PharMerica CORP - FORM 10-K

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

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

For the year ended December 31, 2014

☐	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: 001-33380

PHARMERICA CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		87-0792558
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1901 Campus Place
Louisville, KY		40299
(Address of Principal Executive Offices)		(Zip Code)

(502) 627-7000

(Registrant’s Telephone Number, Including Area Code)

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

Title of each class		Name of exchange on which registered
Common stock $0.01 par value		New York Stock Exchange

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

N/A

(Title of class)

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

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

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 ☒ No ☐

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

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

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

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

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

The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates as of June 30, 2014 was $831,220,514.

Class of Common Stock	Outstanding at February 20, 2015
Common stock, $0.01 par value	30,154,068

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates certain information by reference from registrant’s definitive proxy statement for the 2015 annual meeting of stockholders, which proxy statement will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2014.

PHARMERICA CORPORATION

FORM 10-K

INDEX

		Page
Part I
Item 1.	Business	3
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	23
Item 2.	Properties	24
Item 3.	Legal Proceedings	24
Item 4.	Mine Safety Disclosures	26

Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
Item 6.	Selected Financial Data	31
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 8.	Financial Statements and Supplementary Data	F-1
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	88
Item 9A.	Controls and Procedures	88
Item 9B.	Other Information	89

Part III
Item 10.	Directors, Executive Officers and Corporate Governance	90
Item 11.	Executive Compensation	90
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	90
Item 13.	Certain Relationships and Related Transactions, and Director Independence	90
Item 14.	Principal Accounting Fees and Services	90

Part IV
Item 15.	Exhibits, Financial Statement Schedules	91

Index

Part I

Item 1.

Business

Overview

Formed in 2006, PharMerica Corporation (the “Corporation,” “we,” “us,” or “our”), a Delaware Corporation, is an institutional pharmacy services company that services healthcare facilities, provides pharmacy management services to hospitals, provides specialty infusion services to patients outside a hospital setting, and offers the only national oncology pharmacy in the United States. The Corporation is the second largest institutional pharmacy services company in the United States based on revenues and customer licensed beds under contract, operating 98 institutional pharmacies and 14 specialty infusion centers and 5 specialty oncology pharmacies in 45 states. The Corporation’s customers are typically institutional healthcare providers, such as skilled nursing facilities, nursing centers, assisted living facilities, hospitals, individuals receiving in-home care and other long-term alternative care providers. The Corporation is generally the primary source of supply of pharmaceuticals to its customers. The Corporation also provides pharmacy management services to 89 hospitals in the United States.

Institutional Pharmacy Business

Our core business provides pharmacy products and services to residents and patients in skilled nursing facilities, nursing centers, assisted living facilities, hospitals, and other long-term alternative care settings. We purchase, repackage, and dispense prescription and non-prescription pharmaceuticals in accordance with physician orders and deliver such medication to healthcare facilities for administration to individual patients and residents. Depending on the specific location, we service healthcare facilities typically within a radius of 120 miles or less of our pharmacy locations at least once each day. We provide 24-hour, seven-day per week on-call pharmacist services for emergency dispensing, delivery, and/or consultation with the facility’s staff or the resident’s attending physician. We also provide various supplemental healthcare services that complement our institutional pharmacy services.

We offer prescription and non-prescription pharmaceuticals to our customers through unit dose or modified unit dose packaging, dispensing, and delivery systems, typically in a 14 to 30 day supply. Unit dose medications are packaged for dispensing in individual doses as compared to bulk packaging used by most retail pharmacies. The customers we serve prefer the unit dose delivery system over the bulk delivery system employed by retail pharmacies because it improves control over the storage and ordering of drugs and reduces errors in drug administration in healthcare facilities. Nursing staff in our customers’ facilities administer the pharmaceuticals to individual patients and residents. The Corporation also utilizes an on-site dispensing system, with real time data transfer between the system and the Corporation, which provides timely medication administration in emergency and first dose situations. We also offer clinical pharmacy programs that encompass a wide range of drug therapy and disease management protocols, including protocols for anemia treatment, infectious diseases, wound care, nutritional support, renal dosing, and therapeutic substitution.

Our computerized dispensing and delivery systems are designed to improve efficiency and control over distribution of medications to patients and residents. We provide computerized physician orders and medication administration records for patients or residents on a monthly basis as requested. Data from these records are formulated into monthly management reports on patient and resident care and quality assurance. This system improves efficiencies in nursing time, reduces drug waste, and helps to improve patient outcomes.

Hospital Pharmacy Management Services

We also provide hospital pharmacy management services. These services generally entail the overall management of the hospital pharmacy operations, including the ordering, receipt, storage, and dispensing of pharmaceuticals to the hospital’s patients pursuant to the clinical guidelines established by the hospital. We offer the hospitals a wide range of regulatory and financial management services, including inventory control, budgetary analysis, staffing optimization, and assistance with obtaining and maintaining applicable regulatory licenses, certifications, and accreditations. We work with the hospitals to develop and implement pharmacy policies and procedures, including drug formulary development and utilization management. We also offer clinical pharmacy programs that encompass a wide range of drug therapy and disease management protocols, including protocols for anemia treatment, infectious diseases, wound care, nutritional support, renal dosing, and therapeutic substitution. The hospital pharmacy management services business is comprised of a few customers, of which, our largest service is to the majority of the Kindred hospitals.

