restated, the “2008 Plan”), the Company may issue, among other things, incentive stock options (“ISOs”), non-qualified stock options (“NQSOs”), stock appreciation rights ("SARs"), restricted stock, performance shares and performance units to employees and directors. While SARS are authorized under the 2008 Plan, they may also be issued outside of the plan. Under the 2008 Plan,
3,580,000
shares were originally reserved for issuance (subject to adjustment for grants made under the Company's 2001 Incentive Stock Plan (the “2001 Plan”) after January 1, 2008, as well as for forfeitures, expirations or awards that under the 2001 Plan otherwise settled in cash after the adoption thereof). Upon the effective date of the 2008 Plan, the Company ceased making grants under the 2001 Plan. The 2008 Plan is administered by the Company's Management Development and Compensation Committee (the “Compensation Committee”), a standing committee of the Board of Directors. On June 10, 2010, the Company's stockholders approved an amendment to the 2008 Plan to increase the number of authorized shares of common stock available for issuance by
3,275,000
shares to
6,855,000
shares.
As of
September 30, 2012
, there were
1,853,799
shares that remained available for grant under the 2008 Plan.
BioScrip/CHS Equity Plan
Effective upon closing of the acquisition of CHS, the CHS 2006 Equity Incentive Plan was adopted by the Company and renamed the “BioScrip/CHS 2006 Equity Incentive Plan” (as amended and restated, the “BioScrip/CHS Plan”). There were
13,000,000
shares of CHS common stock originally authorized for issuance under the CHS 2006 Equity Incentive Plan, which were converted into
3,106,315
shares of BioScrip common stock, and adjusted using the exchange ratio defined by the merger agreement. The Board of Directors further amended the BioScrip/CHS Plan to provide for it to have substantially the same terms and provisions as the 2008 Plan.
Of the options authorized and outstanding under the BioScrip/CHS Plan on the date of the acquisition,
716,086
options were designated as “rollover” options. These rollover options were issued to the top five executives of CHS at the time of the acquisition, and otherwise remain subject to the term of the BioScrip/CHS Plan, as amended, and fully vested on the date of conversion. Under the terms of the BioScrip/CHS Plan, any shares of BioScrip common stock subject to rollover options that expire or otherwise terminate before all or any part of the shares subject to such options have been purchased as a result of the exercise of such options shall remain available for issuance under the BioScrip/CHS Plan.
The remaining
2,390,229
shares are authorized for issuance under the BioScrip/CHS Plan. These shares may be used for awards under the BioScrip/CHS Plan, provided that awards using such available shares are not made after the date that awards or grants could have been made under the terms of the pre-existing plan, and are only made to individuals who were not employees or directors of BioScrip or an affiliate or subsidiary of BioScrip prior to such acquisition. As of
September 30, 2012
, there were
1,725,445
shares that remained available under the BioScrip/CHS Plan.
Stock Options
The Company recognized compensation expense related to stock options of
$1.1 million
and
$1.6 million
during the three months ended
September 30, 2012
and
2011
, respectively. The Company recognized compensation expense related to stock options of
$3.3 million
and
$3.3 million
during the
nine
months ended
September 30, 2012
and
2011
, respectively.
Restricted Stock
The Company recognized compensation expense related to restricted stock awards of
$0.2 million
and
$0.1 million
during the three months ended
September 30, 2012
and
2011
, respectively. The Company recognized compensation expense related to restricted stock awards of
$0.3 million
and
$0.4 million
during the
nine
months ended
September 30, 2012
and
2011
, respectively.
Stock Appreciation Rights
The Company recognized compensation expense related to stock appreciation rights awards of
$0.5 million
and
$0.1 million
during the three months ended
September 30, 2012
and
2011
, respectively. The Company recognized compensation expense related to stock appreciation rights awards of
$0.8 million
and
$0.2 million
during the
nine
months ended
September 30, 2012
and
2011
, respectively.
|
|
NOTE 14--
|
SUBSEQUENT EVENTS
|
Resolution of claims by Department of Justice and State Governments
In connection with the complaint alleging violations of healthcare statutes and regulations by the Company and predecessor companies dating back to 2000, the Company finalized its resolution of these claims with the Department of Justice (DOJ) and State governments in October of 2012. the final settlement amounts of
$4.4 million
to the federal government and
$0.6 million
to the States were fully accrued at September 30, 2012 (see note 8).