Catamaran Corp - FORM 10-Q - October 31, 2014

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EX-31.1 - EXHIBIT - Catamaran Corp	ctrxex312014q3.htm
EX-31.2 - EXHIBIT - Catamaran Corp	ctrxex3122014q3.htm
EX-10.1 - EXHIBIT - Catamaran Corp	ctrxex1012014q3.htm
EX-32.1 - EXHIBIT - Catamaran Corp	ctrxex3212014q3.htm
EX-32.2 - EXHIBIT - Catamaran Corp	ctrxex3222014q3.htm
EX-3.1 - EXHIBIT - Catamaran Corp	ctrxex3112014q3.htm
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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 000-52073

CATAMARAN CORPORATION

(Exact name of registrant as specified in its charter)



Yukon Territory		98-0167449
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

1600 McConnor Parkway

Schaumburg, Illinois 60173-6801

(Address of principal executive offices, zip code)

(800) 282-3232

(Registrant’s phone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):



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

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

As of October 30, 2014, there were 207,484,514 of the Registrant’s common shares, no par value per share, outstanding.

TABLE OF CONTENTS



	Page
PART I — FINANCIAL INFORMATION	3

Item 1. Financial Statements (unaudited)	3

Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	3

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013	4

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013	5

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	6

Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2014 and 2013	7

Notes to Unaudited Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3. Quantitative and Qualitative Disclosures About Market Risk	35

Item 4. Controls and Procedures	35

PART II — OTHER INFORMATION	37

Item 1. Legal Proceedings	37

Item 1A. Risk Factors	37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 3. Defaults Upon Senior Securities	37

Item 4. Mine Safety Disclosures	37

Item 5. Other Information	37

Item 6. Exhibits	38

SIGNATURE	39

Exhibit 3.1
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 101

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PART I. FINANCIAL INFORMATION


ITEM 1.	Financial Statements

CATAMARAN CORPORATION

Consolidated Balance Sheets

(in thousands, except share data)



	September 30, 2014			December 31, 2013
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	906,835		$	387,241
Restricted cash	32,224			32,220
Accounts receivable, net of allowance for doubtful accounts of $3,937 (2013 — $5,860)	1,296,245			959,586
Rebates receivable	880,117			305,955
Other current assets	176,987			152,673
Total current assets	3,292,408			1,837,675
Property and equipment, net of accumulated depreciation of $142,152 (2013 — $103,858)	188,728			197,007
Goodwill	4,724,639			4,720,275
Other intangible assets, net of accumulated amortization of $523,462 (2013 — $363,546)	1,019,240			1,181,419
Other long-term assets	74,250			59,387
Total assets	$	9,299,265		$	7,995,763

LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	1,105,771		$	817,805
Accrued expenses and other current liabilities	313,398			254,100
Rebates payable	915,035			356,265
Current portion - long-term debt	75,000			50,000
Total current liabilities	2,409,204			1,478,170
Deferred income taxes	259,311			301,341
Long-term debt	1,362,202			1,215,363
Other long-term liabilities	97,336			89,391
Total liabilities	4,128,053			3,084,265
Commitments and contingencies (Note 10)
Shareholders’ equity
Common shares: no par value, unlimited shares authorized; 207,484,514 shares issued and outstanding at September 30, 2014 (December 31, 2013 — 206,305,070 shares)	4,264,444			4,215,291
Additional paid-in capital	65,953			77,790
Retained earnings	834,006			617,161
Accumulated other comprehensive loss	(1,452		)	(1,752		)
Total shareholders' equity	5,162,951			4,908,490
Non-controlling interest	8,261			3,008
Total equity	5,171,212			4,911,498
Total liabilities and equity	$	9,299,265		$	7,995,763

See accompanying notes to the unaudited consolidated financial statements.

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CATAMARAN CORPORATION

Consolidated Statements of Operations

(in thousands, except share and per share data)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(unaudited)				(unaudited)

Revenue	$	5,541,713	$	3,614,148	$	15,842,000	$	10,251,295
Cost of revenue	5,190,165		3,326,360		14,845,976		9,450,546
Gross profit	351,548		287,788		996,024		800,749
Expenses:
Selling, general and administrative	131,897		110,454		389,048		310,839
Depreciation of property and equipment	19,442		9,979		44,904		24,887
Amortization of intangible assets	52,216		47,220		162,179		147,368
	203,555		167,653		596,131		483,094
Operating income	147,993		120,135		399,893		317,655
Interest and other expense, net	17,918		9,026		44,882		30,972
Income before income taxes	130,075		111,109		355,011		286,683
Income tax expense	33,763		27,981		95,113		75,616
Net income	96,312		83,128		$	259,898	$	211,067
Less: Net income attributable to non-controlling interest	14,344		10,190		43,053		23,303
Net income attributable to the Company	$	81,968	$	72,938	$	216,845	$	187,764
Earnings per share attributable to the Company:
Basic	$	0.40	$	0.35	$	1.05	$	0.91
Diluted	$	0.39	$	0.35	$	1.05	$	0.91
Weighted average number of shares used in computing earnings per share:
Basic	207,447,647		206,203,263		206,973,924		205,920,803
Diluted	207,875,252		206,824,618		207,470,739		206,636,923

See accompanying notes to the unaudited consolidated financial statements.

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CATAMARAN CORPORATION

Consolidated Statements of Comprehensive Income

(in thousands)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014		2013
	(unaudited)					(unaudited)
Net income	$	96,312	$	83,128		$	259,898	$	211,067
Other comprehensive income, net of tax
Unrealized income (loss) on cash flow hedge, net of income tax expense of $368 for the three and nine months ended September 30, 2013	382		(853		)	300		194
Comprehensive income	96,694		82,275			260,198		$	211,261
Less: Comprehensive income attributable to non-controlling interest	14,344		10,190			43,053		$	23,303
Comprehensive income attributable to the Company	$	82,350	$	72,085		$	217,145	$	187,958

See accompanying notes to the unaudited consolidated financial statements.

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CATAMARAN CORPORATION

Consolidated Statements of Cash Flows

(in thousands)



	Nine Months Ended September 30,
	2014			2013
	(unaudited)
Cash flows from operating activities:
Net income	$	259,898		$	211,067
Items not involving cash:
Stock-based compensation	24,379			19,724
Depreciation of property and equipment	47,861			28,204
Amortization of intangible assets	162,179			147,368
Deferred lease inducements and rent	5,947			24,042
Deferred income taxes	(43,546		)	(36,225		)
Tax benefit on option exercises	(4,241		)	(10,469		)
Deferred financing cost amortization	7,126			6,999
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable	(336,629		)	(119,630		)
Rebates receivable	(574,416		)	11,131
Restricted cash	(4		)	199
Other current assets	(11,390		)	8,036
Accounts payable	287,949			47,608
Accrued expenses and other current liabilities	48,531			(17,983		)
Rebates payable	558,770			14,022
Other long-term assets and liabilities	(5,320		)	1,760
Net cash provided by operating activities	427,094			335,853
Cash flows from investing activities:
Acquisition, net of cash acquired	(2,026		)	(7,076		)
Purchases of property and equipment	(46,209		)	(93,272		)
Proceeds from restricted cash	—			20,004
Net cash used by investing activities	(48,235		)	(80,344		)
Cash flows from financing activities:
Proceeds from issuance of debt	492,500			100,000
Repayment of long-term debt	(325,000		)	(256,250		)
Payment of financing costs	(1,963		)	(2,347		)
Proceeds from exercise of options	5,596			2,976
Proceeds from exercise of warrants	3,453			487
Tax benefit on option exercises	4,241			10,469
Payments of contingent consideration	—			(23,203		)
Distributions to non-controlling interest	(37,800		)	(22,115		)
Other	(353		)	—
Net cash provided (used) by financing activities	140,674			(189,983		)
Effect of foreign exchange on cash balances	61			(75		)
Increase in cash and cash equivalents	519,594			65,451
Cash and cash equivalents, beginning of period	387,241			370,776
Cash and cash equivalents, end of period	$	906,835		$	436,227

See accompanying notes to the unaudited consolidated financial statements.

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CATAMARAN CORPORATION

Consolidated Statements of Equity

(in thousands, except share data)



	Common Shares			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Non-controlling Interest
	Shares	Amount		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Non-controlling Interest			Total
Balance at December 31, 2013	206,305,070	$	4,215,291	$	77,790		$	617,161	$	(1,752	)	$	3,008		$	4,911,498
Activity during the period (unaudited):
Net income	—	—		—			216,845		—			43,053			259,898
Exercise of stock options	294,358	7,950		(2,354		)	—		—			—			5,596
Exercise of warrants	425,160	20,624		(17,171		)	—		—			—			3,453
Vesting of restricted stock units	459,926	20,579		(20,579		)	—		—			—			—
Tax benefit on options exercised	—	—		4,241			—		—			—			4,241
Stock-based compensation	—	—		24,379			—		—			—			24,379
Distributions to non-controlling interest	—	—		—			—		—			(37,800		)	(37,800		)
Other comprehensive income, net of tax	—	—		—			—		300			—			300
Other	—	—		(353		)	—		—			—			(353		)
Balance at September 30, 2014 (unaudited)	207,484,514	$	4,264,444	$	65,953		$	834,006	$	(1,452	)	$	8,261		$	5,171,212

Balance at December 31, 2012	205,399,102	$	4,180,778	$	73,530		$	354,991	$	(2,191	)	$	2,753		$	4,609,861
Activity during the period (unaudited):
Net income	—	—		—			187,764		—			23,303			211,067
Exercise of stock options	344,254	4,241		(1,265		)	—		—			—			2,976
Exercise of warrants	60,000	2,910		(2,423		)	—		—			—			487
Vesting of restricted stock units	494,964	27,210		(27,210		)	—		—			—			—
Tax benefit on options exercised	—	—		10,469			—		—			—			10,469
Stock-based compensation	—	—		19,724			—		—			—			19,724
Distributions to non-controlling interest	—	—		—			—		—			(22,115		)	(22,115		)
Other comprehensive income, net of tax	—	—		—			—		194			—			194
Balance at September 30, 2013 (unaudited)	206,298,320	$	4,215,139	$	72,825		$	542,755	$	(1,997	)	$	3,941		$	4,832,663

See accompanying notes to the unaudited consolidated financial statements.

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CATAMARAN CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


1.	Description of Business

Catamaran Corporation (“Catamaran” or the “Company”) is a leading provider of pharmacy benefits management (“PBM”) services and healthcare information technology (“HCIT”) solutions to the healthcare benefits management industry. The Company’s product offerings and solutions combine a wide range of PBM services, software applications, application service provider (“ASP”) processing services and professional services designed for many of the largest organizations in the pharmaceutical supply chain, such as federal, provincial, state and local governments, unions, corporations, pharmacy benefit managers, managed care organizations, retail pharmacy chains and other healthcare intermediaries. The Company is headquartered in Schaumburg, Illinois with several locations in the U.S. and Canada. The Company trades on the Toronto Stock Exchange under ticker symbol “CCT” and on the Nasdaq Global Select Market under ticker symbol “CTRX.”


2.	Basis of Presentation

Basis of presentation:

The unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), pursuant to the Securities and Exchange Commission’s (“SEC”) rules and regulations for reporting on Form 10-Q, and following accounting policies consistent with the Company’s audited annual consolidated financial statements for the year ended December 31, 2013. The unaudited consolidated financial statements of the Company include its wholly-owned subsidiaries and all significant intercompany transactions and balances have been eliminated in consolidation. Amounts in the unaudited consolidated financial statements and notes thereto are expressed in U.S. dollars, except where indicated. The financial information included herein reflects all adjustments (consisting only of normal recurring adjustments), which, in the opinion of management, are necessary for a fair presentation of the results for the periods presented. Certain reclassifications have been made to conform the prior year's consolidated financial statements to the current year's presentation. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014. As of the issuance date of the Company’s financial statements, the Company has assessed whether subsequent events have occurred that require adjustment to or disclosure in these unaudited consolidated financial statements in accordance with Financial Accounting Standards Board’s (“FASB”) guidance.

Pursuant to the SEC rules and regulations for reporting on Form 10-Q, certain information and note disclosures normally included in the annual consolidated financial statements prepared in accordance with GAAP have been condensed or excluded. As a result, these unaudited consolidated financial statements do not contain all the disclosures required to be included in the annual consolidated financial statements and should be read in conjunction with the most recent audited annual consolidated financial statements and notes thereto described in our Annual Report on Form 10-K for the year ended December 31, 2013.

Use of estimates:

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Significant items subject to such estimates and assumptions include revenue recognition, rebates, purchase price allocation and contingent consideration in connection with acquisitions, valuation of property and equipment, valuation of intangible assets acquired and related amortization periods, impairment of goodwill, income tax uncertainties, contingencies and valuation allowances for receivables and income taxes. Actual results could differ from those estimates.


3.	Recent Accounting Pronouncements

a) Recent accounting standards implemented

In July 2013, the FASB issued authoritative guidance containing changes to the presentation of an unrecognized tax benefit when a loss or credit carryforward exists. The new standard requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in the settlement of the uncertain tax positions. The Company adopted this standard on January 1, 2014; however, the implementation of the standard did not have a significant impact on its financial results or in the presentation and disclosure of its financial statements.

No other new accounting standards have been adopted during the three and nine months ended September 30, 2014.

b) Recent accounting standards issued

On May 28, 2014, the FASB issued Accounting Standard Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

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No other new standards have been issued during the three and nine months ended September 30, 2014 that the Company assessed to have a significant impact on its financial results or in the presentation and disclosure of its financial statements.