Index

Consultant Pharmacist Services

Federal and state regulations mandate that long-term care facilities, in addition to providing a source of pharmaceuticals, retain consultant pharmacist services to monitor and report on prescription drug therapy in order to maintain and improve the quality of resident care. On September 30, 2008, the United States Department of Health and Human Services Office of Inspector General (“OIG”) published OIG Supplemental Compliance Program Guidance for Nursing Homes. With quality of care being the first risk area identified, the supplemental guidance is part of a series of government efforts focused on improving quality of care at skilled nursing and long-term care facilities. The guidance contains compliance recommendations and an expanded discussion of risk areas. The guidance stressed that facilities must provide pharmaceutical services to meet the needs of each resident and should be mindful of potential quality of care problems when implementing policies and procedures on proper medication management. It further stated that facilities can reduce risk by educating staff on medication management and improper pharmacy kickbacks for consultant pharmacists and that facilities should review the total compensation paid to consultant pharmacists to ensure it is not structured in a way that reflects the volume or value of particular drugs prescribed or administered to residents.

We provide consultant pharmacist services to approximately 67% of our patients serviced. The services offered by our consultant pharmacists include:

•

Monthly reviews of each resident’s drug regimen to assess the appropriateness and efficiency of drug therapies, including the review of medical records, monitoring drug interactions with other drugs or food, monitoring laboratory test results, and recommending alternative therapies;

•

Participation on quality assurance and other committees of our customers, as required or requested by such customers;

•

Monitoring and reporting on facility-wide drug utilization;

•

Development and maintenance of pharmaceutical policy and procedure manuals; and

•

Assistance with federal and state regulatory compliance pertaining to resident care.

Medical Records

The Corporation provides medical records services, which includes the completion and maintenance of medical record information for patients in the Corporation’s customer’s facilities. The medical records services include:

•

Real-time access to medication and treatment administration records, physician order sheets and psychotropic drug monitoring sheets;

•

Online ordering to save time and resources;

•

A customized database with the medication profiles of each resident’s medication safety, efficiency and regulatory compliance;

•

Web-based individual patient records detailing each prescribed medicine; and

•

Electronic medical records to improve information to make it more legible and instantaneous.

Specialty Infusion Services

The Corporation provides specialty infusion services focused on providing complex pharmaceutical products and clinical services to patients in client facilities, hospice, and outside of hospital or nursing home settings. We offer high-touch clinical services to patients with acute or chronic conditions. The delivery of specialty infusion therapy requires comprehensive planning and monitoring which is provided through our registered nursing staff. Our nursing staff performs an initial patient assessment, provides therapy specific training and education, administers therapy and monitors for potential side effects. We also provide extensive clinical monitoring and patient follow-up to ensure patient therapy adherence and proactively manage patients’ conditions. An in-network strategy facilitates easier decision-making for referral sources and provides us with the ability to pre-authorize patients, auto adjudicate, and bill electronically, enabling faster prescription turnaround.

Specialty Oncology Pharmacy

We provide dispensing of oncology drugs, care management and other related services to patients, oncology practices, and hospitals. These services encompass clinical coordination and review, compliance to appropriate oncology protocols, patient assistance with outside funding, and timely delivery of medication. We coordinate the administration of medications to the physician’s office or directly to the patient at the appropriate point of treatment. We work directly with the payers to bill insurance companies for the medication provided, ensuring all prior authorizations and approvals are obtained. These services offer physicians an alternative to the traditional buy-and-bill distribution model, allowing them to outsource drug procurement, inventory management, and prescription administration.

Index

Our Business Focus

Drive Scale Economies. We will focus on consistently providing quality pharmaceutical services to our customers at competitive prices and delivery of prescriptions in a timely and effective manner. Our business seeks to implement innovative and cost-effective solutions to improve the provision of medication to our customers and the residents and patients that they serve.

Focus on Organic Growth through New Sales and Client Retention. We aim to grow our business through expansion in our existing markets and by servicing new customers. We believe our industry has underlying market growth potential attributable to both an increase in drug utilization as well as the general aging population of the United States.

Acquire Competitors. We also intend to expand our market share through selected geographic expansion in markets not currently served by us and through strategic acquisitions in existing and underserved markets. The Corporation currently operates in 45 states. We believe that there are growth opportunities in several other markets. There are numerous businesses in our markets, mostly small or regional companies that lack the scale that we believe will be necessary to ultimately compete in a market that is national in scope. We intend to actively seek opportunities to acquire companies. Since its formation in 2006, the Corporation has acquired 16 institutional pharmacy businesses, two specialty infusion services business and one specialty oncology pharmacy.

Sales and Marketing

We sell our products and services through a national sales force. The sales force is organized by both geographic lines and size of client. We believe this helps us to maximize coverage, manage costs, and align more effectively with our operating regions. Our sales representatives specialize in the products and services we offer and the markets in which we operate. Their knowledge permits us to meet the unique needs of our customers while maintaining profitable relationships.

Customers

Institutional Care Settings. Our customers are typically institutional healthcare providers, such as skilled nursing facilities, nursing centers, assisted living facilities and other long-term alternative care settings. We are generally the primary source of pharmaceuticals for our customers.

Our customers depend on institutional pharmacies like us to provide the necessary pharmacy products and services and to play an integral role in monitoring patient medication regimens and safety. We dispense pharmaceuticals in patient specific packaging in accordance with physician instructions.

During 2013, revenues from Kindred Healthcare (“Kindred”) facilities represented approximately 9.2% of the Corporation’s total revenues. Kindred did not renew the Corporation's contract for pharmacy services and the contract expired on December 31, 2013. As of January 1, 2014, we no longer provide institutional pharmacy services to Kindred.

Specialty Infusion Services. At December 31, 2014, the Corporation provided specialty infusion services to patients in 14 states with acute or chronic conditions in a setting outside of a hospital or nursing home.

Specialty Oncology Services. At December 31, 2014, the Corporation provided specialty oncology medication services to patients in 44 states with acute and chronic conditions in a hospital or physician practice or the home setting.

Hospital Pharmacy Management Services. At December 31, 2014, the Corporation provided hospital pharmacy management services to Kindred and other customers at 89 locations.