4. Business Combinations

Restat Acquisition

On October 1, 2013, the Company completed the acquisition of all of the outstanding equity interests of Restat, LLC ("Restat"), a privately-held PBM based in Milwaukee, Wisconsin, for a purchase price of $409.5 million in cash subject to certain customary post-closing adjustments. The purchase price was funded from the Company’s existing cash balance and $350.0 million in borrowings under a five-year senior secured revolving credit facility (the “Revolving Facility”). The acquisition provides the Company the opportunity to bring Catamaran's full-suite of technology and clinical services to Restat's clients, including mail and specialty pharmacy services. The results of Restat have been included in the Company's results since October 1, 2013.

The acquisition was accounted for under the acquisition method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition has been recorded to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. The carrying values for current assets and liabilities were deemed to approximate their fair values due to the short-term nature of their maturities. Fair values for acquired amortizable intangible assets were determined as follows: customer relationships were valued using an excess earnings model based on expected future revenues derived from the customers acquired, non-compete agreements were valued using discounted cash flow models based on expected future results of Restat and trademarks/tradenames were valued using a royalty savings model based on future projected revenues of Restat. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill.

All of the assets and liabilities recorded for the acquisition are included within the Company's PBM segment. The residual amount of the purchase price after allocation to identifiable net assets represents goodwill. Goodwill is non-amortizing for financial statement purposes. Goodwill of $227.8 million related to the Restat acquisition is tax deductible. The goodwill recognized by the Company represents many of the synergies and business growth opportunities that the Company anticipates may be realized from the acquisition of Restat. The synergies include improved pricing from the Company's suppliers due to the increased volume of prescription drug purchases, pull through opportunities of the Company's mail and specialty service offerings, and a more efficient leveraging of resources to achieve operating profits.

The following summarizes the fair values assigned to the assets acquired and liabilities assumed at the acquisition date (in thousands):



	Initial Amounts Recognized at Acquisition Date (a)		Measurement Period Adjustments (b)			Current Amounts Recognized at Acquisition Date
Accounts receivable	$	13,842	$	—		$	13,842
Rebates receivable	6,635		(254		)	6,381
Other current assets	383		—			383
Total current assets	20,860		(254		)	20,606
Property and equipment	1,263		—			1,263
Intangible assets	182,720		—			182,720
Goodwill	223,474		4,364			227,838
Total assets acquired	428,317		4,110			432,427
Accounts payable	22,370		—			22,370
Rebates payable	16,106		—			16,106
Accrued liabilities	7,231		—			7,231
Other long-term liabilities	—		2,084			2,084
Total liabilities assumed	45,707		2,084			47,791

Net assets acquired	$	382,610	$	2,026		$	384,636

(a) As previously reported in the Company's Form 10-K for the period ended December 31, 2013.

(b) These measurement period adjustments were recorded through June 30, 2014 to reflect an additional $2.0 million paid to former Restat owners for working capital reconciliation as well as changes in the estimated fair values of the associated assets acquired and liabilities assumed based on factors existing as of the acquisition date.

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CATAMARAN CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

During the three and nine months ended September 30, 2014, the Company recognized $8.7 million and $26.0 million, respectively, of amortization expense from intangible assets acquired in the Restat acquisition. Amortization associated with the Restat acquisition for the remainder of 2014 is expected to be $7.7 million.

The estimated fair values and useful lives of intangible assets acquired are as follows (dollars in thousands):



	Fair Value		Useful Life
Customer relationships - PBM	$	143,200	10 years
Customer relationships - cash card	35,500		3 years
Trademarks/Trade names	1,000		1 year
Non-compete agreements	3,020		5 years
Total	$	182,720

None of the acquired intangible assets will have any residual value at the end of the amortization periods. There were no in-process research and development assets acquired.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined historical results of operations of the Company and its acquisition of Restat as if the acquisition had occurred on the first day of the fiscal year prior to the fiscal year when the acquisition was completed. The unaudited pro forma financial information includes certain adjustments related to the acquisition, such as increased amortization from the fair value of intangible assets acquired recorded as part of the purchase accounting, the elimination of transactions between the Company and the acquired entities, and related income tax effects.

Unaudited pro forma results of operations are as follows (in thousands, except share and per share amounts):



	Three Months Ended September 30, 2013		Nine Months Ended September 30, 2013
Revenue	$	3,830,243	$	10,865,244
Gross profit	$	312,863	$	863,506
Net income attributable to the Company	$	75,996	$	199,003
Earnings per share attributable to the Company:
Basic	$	0.37	$	0.97
Diluted	$	0.37	$	0.96
Weighted average shares outstanding:
Basic	206,203,263		205,920,803
Diluted	206,824,618		206,636,923

This unaudited pro forma financial information is not intended to represent or be indicative of what would have occurred if these transactions had taken place on the date presented and is not indicative of what the Company's actual results of operations would have been had the acquisitions been completed at the beginning of the period indicated above. Further, the pro forma combined results do not reflect one-time costs to fully integrate and operate the combined organization more efficiently or anticipated synergies expected to result from the combinations and should not be relied upon as being indicative of the future results that the Company will experience.

Salveo Specialty Pharmacy Acquisition

Subsequent to the end of the current reporting period, on October 8, 2014, the Company announced the entry into a definitive purchase agreement to acquire all of the outstanding capital stock of Salveo Specialty Pharmacy, Inc. ("Salveo"), an independent specialty pharmacy platform with pharmacy locations in New York and California, for a purchase price of $260.0 million in cash, subject to certain customary post-closing adjustments. The acquisition provides the Company with the opportunity to expand its geographic footprint and therapy mix in the specialty pharmacy market. The acquisition is expected to be completed in the fourth quarter of 2014, subject to certain customary closing conditions. The initial accounting for this acquisition was incomplete at the time these financial statements were available for issuance as the acquisition has not closed.

5. Goodwill and Other Intangible Assets

Goodwill is reviewed for impairment annually or more frequently if impairment indicators arise. The Company allocates goodwill to both the PBM and HCIT segments. There were no impairments of goodwill during the three and nine months ended September 30, 2014 and 2013.

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CATAMARAN CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The changes in the carrying amounts of goodwill by reportable segment for the nine months ended September 30, 2014 are as follows (in thousands):



	PBM		HCIT		Total
Balance at December 31, 2013	$	4,700,610	$	19,665	$	4,720,275
Measurement period adjustments (a)	2,338		—		2,338
Working capital adjustment (b)	2,026		—		2,026
Balance at September 30, 2014	$	4,704,974	$	19,665	$	4,724,639


(a)	Represents adjustments to the fair value of assets acquired and liabilities assumed for recent acquisitions during the measurement period. The measurement period adjustments were not recast to the 2013 consolidated financial statements as they were not deemed material.


(b)	Represents adjustments to purchase price for the Restat acquisition, including settlement of working capital adjustment.

Definite-lived intangible assets are amortized over the useful lives of the related assets. The components of intangible assets were as follows (in thousands):



	September 30, 2014						December 31, 2013
	Gross Carrying Amount		Accumulated Amortization		Net		Gross Carrying Amount		Accumulated Amortization		Net
Customer relationships	$	1,527,722	$	514,204	$	1,013,518	$	1,528,475	$	355,737	$	1,172,738
Non-compete agreements	11,920		6,877		5,043		13,430		6,463		6,967
Other intangible assets	3,060		2,381		679		3,060		1,346		1,714
Total	$	1,542,702	$	523,462	$	1,019,240	$	1,544,965	$	363,546	$	1,181,419

Total amortization associated with intangible assets at September 30, 2014 is estimated to be $51.0 million for the remainder of 2014, $194.0 million in 2015, $166.7 million in 2016, $147.5 million in 2017, $137.2 million in 2018, $126.8 million in 2019 and $195.9 million in total for years after 2019.

6. Debt

The following table sets forth the components of the Company's long-term debt, net of unamortized debt discounts as of September 30, 2014 and December 31, 2013 (in thousands).



	September 30, 2014			December 31, 2013
Senior secured term loan facility due July 1, 2018 with an interest rate of 1.81% at September 30, 2014 and December 31, 2013.	$	944,122		$	965,363
Senior secured revolving credit facility due June 1, 2018 with an interest rate of 1.81% at September 30, 2014 and December 31, 2013.	—			300,000
4.75% Senior Notes due 2021	493,080			—
Less current maturities	(75,000		)	(50,000		)
Long-term debt	$	1,362,202		$	1,215,363

4.75% Senior Notes

In March 2014, the Company issued $500.0 million aggregate principal amount of 4.75% Senior Notes due 2021 (the “Senior Notes”). The Senior Notes mature on March 15, 2021 and bear interest at 4.75% per year. The Company will pay interest on the Senior Notes on March 15 and September 15 of each year, or the first business day thereafter if such date is not a business day. The Company made its first interest payment of $12.1 million in September 2014 on the Senior Notes. The Company received approximately $492.5 million in net proceeds from the Senior Note offering, after deducting $7.5 million in underwriting discounts. Additionally the Company incurred approximately $2.0 million in offering expenses. The Company used part of the net proceeds from this offering to repay $300.0 million of the Company's outstanding borrowings under the senior secured revolving credit facility (the "Revolving Facility"). The Company used the remainder of the net proceeds from this offering for general corporate purposes.

As discussed, in connection with the Senior Notes, the Company incurred approximately $7.5 million in underwriting debt discount and approximately $2.0 million in debt issuance costs. The $7.5 million debt discount incurred in connection with the Senior Notes is presented on the consolidated balance sheet as a reduction to long-term debt. The debt discount amounts are being amortized to interest expense over the life of the Senior Notes. The Company uses the straight-line method to amortize the debt discount amounts as it does not result in a materially

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

different amount of interest expense than the effective interest rate method. The $2.0 million in offering expenses incurred in connection with the issuance of the Senior Notes are presented on the consolidated balance sheet as other assets. The offering expenses are being amortized to interest expense over the life of the Senior Notes using the straight-line method. The amortization related to financing costs and debt discounts totaled $0.3 million and $0.7 million for the three and nine months ended September 30, 2014, respectively.

Guarantees

The Senior Notes are jointly and severally and fully and unconditionally guaranteed by each of the Company’s existing and future wholly-owned subsidiaries that guarantees obligations under (i) the credit agreement or (ii) certain other future indebtedness with an aggregate principal amount in excess of $175.0 million.

A subsidiary guarantor will be released from its obligations under its respective guarantee of the Senior Notes upon the release or discharge of such subsidiary guarantor from its guarantee of obligations under the credit agreement or certain other future indebtedness in an aggregate principal amount in excess of $175.0 million, or upon the earlier occurrence of certain other customary circumstances as set forth in the indenture. The Senior Notes and the guarantees by the subsidiary guarantors are the general senior unsecured obligations of the Company and the subsidiary guarantors. They rank equally in right of payment with the existing and future senior unsecured indebtedness of the Company and the subsidiary guarantors.

Prepayments and Repayments

Prior to the scheduled maturity of the Senior Notes, the Company may at any time redeem all or a part of the Senior Notes, upon not less than 30 nor more than 60 days’ prior written notice at a redemption price equal to the greater of: (i) 100% of the principal amount of the Senior Notes to be redeemed, and (ii) the sum of the present values of the remaining scheduled payments of principal of and interest on the Senior Notes to be redeemed (exclusive of interest accrued to the applicable redemption date) discounted to such redemption date on a semi-annual basis, assuming a 360-day year consisting of twelve 30-day months, at the then current treasury rate plus 50 basis points, plus, in each case, accrued and unpaid interest thereon to, but not including, the applicable redemption date.

If the Company experiences a change of control triggering event (as defined in the supplemental indenture), holders of the Senior Notes may require the Company to purchase the Senior Notes at a purchase price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest, if any, to the date of purchase.

The Company is not required to make mandatory redemption payments or sinking fund payments with respect to the Senior Notes.

Certain Covenants and Events of Default

The indenture governing the Senior Notes includes certain restrictive covenants, including covenants that limit the Company's ability and the ability of its subsidiaries to, among other things, incur secured debt; enter into sale and leaseback transactions; and amalgamate, consolidate, merge or transfer substantially all of the Company's assets to another entity. The covenants are subject to a number of important exceptions and qualifications set forth in the indenture.

The indenture governing the Senior Notes provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the indenture and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the trustee or holders of at least 25% in aggregate principal amount of and accrued but unpaid interest on the then outstanding Senior Notes may declare the principal amount of all the Senior Notes to be due and payable immediately. As of September 30, 2014, the Company was in compliance with the covenants under the Senior Notes.

Senior Secured Credit Facility

The Company maintains a credit agreement (as amended and supplemented from time to time, the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMCB”), as administrative agent, and a syndicate of lenders in an aggregate principal amount of $1.8 billion. The Credit Agreement provides for (i) a five-year senior secured term loan facility in the amount of $1.0 billion (the “Term Loan Facility”) and (ii) a five-year Revolving Facility in the amount of $800.0 million.

The Company made a principal repayment of $12.5 million in July 2014 on the Term Loan facility leaving the Company with $962.5 million outstanding as of September 30, 2014. In March 2014 the Company used the proceeds from the offering of the Senior Notes (refer above for a detailed discussion) to repay $300.0 million of the outstanding borrowings under the Revolving Facility. As of September 30, 2014 the Company had approximately $800.0 million of available borrowing capacity under the Revolving Facility. The amortization related to financing costs and debt discounts associated with the Credit Agreement totaled $2.1 million for the three months ended September 30, 2014 and September 30, 2013, respectively. The amortization related to financing costs and debt discounts associated with the Credit Agreement totaled $6.4 million and $7.0 million for the nine months ended September 30, 2014 and September 30, 2013, respectively.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Interest and Fees

The interest rates applicable to the Term Loan Facility and the Revolving Facility are based on a fluctuating rate of interest measured by reference to either, at the Company’s option, (a) an adjusted London Interbank Offered Rate (adjusted for maximum reserves) (“LIBOR”), plus an applicable margin or (b) an alternative base rate (which is the greatest of (i) the prime rate, (ii) the Federal Funds rate plus 0.5% and (iii) one-month LIBOR plus 1.0%), plus an applicable margin. The applicable margin, in each case, is adjusted from time to time based on the Company’s consolidated leverage ratio as of the last day of each fiscal quarter. The applicable margin for all borrowings is 0.625% per annum with respect to base rate borrowings and 1.625% per annum with respect to LIBOR borrowings. The Company intends to continue to elect the LIBOR rate as it has previously done during the term of the Credit Agreement. This resulted in an applicable interest rate of 1.81% at September 30, 2014 for both the Term Loan Facility and the Revolving Facility. See Note 11 — Financial Instruments for information on the Company's interest rate swap agreements. In addition to paying interest on outstanding principal under the Credit Agreement, the Company is required to pay a commitment fee to the lenders in respect of the unutilized commitments under the Credit Agreement at a fluctuating rate based on the Company’s leverage ratio.

Certain Covenants and Events of Default

The Credit Agreement contains a number of covenants that require the Company to maintain certain financial ratios, meet customary reporting requirements and restrict, with certain exceptions, transactions the Company or its subsidiaries may enter into, in each case as described further in the Company's 2013 Annual Report on Form 10-K. As of September 30, 2014, the Company was in compliance with the covenants of the Credit Agreement.

Maturity

Principal amounts outstanding under the Revolving Facility are due and payable in full on June 1, 2018. Principal repayments on the Term Loan Facility will be due as follows (in thousands):



Year	Amount due
2014	$	25,000
2015	68,750
2016	93,750
2017	118,750
2018	656,250
Total	$	962,500

Guarantees and Collateral

The Company’s obligations under the Credit Agreement are guaranteed by all existing and future, direct and indirect, material subsidiaries of the Company (collectively, the “Subsidiary Guarantors”). In addition, the Company and each Subsidiary Guarantor have pledged substantially all of their assets, subject to certain exceptions, to secure the Company’s obligations under the Credit Agreement.

The carrying value of the Company's debt at September 30, 2014 approximates its fair value.

7. Stock-Based Compensation

During the three months ended September 30, 2014 and 2013, the Company recorded stock-based compensation expense of $9.0 million and $6.6 million, respectively. During the nine months ended September 30, 2014 and 2013, the Company recorded stock-based compensation expense of $24.4 million and $19.7 million, respectively. There were 4,795,247 and 698,715 stock-based awards available for grant under the Long-Term Incentive Plan ("LTIP") and the plans assumed in connection with the merger with Catalyst Health Solutions, Inc. ("Assumed Plans"), respectively, as of September 30, 2014.

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(i) Stock options

The Black-Scholes option-pricing model was used to estimate the fair value of the stock options issued in each period at the grant date. Below is a summary of options granted and the assumptions utilized to derive fair value of the stock options under the Black-Scholes option-pricing model:



	Nine Months Ended September 30,
	2014		2013
Total stock options granted	432,586		367,195
Volatility	37.7% - 39.2%		41.8% - 45.4%
Risk-free interest rate	1.54% - 1.73%		0.81% - 1.74%
Expected life (in years)	4.5		4.5
Dividend yield	—		—
Weighted-average grant date fair value	$	15.47	$	21.44

The table below summarizes the stock options outstanding as of September 30, 2014 under both plans.



	Options Outstanding	Weighted Average Exercise Price		Unrecognized Compensation Cost		Weighted Average Period
				(in thousands)
LTIP	1,320,587	$	36.21	$	9,353	2.56
Assumed Plans	146,464	$	46.78	$	1,845	3.26

(ii) Restricted stock units

During the three and nine months ended September 30, 2014, the Company granted time-based RSUs and performance-based RSUs to its employees and non-employee directors under both the LTIP and the Assumed Plans. Time-based RSUs either vest on a straight-line basis over a range of two to four years, or cliff vest after a three to four year period. Performance-based RSUs cliff vest based upon reaching agreed upon three-year performance conditions. The number of outstanding performance-based RSUs as of September 30, 2014 stated below assumes the associated performance targets will be met at the maximum level.

The table below summarizes the number of time-based and performance-based RSUs that were granted and outstanding under both plans for the nine months ended September 30, 2014:



	LTIP Plan				Assumed Plans
	Number of Restricted Stock Units				Number of Restricted Stock Units
	Time-Based	Performance - Based	Weighted Average Grant Date Fair Value Per Unit		Time-Based	Performance - Based	Weighted Average Grant Date Fair Value Per Unit
Granted	300,899	392,388	$	44.83	155,615	91,516	$	44.41
Outstanding	723,933	830,880	$	44.65	263,538	86,948	$	46.65

The table below summarizes the unrecognized compensation cost related to the outstanding RSUs at September 30, 2014.



	Unrecognized Compensation Cost		Weighted Average Period
	(in thousands)
LTIP	$	40,561	2.18
Assumed Plans	$	13,369	2.74

(iii) Warrants

On July 2, 2012, the Company issued 66.8 million common shares and 0.5 million warrants in connection with the Company's merger with Catalyst Health Solutions, Inc. As of December 31, 2013, 425,160 of the warrants issued were outstanding. In June 2014, all of the outstanding warrants were exercised carrying a weighted average exercise price of $8.12. As of September 30, 2014, there were no warrants outstanding.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Segment Information

The Company reports in two operating segments: PBM and HCIT. The Company evaluates segment performance based upon revenue and gross profit. Financial information by segment is presented below (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
PBM:
Revenue	$	5,505,087	$	3,578,767	$	15,734,424	$	10,142,515
Cost of revenue	5,174,185		3,310,636		14,796,748		9,399,949
Gross profit	330,902		268,131		937,676		742,566
Total assets at September 30	8,822,942		7,115,563		8,822,942		7,115,563
HCIT:
Revenue	36,626		35,381		107,576		108,780
Cost of revenue	15,980		15,724		49,228		50,597
Gross profit	20,646		$	19,657	58,348		58,183
Total assets at September 30	476,323		377,323		476,323		377,323
Consolidated:
Revenue	5,541,713		3,614,148		15,842,000		10,251,295
Cost of revenue	5,190,165		3,326,360		14,845,976		9,450,546
Gross profit	351,548		287,788		996,024		800,749
Total assets at September 30	$	9,299,265	$	7,492,886	$	9,299,265	$	7,492,886

9. Income Taxes

The Company’s effective tax rate for the three months ended September 30, 2014 and 2013 was 26.0% and 25.2%, respectively. The Company’s effective tax rate for the nine months ended September 30, 2014 and 2013 was 26.8% and 26.4%, respectively. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions including Canada. With a few exceptions, the Company is no longer subject to tax examinations by tax authorities for years prior to 2007.

10. Commitments and Contingencies

In July 2014, the Company received a subpoena from the United States Attorney's Office for the District of Rhode Island, requesting documents and information concerning bona fide service fees and rebates received from certain pharmaceutical manufacturers in connection with certain drugs utilized under Part D of the Medicare program. The Company has been cooperating with the government and collecting documents in response to the subpoena.

From time to time in connection with its operations, the Company is named as a defendant in actions for damages and costs allegedly sustained by third party plaintiffs. The Company has considered these proceedings and disputes in determining the necessity of any accruals for losses that are probable and reasonably estimable. In addition, various aspects of the Company’s business may subject it to litigation and liability for damages arising from errors in processing the pricing of prescription drug claims, failure to meet performance measures within certain contracts relating to its services performed, its ability to obtain certain levels of discounts or rebates on prescription purchases from retail pharmacies and drug manufacturers or other actions or omissions. The Company’s recorded accruals are based on estimates developed with consideration given to the potential merits of claims or quantification of any performance obligations. The Company takes into account its history of claims, the limitations of any insurance coverage, advice from outside counsel, and management’s strategy with regard to the settlement or defense of such claims and obligations. While the ultimate outcome of those claims, lawsuits or performance obligations cannot be predicted with certainty, the Company believes, based on its understanding of the facts of these claims and performance obligations, that adequate provisions have been recorded in the accounts where required.

11. Financial Instruments

The Company is subject to interest rate risk related to the variable rate debt under the Credit Agreement. When interest rates increase, interest expense would also increase. Conversely, when interest rates decrease, interest expense would also decrease.

In order to manage fluctuations in cash flows resulting from interest rate risk attributable to changes in the benchmark interest rates used in the Credit Agreement, the Company entered into a 3-year interest rate swap agreement with a total notional amount of $500 million. The swap agreement fixed the variable LIBOR rate on the Company's Term Loan Facility to 0.52%, resulting in a current effective rate as of September 30, 2014 of 2.14% after taking into account the 1.63% margin per the Credit Agreement, as amended. Under the interest rate swap, the Company

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

receives LIBOR-based variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent to fixed-rate debt with respect to the notional amount of such swap agreements. This interest rate contract derivative instrument was designated as a cash flow hedge upon inception in August 2012 and it expires in August 2015.

The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company does not enter into derivative instruments for any purpose other than hedging identified exposures. That is, the Company does not speculate using derivative instruments and has not designated any instruments as fair value hedges or hedges of the foreign currency exposure of a net investment in foreign operations.

The fair value of the interest rate swap liability as of September 30, 2014 was $1.4 million. Interest expense for the three and nine months ended September 30, 2014 includes $0.4 million and $1.2 million, respectively, of expense reclassified from other comprehensive income into current earnings. Interest expense for the three and nine months ended September 30, 2013 includes $0.4 million and $1.1 million, respectively, of expense reclassified from other comprehensive income into current earnings. As of September 30, 2014, approximately $1.4 million of deferred expenses related to the derivative instruments accumulated in other comprehensive income is expected to be reclassified as interest expense during the next twelve months. This expectation is based on the expected timing of the occurrence of the hedged forecasted transactions and assumes the current LIBOR rate will remain consistent. Fluctuations in the market LIBOR rate will have an impact on the amount of expense reclassified from accumulated other comprehensive income to interest expense, as well as the overall fair value of the derivative instrument.

12. Fair Value

Fair value measurement guidance defines a three-level hierarchy to prioritize the inputs to valuation techniques used to measure fair value into three broad levels, with Level 1 considered the most reliable. During the three and nine months ended September 30, 2014, there were no movements of fair value measurements between Levels 1, 2 and 3. For assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets, the table below categorizes fair value measurements across the three levels as of September 30, 2014 and December 31, 2013 (in thousands):



	September 30, 2014
	Quoted Prices in Active Markets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Liabilities:
Contingent purchase price consideration	$	—	$	—	$	20,000	$	20,000
Derivative	$	—	$	1,401	$	—	$	1,401



	December 31, 2013
	Quoted Prices in Active Markets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Liabilities:
Contingent purchase price consideration	$	—	$	—	$	19,954	$	19,954
Derivative	$	—	$	1,719	$	—	$	1,719

When available and appropriate, the Company uses quoted market prices in active markets to determine fair value, and classifies such items within Level 1. Level 1 values only include instruments traded on a public exchange. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability or can be derived principally from or corroborated by observable market data. If the Company were to use one or more significant unobservable inputs for a model-derived valuation, the resulting valuation would be classified in Level 3.

Contingent purchase price consideration

The contingent purchase price consideration liability reflects the fair values of potential future payments related to certain legacy acquisitions. The potential future payments are contingent upon the acquired entities meeting certain revenue, gross margin and client retention milestones. As of September 30, 2014, the fair value of the contingent purchase price consideration was $20.0 million and was recorded as accrued expenses and other current liabilities in the consolidated balance sheet.

As the fair value measurement for the contingent consideration is based on inputs not observed in the market, this measurement is classified as Level 3 measurements as defined by fair value measurements guidance.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Derivatives

Derivative liabilities relate to the interest rate swap agreement (refer to Note 11 — Financial Instruments for further information), which had a fair value of $1.4 million as of September 30, 2014. As the fair value measurement for the derivative instrument is based on quoted prices from a financial institution, this measurement is classified as Level 2 measurement as defined by fair value measurements guidance.

13. Earnings Per Share

The Company calculates basic EPS using the weighted average number of common shares outstanding during the period. Diluted EPS is calculated using the same method as basic EPS, but the Company adds the number of additional common shares that would have been outstanding for the period if the potential dilutive common shares had been issued. The following is the reconciliation between the number of weighted average shares used in the basic and diluted EPS calculations for the three and nine months ended September 30, 2014 and 2013:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2014	2013	2014	2013
Weighted average number of shares used in computing basic EPS	207,447,647	206,203,263	206,973,924	205,920,803
Add dilutive common stock equivalents:
Outstanding stock options and restricted stock units (a)	427,605	621,355	496,815	716,120
Weighted average number of shares used in computing diluted EPS	207,875,252	206,824,618	207,470,739	206,636,923

(a) Excludes 1,472,098 and 746,691 common stock equivalents for the three months ended September 30, 2014 and 2013 because their effect was anti-dilutive. Excludes 1,322,745 and 633,407 common stock equivalents for the nine months ended September 30, 2014 and 2013 because their effect was anti-dilutive.

14. Concentration Risk

For the three months ended September 30, 2014 and 2013, one client accounted for 34% and 19% of total revenues, respectively. For the nine months ended September 30, 2014 and 2013, one client accounted for 33% and 19% of total revenues, respectively.

At September 30, 2014, one client accounted for 19% of the outstanding accounts receivable balance. At December 31, 2013, one client accounted for 15% of the outstanding accounts receivable balance.

15. Condensed Consolidating Financial Information

The Senior Notes issued by the Company are fully and unconditionally (subject to certain customary release provisions, including sale, exchange, transfer or liquidation of the guarantor subsidiary) guaranteed by certain of our 100% owned subsidiaries. The following condensed consolidating financial information has been prepared in accordance with the requirements for presentation of such information (statements of comprehensive income were omitted as all other comprehensive income is attributed to the Company and was not material in any period presented). The condensed consolidating financial information presented below is not indicative of what the financial position, results of operations or cash flows would have been had each of the entities operated as an independent company during the period for various reasons, including, but not limited to, intercompany transactions and integration of systems.