Suppliers/Inventory

We obtain pharmaceutical and other products from AmerisourceBergen Drug Corporation ("ABDC") and other contracts negotiated directly with pharmaceutical manufacturers for discounted prices. The loss of a supplier could adversely affect our business if alternate sources of supply are unavailable.

We seek to maintain an on-site inventory of pharmaceuticals and supplies to ensure prompt delivery to our customers. ABDC maintains local distribution facilities in most major geographic markets in which we operate. In addition, beginning in the fourth quarter of 2013, we began supplying many of our pharmacies with select products from a distribution center operated by a third-party logistics company.

Index

The Corporation and ABDC are parties to certain legal proceedings with respect to the Amended Prime Vendor Agreement, as amended by the First Amendment to the Amended Prime Vendor Agreement (the “Amended PVA”) as further described in Note 6 of the consolidated financial statements.

On March 2, 2015, the corporation provided ABDC with a notice of termination of the Amended PVA effective April 1, 2015. On February 27, 2015, we signed a new Prime Vendor Agreement with Cardinal Health. See Item 9B below.

Brand versus Generic

The following table summarizes the Corporation’s generic drug dispensing rate:

	2012			2013				2014
	83.3%				83.4%				84.9%

The following table summarizes the material brand-to-generic conversions expected to occur in 2015 through 2018:

2015	2016	2017	2018
Colcrys (Q1)	Gleevec (Q1)	Symbicort (Q3)	Novolog (Q1)
Copaxone (Q1)	Nuedexta (Q1)	Namenda XR (Q4)*	Spiriva (Q1)
Invega (Q1)	Combivent (Q2)	Seroquel XR (Q4)	Nasonex (Q2)
Lumigan (Q1)	Crestor (Q2)
Renegal (Q1)	Cubicin (Q2)
Abilify (Q2)*	Lantus (Q2)*
Renvela (Q2)	Advair Diskus (Q3)*
Zyvox (Q2)*	Tamiflu (Q3)
Aggrenox (Q3)	Azilect (Q4)
Exelon (Q3)*	Zetia (Q4)
Namenda IR (Q3)*
Patanol (Q4)
Avodart (Q4)

* These represent the most significant brand-to-generic conversions
(Number in parentheses refers to the expected quarter of conversion)

When a branded drug shifts to a generic, initial pricing of the generic drug in the market will vary depending on the number of manufacturers launching their generic version of the drug. Historically, a shift from brand-to-generic decreased our revenue and improved our gross margin from sales of these classes of drugs during the initial time period that a brand drug has a generic alternative. However, recent experience has indicated that the third-party payers may reduce their reimbursements to the Corporation faster than previously experienced. In addition, the number of generic manufacturers entering the market impacts the overall cost and reimbursement of generic drugs. This acceleration in the reimbursement reduction and the number of generic manufacturers have resulted in margin compression much earlier than we have historically experienced. Due to the unique nature of the brand-to-generic conversion, management cannot estimate the future financial impact of the brand-to-generic conversions on the Corporation’s results of operations.

Index

Supplier and Manufacturer Rebates

We currently receive rebates from certain manufacturers and distributors of pharmaceutical products for achieving targets of market share or purchase volumes. Rebates are designed to prefer, protect, or maintain a manufacturer’s products that are dispensed by the pharmacy under its formulary. Rebates for brand name products are generally based upon achieving a defined market share tier within a therapeutic class and can be based on either purchasing volumes or actual prescriptions dispensed. Rebates for generic products are more likely to be based on achieving purchasing volume requirements.

Information Technology

Computerized medical records and documentation are an integral part of our distribution system. We primarily utilize a proprietary information technology infrastructure that automates order entry of medications, dispensing of medications, invoicing, and payment processing. These systems provide consulting drug review, electronic medication management, medical records, and regulatory compliance information to help ensure patient safety. These systems also support verification of eligibility and electronic billing capabilities for the Corporation’s pharmacies. They also provide order entry, shipment, billing, reimbursement and collection of service fees for medications, specialty services and other services rendered.

Based upon our electronic records, we are able to provide reports to our customers and management on patient care and quality assurance. These reports help to improve efficiency in patient care, reduce drug waste, and improve patient outcomes. We expect to continue to invest in technologies that help critical information access and system availability.

Sources of Pharmacy Revenues

We receive payment for our services from third party payers, including Medicare Part D Plans, government reimbursement programs under Medicare and Medicaid, and non-government sources such as institutional healthcare providers, commercial insurance companies, health maintenance organizations, preferred provider organizations, private payers, and contracted providers. The sources and amounts of our revenues will be determined by a number of factors, including the mix of our customers’ patients, brand to generic conversions and the rates and changes of reimbursement among payers. Changes in our customers’ censuses, the case mix of the patients, brand and generic dispensing rates, and the payer mix among private pay, Medicare Part D, institutional healthcare providers, and Medicaid, will affect our profitability.

A summary of revenue by payer type for the years ended December 31, are as follows (dollars in millions):

	2012					2013					2014
	Amount		% of Revenues			Amount		% of Revenues			Amount		% of Revenues
Medicare Part D	$	873.0		47.6	%	$	813.7		46.3	%	$	866.0		45.7	%
Institutional healthcare providers		561.4		30.6			519.2		29.5			459.7		24.3
Medicaid		165.9		9.1			157.0		9.0			167.1		8.8
Private and other		84.7		4.6			77.2		4.4			81.9		4.3
Insured		79.5		4.3			113.0		6.4			239.0		12.6
Medicare		4.2		0.3			15.5		0.9			21.9		1.2
Hospital management fees		63.9		3.5			62.3		3.5			58.9		3.1
Total	$	1,832.6		100.0	%	$	1,757.9		100.0	%	$	1,894.5		100.0	%

The change in the revenue by payer type, as a percent of total revenue, over the three year period is a result of the 2012 acquisition of Amerita and the 2013 acquisition of Onco, both of which are more heavily weighted to insured and Medicare payer sources.