The condensed consolidating financial information is presented separately for:


i.	Catamaran Corporation (the parent company), the issuer of the Senior Notes;


ii.	Guarantor subsidiaries, on a combined basis, as specified in the indenture governing Catamaran's obligations under the Senior Notes;


iii.	Non-guarantor subsidiaries, on a combined basis;


iv.	Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among Catamaran Corporation, the guarantor subsidiaries and the non-guarantor subsidiaries, (b) eliminate the investments in our subsidiaries and (c) record consolidating entries; and


v.	Catamaran Corporation and subsidiaries on a consolidated basis.

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CATAMARAN CORPORATION

Condensed Consolidated Balance Sheets

September 30, 2014

(in thousands)



	Catamaran Corporation		Guarantors		Non-Guarantors		Consolidations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	238,095	$	605,182	$	63,558	$	—		$	906,835
Restricted cash	—		27,388		4,836		—			32,224
Accounts receivable, net	275		1,288,324		94,432		(86,786		)	1,296,245
Rebates receivable	10,698		868,643		144,499		(143,723		)	880,117
Other current assets	134		129,285		47,568		—			176,987
Intercompany receivable	235,851		—		—		(235,851		)	—
Total current assets	485,053		2,918,822		354,893		(466,360		)	3,292,408
Property and equipment, net	95		147,633		41,000		—			188,728
Goodwill	—		4,641,174		83,465		—			4,724,639
Other intangible assets, net	—		1,002,933		16,307		—			1,019,240
Investment in subsidiaries	6,105,884		142,927		37,072		(6,285,883		)	—
Other long-term assets	14,858		44,400		21,884		(6,892		)	74,250
Total assets	$	6,605,890	$	8,897,889	$	554,621	$	(6,759,135	)	$	9,299,265
LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	—	$	1,134,918	$	97,220	$	(126,367	)	$	1,105,771
Accrued expenses and other current liabilities	4,336		284,510		31,097		(6,545		)	313,398
Rebates payable	—		1,005,692		53,066		(143,723		)	915,035
Current portion - long-term debt	75,000		—		—		—			75,000
Intercompany payable	—		146,870		12,350		(159,220		)	—
Total current liabilities	79,336		2,571,990		193,733		(435,855		)	2,409,204
Deferred income taxes	—		254,009		5,302		—			259,311
Long-term debt	1,362,202		—		—		—			1,362,202
Other long-term liabilities	1,401		70,611		25,324		—			97,336
Total liabilities	1,442,939		2,896,610		224,359		(435,855		)	4,128,053
Commitments and contingencies (Note 10)
Shareholders’ equity
Total shareholders' equity	5,162,951		6,001,279		329,017		(6,330,296		)	5,162,951
Non-controlling interest	—		—		1,245		7,016			8,261
Total equity	5,162,951		6,001,279		330,262		(6,323,280		)	5,171,212
Total liabilities and equity	$	6,605,890	$	8,897,889	$	554,621	$	(6,759,135	)	$	9,299,265

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CATAMARAN CORPORATION

Condensed Consolidated Balance Sheets

December 31, 2013

(in thousands)



	Catamaran Corporation		Guarantors		Non-Guarantors		Consolidations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	15,090	$	350,889	$	21,262	$	—		$	387,241
Restricted cash	—		27,384		4,836		—			32,220
Accounts receivable, net	194		954,006		61,319		(55,933		)	959,586
Rebates receivable	35,777		473,924		92,227		(295,973		)	305,955
Other current assets	107		114,808		16,785		20,973			152,673
Intercompany receivable	130,743		—		125,888		(256,631		)	—
Total current assets	181,911		1,921,011		322,317		(587,564		)	1,837,675
Property and equipment, net	69		188,676		8,262		—			197,007
Goodwill	—		4,636,810		83,465		—			4,720,275
Other intangible assets, net	—		1,160,205		21,214		—			1,181,419
Investment in subsidiaries	5,980,865		105,947		—		(6,086,812		)	—
Other long-term assets	15,674		30,144		59,932		(46,363		)	59,387
Total assets	$	6,178,519	$	8,042,793	$	495,190	$	(6,720,739	)	$	7,995,763
LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	—	$	840,055	$	37,251	$	(59,501	)	$	817,805
Accrued expenses and other current liabilities	2,947		200,071		28,403		22,679			254,100
Rebates payable	—		612,173		40,065		(295,973		)	356,265
Current portion - long-term debt	50,000		—		—		—			50,000
Intercompany payable	—		232,124		—		(232,124		)	—
Total current liabilities	52,947		1,884,423		105,719		(564,919		)	1,478,170
Deferred income taxes	—		296,040		5,301		—			301,341
Long-term debt	1,215,363		—		—		—			1,215,363
Other long-term liabilities	1,719		86,600		23,651		(22,579		)	89,391
Total liabilities	1,270,029		2,267,063		134,671		(587,498		)	3,084,265
Commitments and contingencies (Note 10)
Shareholders’ equity
Total shareholders' equity	4,908,490		5,775,730		359,274		(6,135,004		)	4,908,490
Non-controlling interest	—		—		1,245		1,763			3,008
Total equity	4,908,490		5,775,730		360,519		(6,133,241		)	4,911,498
Total liabilities and equity	$	6,178,519	$	8,042,793	$	495,190	$	(6,720,739	)	$	7,995,763

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CATAMARAN CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CATAMARAN CORPORATION

Condensed Consolidated Statements of Operations

Three Months ended September 30, 2014

(in thousands)



	Catamaran Corporation			Guarantors			Non-Guarantors		Consolidations			Consolidated

Revenue	$	9,891		$	5,164,201		$	982,885	$	(615,264	)	$	5,541,713
Cost of revenue	8,669			4,886,560			910,200		(615,264		)	5,190,165
Gross profit	1,222			277,641			72,685		—			351,548
Expenses:
Selling, general and administrative	801			103,590			27,506		—			131,897
Depreciation of property and equipment	6			17,970			1,466		—			19,442
Amortization of intangible assets	—			50,596			1,620		—			52,216
	807			172,156			30,592		—			203,555
Operating income	415			105,485			42,093		—			147,993
Interest and other expense, net	14,054			3,021			843		—			17,918
Equity (income) in subsidiaries	(95,608		)	(15,769		)	—		111,377			—
Income before income taxes	81,969			118,233			41,250		(111,377		)	130,075
Income tax expense	—			22,625			11,138		—			33,763
Net income	81,969			95,608			30,112		(111,377		)	96,312
Less net income attributable to non-controlling interest	—			—			—		14,344			14,344
Net income attributable to the Company	$	81,969		$	95,608		$	30,112	$	(125,721	)	$	81,968

CATAMARAN CORPORATION

Condensed Consolidated Statements of Operations

Three Months ended September 30, 2013

(in thousands)



	Catamaran Corporation			Guarantors			Non-Guarantors		Consolidations			Consolidated

Revenue	$	8,635		$	3,272,637		$	517,576	$	(184,700	)	$	3,614,148
Cost of revenue	7,765			3,040,815			462,480		(184,700		)	3,326,360
Gross profit	870			231,822			55,096		—			287,788
Expenses:
Selling, general and administrative	253			89,938			20,263		—			110,454
Depreciation of property and equipment	6			9,274			699		—			9,979
Amortization of intangible assets	—			45,477			1,743		—			47,220
	259			144,689			22,705		—			167,653
Operating income	611			87,133			32,391		—			120,135
Interest and other expense, net	7,873			724			429		—			9,026
Equity (income) in subsidiaries	(80,200		)	(11,544		)	—		91,744			—
Income before income taxes	72,938			97,953			31,962		(91,744		)	111,109
Income tax expense	—			17,753			10,228		—			27,981
Net income	72,938			80,200			21,734		(91,744		)	83,128
Less net income attributable to non-controlling interest	—			—			—		10,190			10,190
Net income attributable to the Company	$	72,938		$	80,200		$	21,734	$	(101,934	)	$	72,938

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CATAMARAN CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CATAMARAN CORPORATION

Condensed Consolidated Statements of Operations

Nine Months ended September 30, 2014

(in thousands)



	Catamaran Corporation			Guarantors			Non-Guarantors		Consolidations			Consolidated

Revenue	$	29,581		$	15,050,082		$	2,423,698	$	(1,661,361	)	$	15,842,000
Cost of revenue	25,670			14,273,762			2,207,905		(1,661,361		)	14,845,976
Gross profit	3,911			776,320			215,793		—			996,024
Expenses:
Selling, general and administrative	1,934			302,454			84,660		—			389,048
Depreciation of property and equipment	23			40,946			3,935		—			44,904
Amortization of intangible assets	—			157,273			4,906		—			162,179
	1,957			500,673			93,501		—			596,131
Operating income	1,954			275,647			122,292		—			399,893
Interest and other expense, net	38,132			4,663			2,087		—			44,882
Equity (income) in subsidiaries	(253,023		)	(44,697		)	—		297,720			—
Income before income taxes	216,845			315,681			120,205		(297,720		)	355,011
Income tax expense	—			62,658			32,455		—			95,113
Net income	216,845			253,023			87,750		(297,720		)	259,898
Less net income attributable to non-controlling interest	—			—			—		43,053			43,053
Net income attributable to the Company	$	216,845		$	253,023		$	87,750	$	(340,773	)	$	216,845

CATAMARAN CORPORATION

Condensed Consolidated Statements of Operations

Nine Months ended September 30, 2013

(in thousands)



	Catamaran Corporation			Guarantors			Non-Guarantors		Consolidations			Consolidated

Revenue	$	25,273		$	9,244,324		$	1,485,165	$	(503,467	)	$	10,251,295
Cost of revenue	22,458			8,603,084			1,328,471		(503,467		)	9,450,546
Gross profit	2,815			641,240			156,694		—			800,749
Expenses:
Selling, general and administrative	761			252,671			57,407		—			310,839
Depreciation of property and equipment	21			22,774			2,092		—			24,887
Amortization of intangible assets	—			142,321			5,047		—			147,368
	782			417,766			64,546		—			483,094
Operating income	2,033			223,474			92,148		—			317,655
Interest and other expense, net	27,334			2,243			1,395		—			30,972
Equity (income) in subsidiaries	(213,065		)	(38,409		)	—		251,474			—
Income before income taxes	187,764			259,640			90,753		(251,474		)	286,683
Income tax expense	—			46,575			29,041		—			75,616
Net income	187,764			213,065			61,712		(251,474		)	211,067
Less net income attributable to non-controlling interest	—			—			—		23,303			23,303
Net income attributable to the Company	$	187,764		$	213,065		$	61,712	$	(274,777	)	$	187,764

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CATAMARAN CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CATAMARAN CORPORATION

Condensed Consolidated Statements of Cash Flows

Nine Months ended September 30, 2014

(in thousands)



	Catamaran Corporation			Guarantors			Non-Guarantors			Consolidations			Consolidated
Cash flows from operating activities:
Net cash provided (used) by operating activities	$	238,031		$	453,497		$	94,441		$	(358,875	)	$	427,094
Cash flows from investing activities:
Acquisitions, net of cash acquired	—			(2,026		)	—			—			(2,026		)
Purchases of property and equipment	(49		)	(28,352		)	(17,808		)	—			(46,209		)
Net cash used by investing activities	(49		)	(30,378		)	(17,808		)	—			(48,235		)
Cash flows from financing activities:
Proceeds from issuance of debt	492,500			—			—			—			492,500
Repayment of long-term debt	(325,000		)	—			—			—			(325,000		)
Payment of financing costs	(1,963		)	—			—			—			(1,963		)
Proceeds from exercise of options	7,950			(2,329		)	(25		)	—			5,596
Proceeds from exercise of warrants	3,453			—			—			—			3,453
Tax benefit on option exercises	—			4,204			37			—			4,241
Net transactions with parent and affiliates	(212,419		)	(150,501		)	(33,755		)	396,675			—
Distributions to non-controlling interest	—			—			—			(37,800		)	(37,800		)
Proceeds from restricted stock	20,441			(19,847		)	(594		)	—			—
Other	—			(353		)	—			—			(353		)
Net cash provided (used) by financing activities	(15,038		)	(168,826		)	(34,337		)	358,875			140,674
Effect of foreign exchange on cash balances	61			—			—			—			61
Change in cash and cash equivalents	223,005			254,293			42,296			—			519,594
Cash and cash equivalents, beginning of period	15,090			350,889			21,262			—			387,241
Cash and cash equivalents, end of period	$	238,095		$	605,182		$	63,558		$	—		$	906,835

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CATAMARAN CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CATAMARAN CORPORATION

Condensed Consolidated Statements of Cash Flows

Nine Months ended September 30, 2013

(in thousands)



	Catamaran Corporation			Guarantors			Non-Guarantors			Consolidations			Consolidated
Cash flows from operating activities:
Net cash provided (used) by operating activities	$	132,146		$	484,989		$	(23,116	)	$	(258,166	)	$	335,853
Cash flows from investing activities:
Acquisitions, net of cash acquired	—			—			(7,076		)	—			(7,076		)
Purchases of property and equipment	(8		)	(90,158		)	(3,106		)	—			(93,272		)
Proceeds from restricted cash	—			20,004			—			—			20,004
Net cash used by investing activities	(8		)	(70,154		)	(10,182		)	—			(80,344		)
Cash flows from financing activities:
Proceeds from issuance of debt	100,000			—			—			—			100,000
Repayment of long-term debt	(256,250		)	—			—			—			(256,250		)
Payment of financing costs	(2,347		)	—			—			—			(2,347		)
Proceeds from exercise of options	4,224			(1,238		)	(10		)	—			2,976
Proceeds from exercise of warrants	487			—			—			—			487
Tax benefit on option exercises	—			10,462			7			—			10,469
Payments of contingent consideration	—			(18,338		)	(4,865		)	—			(23,203		)
Net transactions with parent and affiliates	(23,293		)	(292,700		)	35,712			280,281			—
Distributions to non-controlling interest	—			—			—			(22,115		)	(22,115		)
Proceeds from restricted stock	26,975			(26,259		)	(716		)	—			—
Net cash (used) provided by financing activities	(150,204		)	(328,073		)	30,128			258,166			(189,983		)
Effect of foreign exchange on cash balances	(75		)	—			—			—			(75		)
Change in cash and cash equivalents	(18,141		)	86,762			(3,170		)	—			65,451
Cash and cash equivalents, beginning of period	33,603			303,833			33,340			—			370,776
Cash and cash equivalents, end of period	$	15,462		$	390,595		$	30,170		$	—		$	436,227

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CATAMARAN CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. Lease Exit Costs

In September 2014, the Company executed a plan to exit the space it had leased in Bannockburn, IL. As a result of this exit, the Company recorded a charge and corresponding lease loss accrual equal to the present value of the amount by which the net future lease obligations exceed the remaining rent-related deferred balances. As a result, during the three and nine month periods ended September 30, 2014, the Company recorded approximately $5.5 million of lease loss expense in SG&A expense in the consolidated statements of operations. As of September 30, 2014, the Company had a lease loss accrual of approximately $5.5 million, which is included in accrued expenses and other current liabilities in the consolidated balance sheets. The exit from the space in Bannockburn, IL did not involve any employee termination costs.

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ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Management’s Discussion and Analysis (“MD&A”) section of the Company’s 2013 Annual Report on Form 10-K. Results of the periods presented are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.

Caution Concerning Forward-Looking Statements

Certain statements included in this MD&A and elsewhere in this report, including those that express management's objectives and the strategies to achieve those objectives, as well as information with respect to the Company's beliefs, plans, expectations, anticipations, estimates and intentions, constitute “forward-looking statements” within the meaning of applicable securities laws. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management at this time, are inherently subject to significant business, economic and competitive uncertainties and contingencies. We caution that such forward-looking statements involve known and unknown risks, uncertainties and other risks that may cause our actual financial results, performance, or achievements to be materially different from our estimated future results, performance or achievements expressed or implied by those forward-looking statements. Numerous factors could cause actual results to differ materially from those in the forward-looking statements, including without limitation, our ability to achieve increased market acceptance for our product offerings and penetrate new markets; our ability to compete successfully; our dependence on, and ability to retain, key customers; customer demands for enhanced services levels or loss or unfavorable modification with our customers; the risks and challenges associated with our PBM partnering agreement with Cigna Corporation due to the size of the client and the complexity and long-term nature of the agreement; consolidation in the healthcare industry; our ability to identify and complete acquisitions, manage our growth, integrate acquisitions and achieve expected synergies from acquisitions; changes in industry pricing benchmarks and continuing market and economic challenges; our ability to maintain our relationships with pharmacy providers, pharmaceutical manufacturers, third-party rebate administrators and suppliers; compliance with existing laws, regulations and industry initiatives and future change in laws or regulations in the healthcare industry; our ability to maintain our relationships with suppliers; the outcome of any legal or tax proceeding that has been or may be instituted against us; the existence of undetected errors or similar problems in our software products; potential liability for the use of incorrect or incomplete data; interruption of our operations due to outside sources and breach of our security by third parties; our dependence on the expertise of our senior management and other personnel; maintaining our intellectual property rights and litigation involving intellectual property rights; our ability to obtain, use or successfully integrate third-party licensed technology; our ability to accurately forecast our financial results; our level of indebtedness and the covenants and restrictions in the agreements governing our outstanding indebtedness; our access to sufficient capital to fund our future requirements; potential write-offs of goodwill or other intangible assets; and the material weakness identified in our internal control over financial reporting. This foregoing list of factors is not exhaustive and is subject to change and there can be no assurance that such assumptions will reflect the actual outcome of such items or factors. Other factors that should be considered are discussed from time to time in Catamaran's filings with the U.S. Securities and Exchange Commission, including the risks and uncertainties discussed under the captions “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K and subsequent filings with the U.S. Securities and Exchange Commission, which are available at www.sec.gov.

When relying on forward-looking information to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. In making the forward-looking statements contained in this MD&A, the Company does not assume any future significant acquisitions, dispositions or one-time items. It does assume, however, the renewal of certain customer contracts. Every year, the Company has major customer contracts that come up for renewal. In addition, the Company also assumes new customer contracts. In this regard, the Company is pursuing large opportunities that present a very long and complex sales cycle which substantially affects its forecasting abilities. The Company has assumed certain timing for the realization of these opportunities which it believes is reasonable but which may not be achieved. Furthermore, the pursuit of these larger opportunities does not ensure a linear progression of revenue and earnings since they may involve significant up-front costs followed by renewals and cancellations of existing contracts. The Company has assumed certain revenues which may not be realized. The Company has also assumed that the material factors referred to in the previous paragraph will not cause such forward-looking information to differ materially from actual results or events. There can be no assurance that such assumptions will reflect the actual outcome of such items or factors. Accordingly, investors are cautioned not to put undue reliance on forward-looking statements.

THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS MD&A AND ELSEWHERE IN THIS REPORT REPRESENTS THE COMPANY'S CURRENT EXPECTATIONS AND, ACCORDINGLY, IS SUBJECT TO CHANGE. HOWEVER, THE COMPANY EXPRESSLY DISCLAIMS ANY INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING INFORMATION, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE, EXCEPT AS REQUIRED BY APPLICABLE LAW.

All figures are in U.S. dollars unless otherwise stated.

Overview

PBM Business

The Company provides comprehensive PBM services to customers, which include managed care organizations, local governments, unions, corporations, HMOs, employers, workers’ compensation plans, third party health care plan administrators and federal and state government programs through its network of licensed pharmacies throughout the United States. The PBM services include electronic point-of-sale pharmacy claims management, retail pharmacy network management, mail service pharmacy, specialty service pharmacy, Medicare Part D services, benefit design consultation, preferred drug management programs, drug review and analysis, consulting services, data access and reporting and information analysis. Included in the Company's PBM offerings are the fulfillment of prescriptions through the Company's own mail and specialty

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pharmacies. In addition, the Company is a national provider of drug benefits to its customers under the federal government’s Medicare Part D program.

Revenue primarily consists of sales of prescription drugs, together with any associated administrative fees, to customers and participants, either through the Company’s nationwide network of participating pharmacies or its own mail and specialty pharmacies. Revenue related to the sale of prescription drugs is recognized when the claims are adjudicated and the prescription drugs are shipped. Claims are adjudicated at the point-of-sale using an on-line processing system. Profitability of the PBM segment is largely dependent on the volume and type of prescription drug claims adjudicated and sold. Growth in revenue and profitability of the PBM segment is dependent upon attracting new customers, retaining the Company’s current customers and providing additional services to the Company’s current customer base by offering a flexible and cost-effective alternative to traditional PBM offerings. The Company’s PBM offerings allow its customers to gain increased control of their pharmacy benefit cost and maximize savings and quality of care through a full range of pharmacy spend management services, including: formulary administration, benefit plan design and management, pharmacy network management, drug utilization review, clinical services and consulting, reporting and information analysis solutions, mail and specialty pharmacy services and consumer web services.

Under the Company’s customer contracts, the pharmacy is solely obligated to collect the co-payments from the participants. As such, the Company does not include participant co-payments paid to non-Company owned pharmacies in revenue or cost of revenue. During the three months ended September 30, 2014 and 2013, pharmacies, excluding the Company's internally owned mail and specialty pharmacy locations, collected approximately $1.0 billion and $0.6 billion, respectively, in co-payments from the participants. During the nine months ended September 30, 2014 and 2013, pharmacies, excluding the Company's internally owned mail and specialty pharmacy locations, collected approximately $3.1 billion and $2.0 billion, respectively, in co-payments from the participants. If we had included these co-payments collected at non-Company owned pharmacies in our reported revenue and cost of goods sold, our operating and net income would not have been affected.

The Company evaluates customer contracts to determine whether it acts as a principal or as an agent in the fulfillment of prescriptions through its participating pharmacy network. The Company acts as a principal in most of its transactions with customers, and revenue is recognized at the prescription price (ingredient cost plus dispensing fee) negotiated with customers, plus an administrative fee, if applicable (“gross reporting”). Gross reporting is appropriate when the Company (i) has separate contractual relationships with customers and with pharmacies, (ii) has responsibility for validating and managing a claim through the claims adjudication process, (iii) commits to set prescription prices for the pharmacy, including instructing the pharmacy as to how that price is to be settled (co-payment requirements), (iv) manages the overall prescription drug relationship with the patients, who are participants of customers’ plans, and (v) has credit risk for the price due from the customer. In instances where the Company merely administers a customer’s network pharmacy contract to which the Company is not a party and under which the Company does not assume pricing risk and credit risk, among other factors, the Company only records an administrative fee as revenue. For these customers, the Company earns an administrative fee for collecting payments from the customer and remitting the corresponding amount to the pharmacies in the customer’s network. In these transactions, the Company acts as an agent for the customer. As the Company is not the principal in these transactions, the drug ingredient cost is not included in revenue or in cost of revenue (“net reporting”). As such, there is no impact to gross profit based upon whether gross or net reporting is used.

HCIT Business

The Company is also a leading provider of HCIT solutions and services to providers, payors, and other participants in the pharmaceutical supply chain in the U.S. and Canada. The Company’s product offerings include a wide range of products for managing prescription drug programs and for drug prescribing and dispensing. The Company’s solutions are available on a transaction fee basis using an ASP model. The Company’s payor customers include managed care organizations, health plans, government agencies, employers and intermediaries such as pharmacy benefit managers. The solutions offered by the Company’s services assist both payors and providers in managing the complexity and reducing the cost of their prescription drug programs and dispensing activities. Profitability of the HCIT business depends primarily on revenue derived from transaction processing services and the recognition of revenue in the HCIT business depends on various factors, including the type of service provided, contract parameters and any undelivered elements.

Industry Overview

The PBM industry is intensely competitive, generally resulting in continuous pressure on gross profit as a percentage of total revenue. In recent years, industry consolidation and dramatic growth in managed healthcare have led to increasingly aggressive pricing of PBM services. Given the pressure on all parties to reduce healthcare costs, the Company expects this competitive environment to continue for the foreseeable future. In order to remain competitive, the Company looks to continue to drive purchasing efficiencies of pharmaceuticals to improve operating margins, increase its penetration of mail and specialty fulfillment by Company owned pharmacies, and target the acquisition of other businesses to achieve its strategy of expanding its product offerings and customer base. The Company also looks to retain and expand its customer base by improving the quality of service provided by enhancing its solutions and lowering the total drug spend for customers.

The HCIT industry is increasingly competitive as technologies continue to advance and new products continue to emerge. This rapidly developing industry requires the Company to perpetually improve its offerings to meet customers’ rising product standards. Governmental initiatives to improve the country’s electronic health records should assist the growth of the industry in addition to increased regulatory reporting forecasted by the recent healthcare reform legislation. However, it may also increase competition as more players enter the expanding market.

The complicated environment in which the Company operates presents it with opportunities, challenges, and risks. The Company’s customers are paramount to its success; the retention of existing customers and winning of new customers and members pose the greatest opportunities; and the loss thereof represents an ongoing risk. The preservation of the Company’s relationships with pharmaceutical manufacturers and the

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Company's network of participating retail pharmacies is very important to the execution of its business strategies. The Company’s future success will be influenced by its ability to drive volume at its specialty and mail order pharmacies and increase generic dispensing rates in light of the significant brand-name drug patent expirations expected to occur over the next several years. The Company’s ability to continue to provide innovative and competitive clinical and other services to customers and patients, including the Company’s active participation in the Medicare Part D benefit and the rapidly growing specialty pharmacy industry, also plays an important part in the Company’s future success.

Competitive Strengths

The Company has demonstrated its ability to serve a broad range of clients from large managed care organizations and state governments to employer groups with fewer than a thousand members. The Company believes its principal competitive strengths are:

Flexible, customized and independent services: The Company believes a key differentiator between itself and its competitors is not only the Company's ability to provide innovative PBM services, but also to deliver these services on an à la carte basis. The Catamaran suite of PBM services offers the flexibility of broad product choice along the entire PBM continuum, enabling enhanced customer control, solutions tailored to the Company's customers’ specific requirements, and flexible pricing. The market for the Company's products is divided among customers who contract with the Company to provide a full-suite of PBM services, large customers that have the sophisticated technology infrastructure and staff required to operate a 24-hour data center and other customers that are not able or willing to operate these sophisticated systems.

The Company’s business model allows its customers the flexibility to operate the Company’s systems themselves (with or without taking advantage of the Company’s significant customization, consulting and systems implementation services) on a fee-per-transaction or subscription basis through application service provider processing from the Company’s data center. In other cases, the Company fully manages a customer’s pharmacy benefit program from claims adjudication through clinical programs and consulting.

Leading technology and platform: The Company’s technology is robust, scalable, and web-enabled. The platform is able to cross-check multiple processes, such as reviewing claim eligibility, adverse drug reaction and properly calculating member, pharmacy and payor payments on a real-time basis. The Company’s technology is built on flexible, database-driven rule sets and broad functionality applicable for most any type of business. The Company believes it has one of the most comprehensive claims processing platforms in the market.

The Company’s technology platform allows it to provide customized comprehensive PBM services by offering customers a selection of services to choose from to meet their unique needs. The Company believes this à la carte offering is a key differentiator from its competitors.

Measurable cost savings for customers: The Company provides its customers with increased control over traditional and specialty prescription drug costs and drug benefit programs. The Company’s pricing model and flexible product offerings are designed to deliver measurable cost savings to the Company’s customers. The Company believes its pricing model is a key differentiator from its competitors for the Company’s customers who want to gain control of their prescription drug costs. For customers who select the Company’s pharmacy network and manufacturer rebate services on a fixed fee per transaction basis, there is clarity to the rebates and other fees payable by the pharmaceutical manufacturer or third party rebate administrator to the customer. The Company believes that its pricing model together with the flexibility to select from a broad range of customizable services help the customers realize measurable results and cost savings.