Competition

We face a highly competitive environment in the institutional pharmacy market. In each geographic market, there are national, regional and local institutional pharmacies that provide services comparable to those offered by our pharmacies which may have greater financial and other resources than we do and may be more established in the markets they serve than we are. In addition, owners of skilled nursing facilities are also entering the institutional pharmacy market, particularly in areas of their geographic concentration. On a nationwide basis, there is one larger competitor in the institutional pharmacy industry, Omnicare, Inc.

We believe that the competitive factors most important to our business are pricing, quality and the range of services offered, clinical expertise, ease of doing business with the provider and the ability to develop and maintain relationships with customers. Because relatively few barriers to entry exist in the local markets we serve, we have encountered and will continue to encounter substantial competition from local market entrants.

Index

Patents, Trademarks and Licenses

We use a number of trademarks and service marks. All of the principal trademarks and service marks used in the course of our business have been registered in the United States or are the subject of pending applications for registration.

We have various proprietary products, processes, software and other intellectual property that are used either to facilitate the conduct of our business or that are made available as products or services to customers. We generally seek to protect such intellectual property through a combination of trade secret, patent and copyright laws and through confidentiality and other contractually imposed protections.

Although we believe that our products and processes do not infringe upon the intellectual property rights of any third parties, third parties may assert infringement claims against us from time to time.

Seasonality

Our largest customers in institutional pharmacy services are skilled nursing facilities. Both prescription and non-prescription drug sales at skilled nursing facilities are affected by the timing and severity of the cold/flu season and other seasonality of the long-term care facilities industry, however seasonality does not have a material effect on the Corporation’s consolidated financial results.

Working Capital

For information about the Corporation’s practices relating to working capital items, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”.

Employees

As of December 31, 2014, we had approximately 6,000 employees which included approximately 1,200 part-time employees. The Corporation had approximately 330 employees that were covered by collective bargaining agreements as of December 31, 2014. As of December 31, 2014, we employed approximately 1,500 licensed pharmacists. We believe that our relationships with our employees are good.

Government Regulation

General

Extensive federal, state and local regulations govern institutional pharmacies and the healthcare facilities that they serve. These regulations cover licenses, staffing qualifications, conduct of operations, reimbursement, recordkeeping and documentation requirements and the confidentiality and security of health-related information. Our institutional pharmacies are also subject to federal and state laws that regulate financial arrangements between healthcare providers, including the federal anti-kickback statutes and the federal physician self-referral laws.

Licensure, Certification and Regulation

States generally require that the state board of pharmacy license a pharmacy operating within the state. Many states also regulate out-of-state pharmacies that deliver prescription products to patients or residents in their states. We have the necessary pharmacy state licenses, or pending applications, for each pharmacy we operate. Our pharmacies are also registered with the appropriate federal and state authorities pursuant to statutes governing the regulation of controlled substances. In addition, pharmacists, nurses and other healthcare professionals who provide services on our behalf are in most cases required to obtain and maintain professional licenses and are subject to state regulation regarding professional standards of conduct.

The Drug Enforcement Agency (the “DEA”), the U.S. Food and Drug Administration (the “FDA”), and various state regulatory authorities regulate the distribution of pharmaceutical products and controlled substances. These laws impose a host of requirements on the pharmaceutical supply channel, including providers of institutional pharmacy services. Under the Comprehensive Drug Abuse Prevention and Control Act of 1970, as a dispenser of controlled substances, we must register with the DEA, file reports of inventories and transactions and provide adequate security measures. In addition, we are required to comply with all the relevant requirements of the Controlled Substances Act for the transfer and shipment of pharmaceuticals. The FDA, DEA, and state regulatory authorities have broad enforcement powers, including the ability to seize or recall products and impose significant criminal, civil and administrative sanctions for violations of these laws and regulations. We have received all necessary regulatory approvals and believe that our pharmacy operations are in substantial compliance with applicable federal and state good manufacturing practice requirements.

Index

Client long-term care facilities are separately required to be licensed in the states in which they operate and, if serving Medicaid or Medicare patients, must be certified to be in compliance with applicable program participation requirements. Client facilities are also subject to the nursing home reforms of the Omnibus Budget Reconciliation Act of 1987, as amended, which imposed strict compliance standards relating to quality of care for facility operations, including vastly increased documentation and reporting requirements.

Laws Affecting Referrals and Business Practices

We are subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products and services. These laws include:

•

the federal “anti-kickback” statute, which prohibits, among other things, knowingly or willfully soliciting, receiving, offering or paying remuneration “including any kickback, bribe or rebate” directly or indirectly in return for or to induce the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under Medicare, Medicaid or other federal healthcare programs; and

•

the federal “Stark laws” which prohibit, with limited exceptions, the referral of patients by physicians for certain designated health services, to an entity with which the physician has a financial relationship.

These laws impact the relationships that we may have with potential referral sources. We have a variety of relationships with potential referral sources, including hospitals and skilled nursing facilities with which we have contracted to provide pharmacy services. With respect to the anti-kickback statute, the OIG has enacted safe harbor regulations that outline practices that are deemed protected from prosecution. While we endeavor to comply with the applicable safe harbors, certain of our current arrangements, none of which is material to us, may not qualify for safe harbor protection. Failure to meet a safe harbor does not mean that the arrangement necessarily violates the anti-kickback statute, but may subject the arrangement to greater scrutiny. In addition, as a means of providing guidance to healthcare providers, the OIG issues a variety of sub-regulatory guidance including Special Fraud Alerts, Special Advisory Bulletins, Advisory Opinions, and other compliance guidance documents. This guidance does not have the force of law, but identifies features of arrangements or transactions that may indicate that the arrangements or transactions violate the anti kickback statute or other federal health care laws. While we believe our practices comply with the anti-kickback statute, we cannot assure our practices that are outside of a safe harbor will not be found to violate the anti-kickback statute.