Selected Trends and Highlights for the Three and Nine Months Ended September 30, 2014 and 2013

Business trends

Our results for the three and nine months ended September 30, 2014 reflect the successful execution of our business model, which emphasizes the alignment of our financial interests with those of our clients through greater use of generics and low-cost brands, as well as our mail and specialty pharmacies. The ramp-up of the Cigna contract implementation, continued integration of Restat, increased mail and specialty volumes and new client implementations during 2014 have driven the overall growth in our revenue as well as overall operating results. We also continue to benefit from better management of drug ingredient costs through increased competition among generic manufacturers. The average generic dispensing rate (GDR) or the number of generic prescriptions as a percentage of the total number of prescriptions dispensed for our PBM clients for the three and nine months ended September 30, 2014 increased from the same periods in 2013. These increases were achieved through a broad range of plan design solutions, helped considerably by a continuing wave of major generic releases. This trend is expected to continue throughout 2014. These positive trends have helped offset the negative impact of various marketplace forces affecting pricing and plan structure, among other items, and thus continue to generate improvements in our results of operations. Additionally, as the regulatory environment evolves, we will continue to make significant investments in our systems and product offerings in order to provide compliance solutions to our clients.

Financial results


•	Total revenue for the three months ended September 30, 2014 increased $1.9 billion or 53.3% to $5.5 billion, as compared to $3.6 billion for the same period in 2013. Total revenue for the nine months ended September 30, 2014 increased $5.6 billion or 54.5% to $15.8 billion, as compared to $10.3 billion for the same period in 2013.

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•

Adjusted prescription claim volume increased 45.3% to 101.0 million for the third quarter of 2014, as compared to 69.5 million for the third quarter of 2013. Adjusted prescription claim volume increased 48.2% to 302.2 million for the nine months ended September 30, 2014, as compared to 203.9 million for the same period in 2013. Adjusted prescription claim volume equals the Company's retail and specialty prescriptions, plus mail pharmacy prescriptions multiplied by three. The mail pharmacy prescriptions are multiplied by three to adjust for the fact that they typically include approximately three times the amount of product days supplied compared with retail and specialty prescriptions.


•	Gross profit for the three months ended September 30, 2014 increased $63.8 million or 22.2% to $351.5 million, as compared to $287.8 million for the same period in 2013. Gross profit for the nine months ended September 30, 2014 increased $195.3 million or 24.4% to $996.0 million, as compared to $800.7 million for the same period in 2013.


•	Operating income increased $27.9 million, or 23.2%, for the three months ended September 30, 2014, to $148.0 million, as compared to $120.1 million for the same period in 2013. Operating income increased $82.2 million, or 25.9%, for the nine months ended September 30, 2014, to $399.9 million, as compared to $317.7 million for the same period in 2013.


•	Net income attributable to the Company increased $9.0 million or 12.4% to $82.0 million for the three months ended September 30, 2014, as compared to $72.9 million for the same period in 2013. Net income attributable to the Company increased $29.1 million or 15.5% to $216.8 million for the nine months ended September 30, 2014, as compared to $187.8 million for the same period in 2013.

•

Earnings per share (fully-diluted) attributable to the Company increased $0.04 or 11.4% to $0.39 in the three months ended September 30, 2014, as compared to $0.35 per share (fully-diluted) for the same period in 2013. Earnings per share (fully-diluted) attributable to the Company increased $0.14 or 15.4% to $1.05 in the nine months ended September 30, 2014, as compared to $0.91 per share (fully-diluted) for the same period in 2013.


•	Cash flow from operations increased $91.2 million or 27.2% to $427.1 million in the nine months ended September 30, 2014, as compared to $335.9 million for the same period in 2013.

Business combinations

On October 8, 2014, the Company announced the entry into a definitive purchase agreement to acquire all of the outstanding capital stock of Salveo, an independent specialty pharmacy platform with pharmacy locations in New York and California, for a purchase price of $260.0 million in cash, subject to certain customary post-closing adjustments. The acquisition provides the Company with the opportunity to expand its geographic footprint and therapy mix in the specialty pharmacy market. The acquisition is expected to be completed in the fourth quarter of 2014, subject to certain customary closing conditions.

On October 1, 2013, the Company completed the acquisition of Restat, LLC, a privately held PBM based in Milwaukee, Wisconsin, for a purchase price of $409.5 million in cash subject to certain customary post-closing adjustments. The purchase price was funded from Catamaran’s existing cash balance and $350.0 million in borrowings under its Revolving Facility. The acquisition provides the Company the opportunity to bring Catamaran's full suite of technology and clinical services to Restat's clients, including mail order and specialty pharmacy services.

Recent developments

In March 2014, the Company issued $500.0 million aggregate principal amount of 4.75% Senior Notes due 2021. The Company used the net proceeds from this offering to repay $300.0 million of the Company's outstanding borrowings under the Revolving Facility leaving the Company with approximately $800.0 million of available borrowing capacity under the Revolving Facility as of September 30, 2014. The Company used the remainder of the net proceeds from this offering for general corporate purposes.

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Results of Operations

Three and nine months ended September 30, 2014 as compared to the three and nine months ended September 30, 2013



	Three Months Ended September 30,				Nine Months Ended September 30,
In thousands, except per share data	2014		2013		2014		2013
Revenue	$	5,541,713	$	3,614,148	$	15,842,000	$	10,251,295
Cost of revenue	5,190,165		3,326,360		14,845,976		9,450,546
Gross profit	351,548		287,788		996,024		800,749
SG&A	131,897		110,454		389,048		310,839
Depreciation of property and equipment	19,442		9,979		44,904		24,887
Amortization of intangible assets	52,216		47,220		162,179		147,368
Operating income	147,993		120,135		399,893		317,655
Interest and other expense, net	17,918		9,026		44,882		30,972
Income before income taxes	130,075		111,109		355,011		286,683
Income tax expense	33,763		27,981		95,113		75,616
Net income	96,312		83,128		259,898		211,067
Less: Net loss attributable to non-controlling interest	14,344		10,190		43,053		23,303
Net income attributable to the Company	$	81,968	$	72,938	$	216,845	$	187,764
Diluted earnings per share	$	0.39	$	0.35	$	1.05	$	0.91

Revenue

Revenue increased $1.9 billion, or 53.3%, to $5.5 billion for the three months ended September 30, 2014, as compared to $3.6 billion for the three months ended September 30, 2013. Revenue increased $5.6 billion, or 54.5%, to $15.8 billion for the nine months ended September 30, 2014, as compared to $10.3 billion for the nine months ended September 30, 2013. Revenues increased during both periods primarily as a result of an increase in the adjusted prescription claim volume of 45.3% and 48.2% to 101.0 million and 302.2 million for the three and nine months, respectively, ended September 30, 2014. The increases in claim volume in both periods are mainly due to organic growth added through new customer implementations including the continued implementation of the Cigna contract as well as additional claim volume related to the Restat acquisition. Additionally, revenue per prescription claim has increased in both periods as a result of increased specialty claim volume, which has a higher revenue per prescription claim rate, as compared to the Company's general book of business.

Cost of Revenue

Cost of revenue increased $1.9 billion, or 56.0%, to $5.2 billion for the three months ended September 30, 2014, compared to $3.3 billion for the three months ended September 30, 2013. Cost of revenue increased $5.4 billion, or 57.1%, to $14.8 billion for the nine months ended September 30, 2014 compared to $9.5 billion for the nine months ended September 30, 2013.The increases for both periods are in line with the increases in revenues and are primarily due to increased PBM transaction volumes in 2014 as noted above in the revenue discussion. During the three and nine months ended September 30, 2014, the cost of prescriptions dispensed from the Company's PBM segment accounted for 98.3% and 98.2% of the cost of revenue, respectively. The cost of prescriptions dispensed is substantially comprised of the actual cost of the prescription drugs sold, plus any applicable shipping or dispensing costs.

Gross Profit

Gross profit increased $63.8 million, or 22.2%, to $351.5 million for the three months ended September 30, 2014 as compared to $287.8 million for the same period in 2013. Gross profit increased $195.3 million, or 24.4%, to $996.0 million for the nine months ended September 30, 2014, as compared to $800.7 million for the same period in 2013. The increases during both periods are mostly due to the successful implementation of new customer contracts in 2014, including the continued implementation of the Cigna contract. Gross profit decreased from 8.0% of revenue to 6.3% of revenue during the three months ended September 30, 2014, as compared to the same period in 2013. Gross profit decreased from 7.8% of revenue to 6.3% of revenue during the nine months ended September 30, 2014, as compared to the same period in 2013. The decreases for both periods are mainly due to Cigna transactions carrying a significantly lower gross profit percentage, as compared to the historical PBM business and comprising a larger proportion of revenue.

SG&A Costs

SG&A costs for the three months ended September 30, 2014 were $131.9 million, as compared to $110.5 million for the three months ended September 30, 2013, an increase of $21.4 million, or 19.4%. SG&A costs for the nine months ended September 30, 2014 were $389.0 million, as compared to $310.8 million for the nine months ended September 30, 2013, an increase of $78.2 million, or 25.2%. These increases are mainly due to the addition of operating costs related to the Company's acquisition of Restat that were not present during the three and nine months ended

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September 30, 2013, as well as additional resources added to support the implementation of the Cigna contract and overall growth of the PBM segment. SG&A costs consist primarily of employee costs in addition to professional services costs, facilities and costs not related to revenue. In addition, SG&A costs include stock-based compensation cost of $8.5 million and $6.2 million for the three months ended September 30, 2014 and September 30, 2013, respectively. SG&A costs include stock-based compensation cost of $22.7 million and $18.7 million for the nine months ended September 30, 2014 and September 30, 2013, respectively.

Depreciation

Depreciation expense relates to property and equipment used by the Company, except for those depreciable assets directly related to the generation of revenue, which is included in cost of revenue in the consolidated statements of operations. Depreciation expense was $19.4 million and $10.0 million for the three months ended September 30, 2014 and 2013, respectively. Depreciation expense was $44.9 million and $24.9 million for the nine months ended September 30, 2014 and 2013, respectively. Depreciation expense will fluctuate based on the level of new asset purchases, as well as the timing of assets becoming fully depreciated. Depreciation expense increased during the three and nine months ended September 30, 2014 mainly as a result of new asset purchases made by the Company in 2014 and 2013 to support the growth of the PBM business, including the continued implementation of the Cigna contract and other new clients, as well as the expansion of the Company's mail and specialty businesses.

Amortization

Total amortization expense for the three months ended September 30, 2014 and 2013 was $52.2 million and $47.2 million, respectively, an increase of $5.0 million. Total amortization expense for the nine months ended September 30, 2014 and 2013 was $162.2 million and $147.4 million, respectively, an increase of $14.8 million. The increases in amortization expense were driven mainly by the amortization of intangible assets acquired in the acquisition of Restat. The increases were partially offset by a decline in amortization expense of other intangibles which are primarily amortized on an accelerated basis in line with their estimated remaining benefits, which are greater at the beginning of their useful lives and diminish over time. Amortization expense on all the Company’s intangible assets held as of September 30, 2014 is expected to be approximately $51.0 million for the remainder of 2014. Refer to Note 5 — Goodwill and Other Intangible Assets in the notes to the unaudited consolidated financial statements for more information on amortization expected in future years.

Interest and other expense, net

Interest and other expense, net increased $8.9 million to $17.9 million for the three months ended September 30, 2014 from $9.0 million for the same period in 2013. Interest and other expense, net increased $13.9 million to $44.9 million for the nine months ended September 30, 2014 from $31.0 million for the same period in 2013. The increases are mainly due to higher average principal amount of long-term debt outstanding resulting from the issuance in March 2014 of $500.0 million aggregate principal 4.75% Senior Notes. Refer to Note 6 — Debt in the notes to the unaudited consolidated financial statements for more information related to the Company's Credit Agreement and Senior Notes.

Income Taxes

The Company recognized income tax expense of $33.8 million for the three months ended September 30, 2014, representing an effective tax rate of 26.0%, as compared to $28.0 million, representing an effective tax rate of 25.2%, for the same period in 2013. The Company recognized income tax expense of $95.1 million for the nine months ended September 30, 2014, representing an effective tax rate of 26.8%, as compared to $75.6 million, representing an effective tax rate of 26.4%, for the same period in 2013. The increases in tax expense during both periods ended September 30, 2014 were mainly due to higher taxable income as a result of new customer implementations as well as the acquisition of Restat.

Segment Analysis

The Company reports in two operating segments: PBM and HCIT. The Company evaluates segment performance based on revenue and gross profit. Below is a reconciliation of the Company’s business segments to the unaudited consolidated financial statements.

Three months ended September 30, 2014 as compared to the three months ended September 30, 2013 (in thousands)



	PBM						HCIT						Consolidated
	2014			2013			2014			2013			2014			2013
Revenue	$	5,505,087		$	3,578,767		$	36,626		$	35,381		$	5,541,713		$	3,614,148
Cost of revenue	5,174,185			3,310,636			15,980			15,724			5,190,165			3,326,360
Gross profit	$	330,902		$	268,131		$	20,646		$	19,657		$	351,548		$	287,788
Gross profit %	6.0		%	7.5		%	56.4		%	55.6		%	6.3		%	8.0		%

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Nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 (in thousands)



	PBM						HCIT						Consolidated
	2014			2013			2014			2013			2014			2013
Revenue	$	15,734,424		$	10,142,515		$	107,576		$	108,780		$	15,842,000		$	10,251,295
Cost of revenue	14,796,748			9,399,949			49,228			50,597			14,845,976			9,450,546
Gross profit	$	937,676		$	742,566		$	58,348		$	58,183		$	996,024		$	800,749
Gross profit %	6.0		%	7.3		%	54.2		%	53.5		%	6.3		%	7.8		%

PBM

Revenue was $5.5 billion for the three months ended September 30, 2014, an increase of $1.9 billion, or 53.8%, as compared to the same period in 2013. Revenue was $15.7 billion for the nine months ended September 30, 2014, an increase of $5.6 billion, or 55.1%, as compared to the same period in 2013. The increase in both periods is mainly due to increased adjusted claim volume as a result of organic growth. Adjusted claim volume increased 31.5 million, or 45.3% in the three months ended September 30, 2014, as compared to 69.5 million for the same period in 2013. Adjusted claim volume increased 98.3 million, or 48.2% in the nine months ended September 30, 2014, as compared to 203.9 million for the same period in 2013. Additionally, revenue per prescription claim has increased in both periods as a result of increased specialty claim volume, which have a higher revenue per prescription rate as compared to the Company's general book of business.