In addition to federal law, many states have enacted similar statutes that are not necessarily limited to items or services for which payment is made by federal healthcare programs. Violations of these laws may result in fines, imprisonment, denial of payment for services and exclusion from the Medicare and Medicaid programs and other state-funded programs.

Other provisions in the Social Security Act and in other federal and state laws authorize the imposition of penalties, including criminal and civil fines and exclusions from participation in Medicare, Medicaid and other federal healthcare programs for false claims, improper billing and other offenses. These laws include the federal False Claims Act, under which private parties have the right to bring “qui tam” whistleblower lawsuits against companies that submit false claims for payments to the government. Recent changes to the False Claims Act, expanding liability to certain additional parties and circumstances, may make these qui tam law lawsuits more prevalent. Some states have adopted similar state whistleblower and false claims laws.

In addition, a number of states have undertaken enforcement actions against pharmaceutical manufacturers involving pharmaceutical marketing programs, including looking at relationships with pharmacies and programs containing incentives for pharmacists to dispense one particular product rather than another. These enforcement actions arose under various state laws including fraud and abuse laws and consumer protection laws which generally prohibit false advertising and deceptive trade practices.

In the ordinary course of business, we are regularly and currently subject to inquiries, investigations and audits by federal and state agencies that oversee applicable healthcare program participation and payment regulations. We believe that the regulatory environment surrounding most segments of the healthcare industry remains intense. Federal and state governments continue to impose intensive enforcement policies resulting in a significant number of inspections, citations for regulatory deficiencies and other regulatory sanctions including demands for refund of overpayments, terminations from the Medicare and Medicaid programs, bars on Medicare and Medicaid payments and fines. Such sanctions could have a material adverse effect on our financial condition, results of operation and liquidity.

Index

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

State Laws Affecting Access to Services

Some states have enacted “freedom of choice” or “any willing provider” requirements as part of their state Medicaid programs or in separate legislation. These laws may preclude a nursing center from requiring their patients and residents to purchase pharmacy or other ancillary medical services or supplies from particular providers that have a supplier relationship with the nursing center. Limitations such as these may increase the competition which we face in providing services to nursing center residents.

HIPAA

The Federal Health Insurance Portability and Accountability Act of 1996, commonly known as “HIPAA,” mandates the adoption of regulations aimed at standardizing transaction formats and billing codes for documenting medical services, dealing with claims submissions and protecting the privacy and security of individually identifiable health information. HIPAA regulations that standardize transactions and code sets require standard formatting for healthcare providers, like us, that submit claims electronically.

The HIPAA privacy regulations apply to “protected health information,” or “PHI,” which is defined generally as individually identifiable health information transmitted or maintained in any form or medium, excluding certain education records and student medical records. The privacy regulations seek to limit the use and disclosure of most paper and oral communications, as well as those in electronic form, regarding an individual’s past, present or future physical or mental health or condition, or relating to the provision of healthcare to the individual or payment for that healthcare, if the individual can or may be identified by such information. HIPAA provides for the imposition of civil or criminal penalties if PHI is improperly disclosed.

HIPAA’s security regulations require us to ensure the confidentiality, integrity and availability of all electronic protected health information that we create, receive, maintain or transmit. We must protect against reasonably anticipated threats or hazards to the security of such information and the unauthorized use or disclosure of such information.

In addition to HIPAA, we are subject to state privacy laws and other state privacy or health information requirements not preempted by HIPAA, including those which may furnish greater privacy protection for individuals than HIPAA.

The scope of our operations involving health information is broad and the nature of those operations is complex. Although we believe that our contract arrangements with healthcare payers and providers and our business practices are in compliance with applicable federal and state electronic transmissions, privacy and security of health information laws, the requirements of these laws, including HIPAA, are complicated and are subject to interpretation. In addition, state regulation of matters also covered by HIPAA, especially the privacy standards, is increasing, and determining which state laws are preempted by HIPAA is a matter of interpretation. Failure to comply with HIPAA or similar state laws could subject us to loss of customers, denial of the right to conduct business, civil damages, fines, criminal penalties and other enforcement actions.

The Health Information Technology for Economic and Clinical Health Act (“HITECH”), part of the American Recovery and Reinvestment Act of 2009, changed several aspects of HIPAA including, without limitation, the following: (i) applies HIPAA security provisions and penalties directly to business associates of covered entities; (ii) requires certain notifications in the event of a security breach involving PHI; (iii) restricts certain unauthorized disclosures; (iv) changes the treatment of certain marketing activities; and (v) strengthens enforcement activities. In addition, the Secretary issued an interim final rule on August 24, 2009 that requires notifications for certain unpermitted disclosures of PHI. The final rule was issued on January 17, 2013.

2010 Health Care Reform Legislation

The Patient Protection and Affordable Care Act and the reconciliation law known as Health Care and Education Affordability Reconciliation Act (combined we refer to both Acts as the “2010 Health Care Reform Legislation”) were enacted in March 2010. State participation in the expansion of Medicaid under the 2010 Health Care Reform Legislation is voluntary. Three key provisions of the 2010 Health Care Reform Legislation that are relevant to the Corporation are: (i) the gradual modification to the calculation of the Federal Upper Limit (“FUL”) for drug prices and the definition of Average Manufacturer’s Price (“AMP”), (ii) the closure, over time, of the Medicare Part D coverage gap, which is otherwise known as the “Donut Hole,” and (iii) short cycle dispensing. Regulations under the 2010 Health Care Reform Legislation are expected to continue being drafted, released, and finalized throughout the next several years.

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FUL and AMP Changes

The 2010 Health Care Reform Legislation amended the Deficit Reduction Act of 2005 (the “DRA”) to change the definition of the FUL by requiring the calculation of the FUL as no less than 175% of the weighted average, based on utilization, of the most recently reported monthly AMP for pharmaceutically and therapeutically equivalent multi-source drugs available through retail community pharmacies nationally.

In addition, the definition of AMP changed to reflect net sales only to drug wholesalers that distribute to retail community pharmacies and to retail community pharmacies that directly purchase from drug manufacturers. Further, the 2010 Health Care Reform Legislation continues the current statutory exclusion of prompt pay discounts offered to wholesalers and adds three other exclusions to the AMP definition: (i) bona fide services fees;(ii) reimbursement for unsalable returned goods (recalled, expired, damaged, etc.); and (iii) payments from and rebates/discounts to certain entities not conducting business as a wholesaler or retail community pharmacy. In addition to reporting monthly, the manufacturers are required to report the total number of units used to calculate each monthly AMP. Centers for Medicare and Medicaid Services (“CMS”) will use this information when it establishes FULs as a result of the new volume-weighted requirements pursuant to the 2010 Health Care Reform Legislation.

In September 2011, CMS issued the first draft FUL reimbursement files for multiple source drugs, including the draft methodology used to calculate the FULs in accordance with the Health Care Legislation. CMS continues to release this monthly data and a three-month rolling average and is expected to do so going forward. CMS has not posted monthly AMPs for individual drugs, but only posted the weighted average of monthly AMPs in a FUL group and the calculation methodology.

The Office of Information and Regulatory Affairs website states that the final AMP was expected June 2014, but to date has not been released. Further, CMS has stated that AMP-based FULs will be published at or about the same time that CMS publishes the Medicaid Covered Outpatient Drug final rule, which, according to the latest unified agenda, is expected in April 2015. CMS will continue to post draft monthly FULs. The Corporation will continue to analyze the draft monthly FULs, including the relationship of those FULs to the National Average Drug Acquisition pricing.

Part D Coverage Gap

Starting on January 1, 2011, the Medicare Coverage Gap Discount Program (the “Program”) requires drug manufacturers to provide a 50% discount on the negotiated ingredient cost to certain Medicare Part D beneficiaries for certain drugs and biologics purchased during the coverage gap (this is exclusive of the pharmacy dispensing fee). In addition, the 2010 Health Care Reform Legislation requires Medicare to close or eliminate the coverage gap entirely by fiscal year 2020 by gradually reducing the coinsurance percentage for both drugs covered and not covered by the Program for each applicable beneficiary.

At this time, the Corporation is unable to fully evaluate the impact of the changes to the coverage gap to its business.

Short Cycle Dispensing and Dispensing Fees

Pursuant to the 2010 Health Care Reform Legislation, Prescription Drug Plans (“PDPs”) are required, under Medicare Part D and Medicare Advantage prescription drug plans (“Medicare Advantage” or “MAPDs”) to utilize specific, uniform dispensing techniques, such as weekly, daily, or automated dose dispensing, when dispensing covered Medicare Part D drugs to beneficiaries who reside in a long-term care facility to reduce waste associated with 30 to 90 day prescriptions for such beneficiaries. Pursuant to CMS issued regulation, beginning January 1, 2013, pharmacies dispensing to long-term care facilities must dispense no more than 14-day supplies of brand-name oral solid medications covered by Medicare Part D. The Corporation fully implemented short cycle dispensing on January 1, 2013. The impact of short cycle dispensing has not had a material adverse impact on the Corporation’s results of operations.

In a February 12, 2015 Final Rule entitled "Medicare Program: Contract Year 2016 Policy and Technical Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs", CMS finalized a regulation, effective January 1, 2016, prohibiting financial arrangements that penalize more efficient long-term care dispensing techniques (e.g., dispensing a three day supply over a 14 day supply) through pro-rated dispensing fees based on a day's supply or quantity dispensed. CMS also finalized a requirement that, effective January 1, 2016, any differences in payment methodologies among long-term care pharmacies incentivize more efficient dispensing techniques. The Corporation is unable to evaluate the full impact of these changes on its business at this time.

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Medicare Part D Changes

In a May 23, 2014 Final Rule entitled “Medicare Program: Contract Year 2015 Policy and Technical Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs,” CMS finalized a requirement that, effective June 1, 2015 and enforceable December 1, 2015, all prescribers of Part D covered drugs must be enrolled as Medicare providers (or be granted a valid opt-out affidavit on file with a Part A or Part B Medicare Administrative Contractor) in order for a claim to be covered under Medicare Part D. CMS also finalized several specific requirements to reduce prescriber fraud, waste, and abuse. The Corporation is unable to evaluate the full impact of these changes on its business at this time.

Overview of Reimbursement

Medicare is a federal program that provides certain hospital and medical insurance benefits to persons age 65 and over and to certain disabled persons. Medicaid is a medical assistance program administered by each state that provides healthcare benefits to certain indigent patients. Within the Medicare and Medicaid statutory framework, there are substantial areas subject to administrative rulings, interpretations, and discretion that may affect payments made under Medicare and Medicaid.

We receive payment for our services from institutional healthcare providers, commercial Medicare Part D Plans, third party payer government reimbursement programs such as Medicare and Medicaid, and other non-government sources such as commercial insurance companies, health maintenance organizations, preferred provider organizations, and contracted providers. With respect to our skilled nursing facilities customers, their residents are covered by Medicare Part A, Part B and Part D Plans, Medicaid, insurance, and other private payers (including managed care).

Medicare

The Medicare program consists of four parts: (i) Medicare Part A, which covers, among other things, in-patient hospital, skilled nursing facilities, home healthcare, and certain other types of healthcare services; (ii) Medicare Part B, which covers physicians’ services, outpatient services, and certain items and services provided by medical suppliers such as intravenous therapy; (iii) Medicare Part C or Medicare Advantage, a managed care option for beneficiaries who are entitled to Medicare Part A and enrolled in Medicare Part B, and (iv) Medicare Part D, which provides coverage for prescription drugs that are not otherwise covered under Medicare Part A or Part B for those beneficiaries that enroll.