Cost of revenue was $5.2 billion for the three months ended September 30, 2014, as compared to $3.3 billion for the same period in 2013. Cost of revenue was $14.8 billion for the nine months ended September 30, 2014, as compared to $9.4 billion for the same period in 2013. Cost of revenue has increased in line with the increase in PBM revenue and is driven by the increase in prescriptions processed. Cost of revenue in the PBM segment is predominantly comprised of the cost of prescription drugs from retail network transactions and the cost of prescriptions dispensed at the Company's mail and specialty pharmacies.

Gross profit increased $62.8 million or 23.4% to $330.9 million for the three months ended September 30, 2014, as compared to $268.1 million for the same period in 2013. Gross profit increased $195.1 million or 26.3% to $937.7 million for the nine months ended September 30, 2014, as compared to $742.6 million for the same period in 2013. The increases during both periods are mostly due to the successful implementation of new customer contracts in 2014 which includes the continued implementation of the Cigna contract. Gross profit percentage was 6.0% and 7.5% for the three months ended September 30, 2014 and 2013, respectively. Gross profit percentage was 6.0% and 7.3% for the nine months ended September 30, 2014 and 2013, respectively. Gross profit percentage decreased for the three and nine months ended September 30, 2014, as compared to the same periods in 2013 due to Cigna transactions carrying a significantly lower gross profit percentage as compared to the historical PBM business, coupled with the significant volume associated with the Cigna business representing a larger proportion of total PBM revenue.

HCIT

HCIT revenue increased $1.2 million, or 3.5%, to $36.6 million for the three months ended September 30, 2014, as compared to $35.4 million for the same period in 2013 mostly due to an increase in transaction revenue. HCIT revenue decreased $1.2 million, or 1.1%, to $107.6 million for the nine months ended September 30, 2014, as compared to $108.8 million for the same period in 2013 mainly due to decreases in the professional services revenue.

Gross profit increased by $1.0 million, or 5.0%, to $20.6 million for the three months ended September 30, 2014, as compared to $19.7 million for the same period in 2013. Gross profit increased by $0.2 million, or 0.3%, to $58.3 million for the nine months ended September 30, 2014, as compared to $58.2 million for the same period in 2013. The gross profit percentage was 56.4% for the three months ended September 30, 2014, as compared to 55.6% for the three months ended September 30, 2013. The gross profit percentage was 54.2% for the nine months ended September 30, 2014, as compared to 53.5% for the nine months ended September 30, 2013. The increases in gross profit were mainly attributable to decreases in cost of revenue.

Non-GAAP Measures

The Company reports its financial results in accordance with GAAP, but the Company's management also evaluates and makes operating decisions using EBITDA and Adjusted EPS. The Company's management believes that these measures provide useful supplemental information regarding the performance of business operations and facilitate comparisons to its historical operating results. The Company also uses this information internally for forecasting and budgeting as it believes that the measures are indicative of the Company's core operating results. Note, however, that these items are performance measures only, and do not provide any measure of the Company's cash flow or liquidity. Non-GAAP financial measures should not be considered as a substitute for measures of financial performance in accordance with GAAP, and investors and potential investors are encouraged to review the reconciliations of EBITDA and Adjusted EPS.

EBITDA Reconciliation

EBITDA is a non-GAAP measure that management believes is a useful supplemental measure of operating performance. EBITDA consists of earnings attributable to the Company prior to amortization, depreciation, interest and other expense, net, income taxes and adjustments to remove

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the applicable impact of any non-controlling interest. Management believes it is useful to exclude these items, as they are essentially fixed amounts that cannot be influenced by management in the short term.

Below is a reconciliation of the Company's reported net income to EBITDA for the three and nine months ended September 30, 2014 and 2013.



EBITDA Reconciliation	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2014			2013			2014			2013
	(unaudited)						(unaudited)
Net income attributable to the Company (GAAP)	$	81,968		$	72,938		$	216,845		$	187,764
Add:
Depreciation of property and equipment	20,483			11,059			47,861			28,204
Amortization of intangible assets	52,216			47,220			162,179			147,368
Interest and other expense, net	17,918			9,026			44,882			30,972
Income tax expense	33,763			27,981			95,113			75,616
Adjustments related to non-controlling interest	(644		)	(673		)	(1,819		)	(771		)
EBITDA	$	205,704		$	167,551		$	565,061		$	469,153

EBITDA for the three months ended September 30, 2014 was $205.7 million, compared to $167.6 million for the same period of 2013. EBITDA for the nine months ended September 30, 2014 was $565.1 million, compared to $469.2 million for the same period of 2013. The increases during both periods as compared to the same periods in 2013 are mainly due to increased net income attributable to the Company as a result of increased revenue driven by new customer contract implementations during 2014 as well as the Restat book of business. This was partially offset by increased costs incurred to support the Company's growth and prior acquisitions.

Adjusted EPS Reconciliation

Adjusted EPS adds back the impact of all amortization of intangible assets, net of tax. Amortization of intangible assets arises from the acquisition of intangible assets in connection with the Company's business acquisitions. The Company excludes amortization of intangible assets from non-GAAP Adjusted EPS because it believes (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of the Company's business operations and (ii) such expenses can vary significantly between periods as a result of new acquisitions and full amortization of previously acquired intangible assets. Investors should note that the use of these intangible assets contributes to revenue in the period presented as well as future periods and should also note that such expenses will recur in future periods.

Below is a reconciliation of the Company's reported net income to Adjusted EPS for the three and nine months ended September 30, 2014 and 2013.



Adjusted EPS Reconciliation
(in thousands, except per share data)
	Three Months Ended September 30,												Nine Months Ended September 30,
	2014						2013						2014						2013
	Operational Results			Per Diluted Share			Operational Results			Per Diluted Share			Operational Results			Per Diluted Share			Operational Results			Per Diluted Share
	(unaudited)												(unaudited)
Net income attributable to the Company (GAAP)	$	81,968		$	0.39		$	72,938		$	0.35		$	216,845		$	1.05		$	187,764		$	0.91
Amortization of intangible assets	52,216			0.25			47,220			0.23			162,179			0.78			147,368			0.71
Tax effect of reconciling item	(13,576		)	(0.06		)	(11,899		)	(0.06		)	(43,464		)	(0.21		)	(38,905		)	(0.19		)
Non-GAAP net income attributable to the Company	$	120,608		$	0.58		$	108,259		$	0.52		$	335,560		$	1.62		$	296,227		$	1.43

Adjusted EPS for the three months ended September 30, 2014 was $0.58, as compared to $0.52 in the corresponding period of 2013. Adjusted EPS for the nine months ended September 30, 2014 was $1.62, as compared to $1.43 in the corresponding period of 2013. The increases during the three and nine months ended September 30, 2014, as compared to the same periods in 2013 are mainly due to increased gross profit as a result of organic growth as discussed above as well as the Restat book of business, and was partially offset by increased costs incurred to support the Company's business growth and prior acquisitions.

Liquidity and Capital Resources

The Company’s sources of liquidity have primarily been cash provided by operating activities, proceeds from its public offerings, proceeds from credit facilities and stock option exercises. As of September 30, 2014, under its Credit Agreement, the Company had approximately $962.5 million of outstanding debt under the Term Loan Facility and approximately $800.0 million of available borrowing capacity under the Revolving

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Facility. In March 2014, the Company issued $500.0 million aggregate principal amount of 4.75% Senior Notes due in March 2021. The Company used part of the net proceeds from this offering to repay $300.0 million of the Company's outstanding borrowings under the Revolving Facility. The Company used the remainder of the net proceeds from this offering for general corporate purposes. Due to the outstanding borrowings under the Credit Agreement and the Senior Notes, the Company will continue to incur significant interest expense and expects this expense and the related principal payments to continue for the remainder of 2014 and throughout the remaining term of the debt agreements. Refer to Note 6 — Debt in the notes to the unaudited consolidated financial statements for more information regarding the Credit Agreement and the Senior Notes.

At September 30, 2014 and December 31, 2013, the Company had cash and cash equivalents totaling $906.8 million and $387.2 million, respectively. The Company believes that its cash on hand, together with cash generated from operating activities and cash available through the Revolving Facility, will be sufficient to support planned operations for the foreseeable future and service our outstanding debt obligations. At September 30, 2014, cash and cash equivalents consisted of cash on hand, deposits in banks, and bank term deposits with original maturities of 90 days or less.

As of September 30, 2014, all of the Company’s cash and cash equivalents were exposed to market risks, primarily changes in U.S. interest rates. Declines in interest rates over time would reduce interest income related to these balances.

Consolidated Balance Sheets

Selected balance sheet highlights at September 30, 2014 are as follows:

•

Accounts receivable are comprised of trade accounts receivable primarily from the PBM segment's customers. Accounts receivable increased $336.7 million to $1.3 billion at September 30, 2014, from $959.6 million at December 31, 2013. The accounts receivable balance increased mainly due to an increase in revenue in Q3 2014 compared to Q4 2013 driven mainly by organic growth.The accounts receivable balance is impacted by changes in revenues, as well as the timing of collections, and is continually monitored by the Company to ensure timely collections and to assess the need for any changes to the allowance for doubtful accounts.

•

Rebates receivable of $880.1 million at September 30, 2014 relate to billed and unbilled PBM receivables from pharmaceutical manufacturers and third party administrators in connection with the administration of the rebate program where the Company is the principal contracting party. The receivable and related payable are based on estimates that are subject to final settlement. Rebates receivable increased $574.2 million from $306.0 million at December 31, 2013 due to an increased volume of rebate eligible claims processed in 2014, as well as the timing of receipts from pharmaceutical manufacturers and third party administrators.


•	Other assets are mostly comprised of prepaid assets, inventory and deferred tax assets. Other assets increased $24.3 million or 15.9% to $177.0 million at September 30, 2014 from $152.7 million at December 31, 2013. The increase in other assets is mainly due to an increase in the inventory balance which was driven by an increase in the Company's mail and specialty pharmacy claim volume.

•

Accounts payable predominantly relates to amounts owed to retail pharmacies for prescription drug costs and dispensing fees in connection with prescriptions dispensed by the retail pharmacies to the members of the Company’s customers when the Company is the principal contracting party with the pharmacy. Accounts payable increased $288.0 million to $1.1 billion, from $817.8 million at December 31, 2013, due to the timing of payments made for purchases from the Company's suppliers as well as payments made to participating pharmacies in the Company's retail pharmacy network.

•

Rebates payable represents amounts owed to customers for rebates from pharmaceutical manufacturers and third party administrators where the Company administers the rebate program on the customer’s behalf, and the Company is the principal contracting party. The payable is based on estimates that are subject to final settlement. Rebates payable increased $558.8 million to $915.0 million from $356.3 million at December 31, 2013, due to higher rebate volume.


•	Accrued liabilities are mainly comprised of customer deposits, salaries and wages payables and other accrued liabilities related to operating expenses of the Company. Accrued liabilities increased by $59.3 million to $313.4 million at September 30, 2014 from $254.1 million at December 31, 2013. The increase was driven primarily by increased operating expenses of the Company.

Cash flows from operating activities

For the nine months ended September 30, 2014, the Company generated $427.1 million of cash from operating activities, an increase of $91.2 million, as compared to the amount of cash provided from operations for the same period in 2013. Cash from operating activities increased during the nine months ended September 30, 2014, as compared to the same period in 2013 due to an increase in net income of $48.8 million, and a net cash inflow of $89.9 million due to the timing of receipts and payments on the Company's outstanding accounts receivable, accounts payable and accrued expenses balances. These increases were offset in part by a net cash outflow of $40.8 million due to the increased volume and timing of receipts and payments associated with the Company's rebate program as well as a net cash outflow of $19.4 million related to other assets, driven by an increase in inventory as a result of an expanding mail and specialty business.

Changes in the Company’s cash from operations result primarily from increased net income and the timing of payments on accounts receivable, rebates receivable, and the payment or processing of its various accounts payable and accrued liabilities. The Company continually monitors its balance of trade accounts receivable and devotes ample resources to collection efforts on those balances. Rebates receivable and the related payables are primarily estimates based on claims submitted and are typically paid to customers on a quarterly basis. The timing of the rebate payments to customers and collections of rebates from third-party rebate administrators and pharmaceutical manufacturers causes fluctuations on the balance sheet, as well as in the Company’s cash from operating activities.

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Changes in non-cash items such as depreciation and amortization are caused by the purchase and acquisition of capital and intangible assets. In addition, as assets become fully depreciated or amortized, the related expenses will decrease.

Changes in operating assets and liabilities, as well as non-cash items related to income taxes, will fluctuate based on working capital requirements and the tax provision, which is determined by examining taxes actually paid or owed, as well as amounts expected to be paid or owed in the future.

Cash flows from investing activities

For the nine months ended September 30, 2014, the Company used $48.2 million of cash from investing activities, a decrease of $32.1 million, as compared to $80.3 million of cash used during the nine months ended September 30, 2013. This was mainly due to a decrease in the purchases of property and equipment during the nine months ended September 30, 2014, as compared to the same period in 2013. Purchases of property and equipment were higher in 2013 primarily due to the integration efforts from the Company's merger with Catalyst Health Solutions, Inc. that closed in July 2012.