Part A

The Balanced Budget Act of 1997 (the “BBA”) mandated the Prospective Payment System (“PPS”) for Medicare-eligible enrolled residents in skilled nursing facilities. Under PPS, Medicare pays skilled nursing facilities a fixed fee per patient per day for extended care services to patients, covering substantially all items and services furnished during such enrollee’s stay. Such services and items include pharmacy services and prescription drugs. We bill skilled nursing facilities based upon a negotiated fee schedule and are paid based on those contractual relationships. We do not receive direct payment from Medicare for patients covered under the Medicare Part A benefit. We classify the revenues recognized from these payers as Institutional Healthcare Providers.

Federal legislation continues to focus on reducing Medicare and Medicaid program expenditures. Such decreases may directly impact the Corporation’s customers and their Medicare reimbursement. Given the changing nature of these rules, we are unable at this time to fully evaluate the impact on our business. Any evaluation of budgeting, cost-cutting, and financing of health care must also consider the new federal administration and the impact its proposed health care policies could have on any future cost considerations.

Part D

Medicare Part D provides coverage for prescription drugs that are not otherwise covered under Medicare Part A or Part B for those beneficiaries that enroll. Under Medicare Part D, beneficiaries may enroll in prescription drug plans offered by private commercial insurers who contract with CMS (or in a “fallback” plan offered on behalf of the government through a contractor, to the extent private entities fail to offer a plan in a given area), which provide coverage of outpatient prescription drugs (collectively, “Part D Plans”). Part D Plans include both plans providing the drug benefit on a standalone basis and Medicare Advantage plans providing drug coverage as a supplement to an existing medical benefit under that Medicare Advantage plan. Medicare beneficiaries generally have to pay a premium to enroll in a Part D Plan, with the premium amount varying from one Part D Plan to another, although CMS provides various federal subsidies to Part D Plans to reduce the cost to beneficiaries.

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Part D Plans are required to make available certain drugs on their formularies. Dually-eligible residents in nursing centers generally are entitled to have their prescription drug costs covered by a Part D Plan, provided that the prescription drugs which they are taking are either on the Part D Plan’s formulary or an exception to the Part D Plan’s formulary is granted. CMS reviews the formularies of Part D Plans and requires these formularies to include the types of drugs most commonly used by Medicare beneficiaries. CMS also reviews the formulary exceptions criteria of the Part D Plans that provide for coverage of drugs determined by the Part D Plan to be medically appropriate for the enrollee; however there currently is not a separate formulary for long-term care residents.

We obtain reimbursement for drugs we provide to enrollees of the given Part D Plan in accordance with the terms of agreements negotiated between us and the Part D Plan. The Medicare Part D final rule prohibits Part D plans from paying for drugs and services not specifically called for by the BBA.

Medicare Part D does not alter federal reimbursement for residents of nursing centers whose stay at the nursing center is covered under Medicare Part A. Accordingly, Medicare’s fixed per diem payments to nursing centers under PPS will continue to include a portion attributable to the expected cost of drugs provided to such residents. We will, therefore, continue to receive reimbursement for drugs provided to such residents from the nursing center in accordance with the terms of our agreements with each nursing center.

In addition, we receive rebates from pharmaceutical manufacturers for undertaking certain activities that the manufacturers believe may increase the likelihood that we will dispense their products. CMS continues to question whether institutional pharmacies should be permitted to receive these access/performance rebates from manufacturers with respect to prescriptions covered under Medicare Part D, but has not prohibited the receipt of such rebates. CMS defines these as rebates a manufacturer provides to long-term care pharmacies that are designed to “prefer, protect, or maintain” that manufacturer’s product selection by the long-term care pharmacy or to increase the volume of that manufacturer’s products that are dispensed by the pharmacy under its formulary. CMS, in 2007, required PDPs to have policies and systems in place as part of their drug utilization management programs to protect beneficiaries and reduce costs when long-term care pharmacies receive incentives to move market share through access/performance rebates. The elimination or substantial reduction of manufacturer rebates, if not offset by other reimbursement, would have a material adverse effect on our business.

Medicaid

The reimbursement rate for pharmacy services under Medicaid is determined on a state-by-state basis subject to review by CMS and applicable federal law. Although Medicaid programs vary from state to state, they generally provide for the payment of certain pharmacy services, up to established limits, at rates determined in accordance with each state’s regulations. The federal Medicaid statute specifies a variety of requirements that a state plan must meet, including the requirements related to eligibility, coverage for services, payment, and admissions. For residents that are eligible for Medicaid only, and are not dual eligibles covered under Medicare Part D, we bill the individual state Medicaid program or in certain circumstances the state’s designated managed care or other similar organizations. Federal regulations and the regulations of certain states establish “upper limits” for reimbursement of certain prescription drugs under Medicaid. In most states, pharmacy services are priced at the lower of “usual and customary” charges or cost, which generally is defined as a function of average wholesale price and may include a profit percentage plus a dispensing fee. Most states establish a fixed dispensing fee per prescription that is adjusted to reflect associated cost. Over the last several years, state Medicaid programs have lowered reimbursement through a variety of mechanisms, principally higher discounts off average wholesale price levels, expansion of the number of medications subject to federal upper limit pricing, and general reductions in contract payment methodology to pharmacies.

Environmental Matters

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

Available Information

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

Our SEC filings are available to the public through the New York Stock Exchange (“NYSE”), 20 Broad Street, New York, New York, 10005. Our Common Stock is listed on the NYSE and trades under the symbol “PMC”.

The certifications of our Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K.

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Item 1A.

Risk Factors

You should consider carefully the risks described below, together with all of the other information, in evaluating the Corporation and its common stock. If any of the risks described below actually occur, it could have a material adverse effect on the Corporation’s business, results of operations, financial condition and stock price.