Cash flows from financing activities

For the nine months ended September 30, 2014, the Company generated $140.7 million of cash for financing activities, an increase of $330.7 million, as compared to a use of $190.0 million in cash from financing activities during the nine months ended September 30, 2013. This increase is attributable to the Company's issuance of $500.0 million aggregate principal amount of the Senior Notes, which was partially offset by repaying $300.0 million of the Company's outstanding borrowings under the Revolving Facility.

Cash flows from financing activities generally fluctuate based on payments for acquisitions, proceeds from or payments on debt borrowings and the timing of option exercises by the Company’s employees.

Future Capital Requirements

The Company’s future capital requirements depend on many factors, including servicing its outstanding debt and the integration of its acquisitions. The Company expects to fund its operating and working capital needs and business growth requirements through cash flow from operations, its cash and cash equivalents on hand and available borrowings under its Credit Agreement. Refer to Note 6— Debt in the notes to the unaudited consolidated financial statements for more information on the Credit Agreement.

Subsequent to the end of the current reporting period, on October 8, 2014, the Company announced the entry into a definitive purchase agreement to acquire all of the outstanding capital stock of Salveo, an independent specialty pharmacy platform, for a purchase price of $260.0 million in cash, subject to certain customary post-closing adjustments. The acquisition is expected to be completed in the fourth quarter of 2014, subject to certain customary closing conditions. The Company intends to finance the purchase price for Salveo from its cash on hand, as well as available borrowing capacity under the Revolving Facility.

In March 2014, the Company issued $500.0 million aggregate principal amount of 4.75% Senior Notes due 2021. The Company partially used the net proceeds from this offering to repay $300.0 million of the Company's outstanding borrowings under the Revolving Facility leaving the Company with approximately $800.0 million of available borrowing capacity under the Revolving Facility as of September 30, 2014. As a result of the additional issued debt, the interest expense and cash required to service the Company's debt will increase in future periods.

The Company cannot provide assurance that its actual cash requirements will not be greater than expected as of the date of this quarterly report. In order to meet business growth goals, the Company will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services and technologies, which may adversely affect the Company's liquidity position or require the issuance of additional equity or debt securities. Any issuance of additional equity or debt securities may result in dilution to shareholders, and the Company cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to the Company, or at all.

If sources of liquidity are not available or if it cannot generate sufficient cash flow from operations during the next twelve months, the Company may be required to obtain additional funds through operating improvements, capital markets transactions, asset sales or financing from third parties or a combination thereof. The Company cannot provide assurance that these additional sources of funds will be available in amounts or on terms acceptable to the Company, or at all.

If adequate funds are not available to finance the Company's business growth goals, the Company may have to substantially reduce or eliminate expenditures for expanding operations, marketing, and research and development, or obtain funds through arrangements with partners that require the Company to relinquish rights to certain of its technologies or products. There can be no assurance that the Company will be able to raise additional capital if its capital resources are exhausted. A lack of liquidity and an inability to raise capital when needed may have a material adverse impact on the Company’s ability to continue its operations or expand its business.

Contingencies

For information on legal proceedings and contingencies, refer to Note 10 — Commitments and Contingencies in the notes to the unaudited consolidated financial statements.

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Contractual Obligations

For the nine months ended September 30, 2014, there have been no significant changes to the Company’s contractual obligations as disclosed in its 2013 Annual Report on Form 10-K other than as disclosed below with respect to the required principal payments under the Credit Agreement and required principal and interest payments under the Senior Notes.



	Payments due by period (in millions)
	Total		Less than one year		1-3 years		4-5 years		More than 5 years
Credit Agreement*	$	962.5	$	75.0	$	200.0	$	687.5	$	—
Senior Notes**	$	654.4	$	23.8	$	47.5	$	47.5	$	535.6

*The commitment amounts are exclusive of interest payments. Currently, the Company's long-term debt obligations carry an annual interest rate of 2.14% on $500.0 million, which has been fixed through the Company's interest rate swap agreements, and 1.81% on the remaining $462.5 million of its long-term debt obligations. The interest rate applicable to the Company's long-term debt may fluctuate in the future based on changes in the LIBOR rate. See Note 6 — Debt for further information on the terms of the Company's long-term debt obligations.

** Amounts reported include interest payments on the $500.0 million aggregate principal amount of the Senior Notes which carry an interest rate of 4.75%. Interest payments are due semi-annually on March 15 and September 15 of each year, beginning on September 15, 2014. See Note 6 — Debt for further information on the terms of the Company's long-term debt obligations.

Outstanding Securities

As of October 30, 2014, the Company had 207,484,514 common shares outstanding, 1,465,661 stock options outstanding, and 1,905,299 RSUs outstanding outstanding. The options are exercisable on a one-for-one basis into common shares. The outstanding RSUs are subject to time-based and performance-based vesting restrictions. The number of outstanding RSUs as of October 30, 2014 assumes the associated performance targets will be met at the maximum level for the performance-based RSUs. Upon vesting, the RSUs convert into common shares on a one-for-one basis.

Critical Accounting Policies and Estimates

Refer to Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates in the 2013 Annual Report on Form 10-K for a discussion of the Company’s critical accounting policies and estimates.

Recent Accounting Standards

Refer to Note 3 — Recent Accounting Pronouncements in the notes to the unaudited consolidated financial statements for information on recent updates to accounting guidance that the Company has assessed for any impact to the Company's financial statements.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk in the normal course of its business operations, primarily the risk of loss arising from adverse changes in interest rates. In addition, the Company is subject to interest rate risk related to approximately $462.5 million of the $962.5 million drawn under the Credit Agreement, as of September 30, 2014, as $500.0 million is not impacted due to the interest rate swap agreements the Company maintains which fix the interest rate on that portion of the Term Loan Facility. See Note 11 — Financial Instruments to the Company's unaudited consolidated financial statements included herein for additional information regarding the Company's interest rate swap agreements. As of September 30, 2014, assuming a hypothetical 1% fluctuation in the interest rate of the loan, the Company's pre-tax income would vary by approximately $4.6 million on an annual basis. Actual increases or decreases in earnings in the future could differ materially from this assumption based on the timing and amount of both interest rate changes and the levels of cash held by the Company. The interest rates applicable to borrowings under the Credit Agreement are based on a LIBOR-based floating rate and are described in more detail in Note 6 — Debt to the Company's unaudited consolidated financial statements included herein.

The Company is also subject to foreign exchange rate risk related to its operations in Canada, as disclosed in Item 7A — Quantitative and Qualitative Disclosures About Market Risk - Foreign Exchange Rate Risk in the 2013 Annual Report on Form 10-K. In the three months ended September 30, 2014, there have been no material changes in the Company's foreign exchange rate risk as disclosed in its 2013 Annual Report on Form 10-K.


ITEM 4.	Controls and Procedures

We maintain a system of controls and procedures under the supervision and with the participation of our management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to ensure the Company's consolidated financial statements are prepared in accordance with generally accepted accounting principles and present fairly the Company's financial results of operations. As reported in our 2013 Annual Report on Form 10-K as of December 31, 2013, our management concluded that our internal control over financial reporting was not effective as a result of a material weakness related to ineffective general information technology controls ("GITCs") intended to ensure that access to applications and

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data, and the ability to place program changes into production for such applications and data, was adequately restricted to appropriate internal personnel. Due to this material weakness in internal control over financial reporting, our management concluded in our 2013 Form 10-K that our disclosure controls and procedures were ineffective as of December 31, 2013.

Management has taken steps to remediate the GITC material weakness, including enhancing its internal documentation and monitoring approach to ensure that all GITC procedures designed to restrict access to applications and data are operating in a manner in order to provide management with comfort that access is properly limited to the appropriate internal personnel and the ability to place program changes into production for such applications and data. Management began to implement these remedial steps during 2014 and expects that these steps will be implemented and tested by the end of 2014. In accordance with the Company’s internal control compliance program, the material weakness designation cannot be closed until the remediation processes have been operational for a period of time and successfully tested. As a result, because of the GITC material weakness in internal control over financial reporting disclosed in our 2013 Form 10-K, our CEO and CFO have concluded that our disclosure controls and procedures were ineffective as of September 30, 2014.

As a result of the material weakness identified, the Company assessed the material weakness's impact to the Company's consolidated financial statements to ensure they were prepared in accordance with generally accepted accounting principles and present fairly the Company's financial results of operation as of and for the three and nine months ended September 30, 2014. Based on management's additional procedures and assessment, management concluded that the consolidated financial statements included in this Form 10-Q present fairly, in all material aspects, the Company's financial position, results of operations and cash flows for the periods presented.

Except as described above in regards to the remediation process, there were no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during the three month period ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION


ITEM 1.	Legal Proceedings

For information on legal proceedings, refer to Note 10 —Commitments and Contingencies in the notes to the unaudited consolidated financial statements.

ITEM 1A. Risk Factors

Our Annual Report on Form 10-K for the year ended December 31, 2013 includes a detailed discussion of certain material risk factors facing us. In the three and nine months ended September 30, 2014, there have been no material changes from the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None


ITEM 3.	Defaults Upon Senior Securities

None.


ITEM 4.	Mine Safety Disclosures

Not applicable.


ITEM 5.	Other Information

On and effective October 30, 2014, the board of directors of the Company amended and restated the Company’s Bylaws (the “Bylaws” and, as amended and restated, the “Amended Bylaws”).

The Amended Bylaws added new Sections 3.7 and 3.8 involving certain advance notice and other requirements for shareholders to propose director nominations or other business to be brought before an annual or special meeting of shareholders. These requirements include, among other things, that with respect to these matters, a shareholder must give notice to the Corporate Secretary of the Company;

•

in the case of an annual general meeting of shareholders, not less than 60 nor more than 90 days prior to the first anniversary of the preceding year’s annual general meeting; provided, however, that in the event that the date of the annual general meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the 90th day prior to the date of such annual general meeting and not later than the later of the 60th day prior to the date of such annual general meeting or, if the first public announcement of the date of such annual general meeting is less than 70 days prior to the date of such annual general meeting, the 10th day following the day on which public announcement of the date of such meeting is first made by the Company; and


•	in the case of a special meeting of shareholders that is not also an annual general meeting but is called for the purpose of electing directors of the Company (whether or not called for other purposes), not later than the close of business on the 10th day following the day on which the initial public announcement of the special meeting of shareholders was made.

The notice must also comply with the other requirements set forth in Sections 3.7 and 3.8 of the Amended Bylaws, as applicable. The Amended Bylaws will be submitted to shareholders for approval at the Company’s 2015 annual general meeting. In order for shareholders to propose director nominations or other business to be brought before the Company’s 2015 annual general meeting, shareholders will be required to comply with the advance notice and other requirements set forth in Sections 3.7 and 3.8 of the Amended Bylaws, as applicable. The provisions described herein do not limit the ability of shareholders to make proposals pursuant to Rule 14a-8 of the Securities Exchange Act of 1934 or as required by the Yukon Business Corporations Act.

The foregoing is a brief summary of the material changes effected by adoption of new Sections 3.7 and 3.8 of the Amended Bylaws, which is qualified in its entirety by reference to the Amended Bylaws filed as Exhibit 3.1 hereto.

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ITEM 6. Exhibits



Exhibit Number	Description of Document	Reference

3.1	Amended and Restated Bylaws of Catamaran Corporation, as amended through October 30, 2014	Filed herewith.

10.1	Amendment No. 4 to Credit Agreement, dated as of October 28, 2014, among Catamaran Corporation (f/k/a SXC Health Solutions Corp.), JPMorgan Chase Bank, N.A., individually and as administrative agent, and the other financial institutions signatory thereto	Filed herewith.

31.1	Rule 13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act.	Filed herewith.

31.2	Rule 13a-14(a)/15d-14(a) Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act.	Filed herewith.

32.1	Section 1350 Certification of CEO as adopted by Section 906 of the Sarbanes-Oxley Act.	Filed herewith.

32.2	Section 1350 Certification of CFO as adopted by Section 906 of the Sarbanes-Oxley Act.	Filed herewith.

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013, (ii) the Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013, (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, (v) the Consolidated Statements of Shareholders' Equity for the nine months ended September 30, 2014 and 2013, and (vi) the notes to the Unaudited Consolidated Financial Statements.	Filed herewith.

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SIGNATURE

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	Catamaran Corporation
October 31, 2014	By:	/s/ Michael Shapiro
		Michael Shapiro
		Senior Vice President and Chief Financial Officer (on behalf of the registrant and as principal financial and accounting officer)

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EXHIBIT INDEX



Exhibit Number	Description of Document	Reference

3.1	Amended and Restated Bylaws of Catamaran Corporation, as amended through October 30, 2014	Filed herewith.

10.1	Amendment No. 4 to Credit Agreement, dated as of October 28, 2014, among Catamaran Corporation (f/k/a SXC Health Solutions Corp.), JPMorgan Chase Bank, N.A., individually and as administrative agent, and the other financial institutions signatory thereto	Filed herewith.

31.1	Rule 13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act.	Filed herewith.

31.2	Rule 13a-14(a)/15d-14(a) Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act.	Filed herewith.

32.1	Section 1350 Certification of CEO as adopted by Section 906 of the Sarbanes-Oxley Act.	Filed herewith.

32.2	Section 1350 Certification of CFO as adopted by Section 906 of the Sarbanes-Oxley Act.	Filed herewith.

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013, (ii) the Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013, (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, (v) the Consolidated Statements of Shareholders' Equity for the nine months ended September 30, 2014 and 2013, and (vi) the notes to the Unaudited Consolidated Financial Statements.	Filed herewith.

Catamaran Corp - FORM 10-Q - October 31, 2014

Attached files

Catamaran Corp Reports