Risk Factors Relating to Our Business

Financial soundness of our customers and suppliers may adversely affect our results of operations.

If our customers’ operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, our customers may not be able to pay, or may delay payment of accounts receivable owed to us. Any inability of customers to pay us for our products and services may adversely affect our earnings and cash flow. Additionally, both state and federal government sponsored payers, as a result of budget deficits or reductions, may seek to reduce their healthcare expenditures resulting in the long-term care customers renegotiating their contracts with us. Any reduction in payments by such government sponsored payers may adversely affect our earnings and cash flow. Also some of our customers’ real estate is owned by Real Estate Investment Trusts limiting their ability to renegotiate rental costs furthering their desire to reduce other controllable costs, such as pharmacy costs.

Intense competition may erode our profit margins.

The distribution of pharmaceuticals to healthcare facilities is highly competitive. In each geographic market, there are national, regional and local institutional pharmacies and numerous local retail pharmacies, which provide services comparable to those offered by our pharmacies and may be more established in the markets they serve than we are. We also compete against regional and local pharmacies that specialize in long-term care. Many of our competitors have equal or greater resources and access to capital than the Corporation. In addition, local pharmacies have strong personal relationships with their customers. Because relatively few barriers to entry exist in the local markets we serve, we may encounter substantial competition from local market entrants. In addition, owners of skilled nursing facilities, including prior and current customers, are also entering the institutional pharmacy market, particularly in areas of their geographic concentration. Consolidation within the institutional pharmacy industry may also lead to increased competition. Competitive pricing pressures may adversely affect our earnings and cash flow.

We compete based on innovation and service as well as price. To attract new clients and retain existing clients, we must continually meet service expectations of our clients and customers. We cannot be sure that we will continue to remain competitive with the service to our clients at our current levels of profitability.

If we lose relationships with one or more key pharmaceutical manufacturers or if the payments made or discounts provided by pharmaceutical manufacturers decline, our business and financial results could be adversely affected.

We maintain contractual relationships with numerous pharmaceutical manufacturers that may provide us with, among other things:

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discounts for drugs we purchase to be dispensed from our institutional pharmacies;

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rebates based upon distributions of drugs from our institutional pharmacies; and

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administrative fees for managing rebate programs.

If several of these contractual relationships are terminated or materially altered by the pharmaceutical manufacturers, our business and financial results could be materially adversely affected. In addition, formulary fee programs have been the subject of debate in federal and state legislatures and various other public and governmental forums. Changes in existing laws or regulations or in interpretations of existing laws or regulations or the adoption of new laws or regulations relating to any of these programs may materially adversely affect our business.

CMS has questioned whether long-term care pharmacies should be permitted to receive discounts, rebates and other price concessions from pharmaceutical manufacturers with respect to prescriptions covered under the Medicare Part D benefit. Our business would be adversely affected if CMS should take any action that has the effect of eliminating or significantly reducing the rebates that we receive from pharmaceutical manufacturers.

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Our operating revenue and profitability may suffer upon the occurrence of the loss of certain customers.

We have a number of customers that own or operate numerous facilities in our institutional pharmacy segment. In addition, our hospital revenues are primarily derived from one large multi-facility customer. If we are not able to continue these relationships or are only able to continue these relationships on less favorable terms than the ones currently in place, our operating revenues and results of operations would be materially impacted. There can be no assurance that these customers will not terminate all or a portion of their contracts with the Corporation.

Home infusion joint ventures formed with hospitals could adversely affect our financial results.

The home infusion industry is currently seeing renewed activity in the formation of equity-based infusion joint ventures formed with hospitals. This activity stems, in part, from hospitals seeking to position themselves for new paradigms in the delivery of coordinated healthcare and new methods of payment, including an emerging interdisciplinary care model that is being labeled an “accountable care organization”. These organizations are encouraged by the 2010 Health Care Reform Legislation. These entities are being designed in order to save money and improve quality of care by better integrating care, with the healthcare provider possibly sharing in the financial benefits of the improved efficiency.

Participation in equity-based joint ventures offers hospitals and other providers an opportunity to more efficiently transfer patients to less expensive care settings, while keeping the patient within its network. Additionally, it provides many hospitals with a mechanism to invest accumulated profits in a growing sector with attractive margins.

If home infusion joint ventures continue to expand and we lose referrals as a result, our financial condition, results of operations and liquidity could be adversely affected.

Our operating revenue and profitability may suffer because of an increase in our generic dispensing rate.

A shift in prescriptions dispensed from brand-to-generic and a decline in generic reimbursement rates from the PDP/PBMs may affect our operating revenue. When a branded drug shifts to a generic, initial pricing of the generic drug in the market will vary depending on the number of manufacturers launching their generic version of the drug. Historically a shift from brand-to-generic decreased our revenues and improved our gross margin from sales of these classes of drugs during the initial time period a brand drug has a generic alternative. However, recent experience has indicated that the third-party payers may reduce their reimbursements to the Corporation faster than previously experienced. This acceleration in the reimbursement reduction and the number of generic manufacturers have resulted in margin compression as multi-source alternatives have become available much earlier than we have historically experienced. In addition, the number of generic manufacturers entering the market impacts the overall cost and reimbursement of generic drugs. Due to the unique nature of the brand-to-generic conversion, management cannot estimate the future financial impact of the brand-to-generic conversions on its results of operations.

If we fail to comply with complex and rapidly evolving laws and regulations, we could suffer penalties, be required to pay substantial damages or make significant changes to our operations.

We are subject to numerous federal and state regulations. If we fail to comply with existing or future applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate our institutional pharmacies and our ability to participate in federal and state healthcare programs. As a consequence of the severe penalties we could face, we must devote significant operational and managerial resources to complying with these laws and regulations. Although we believe that we are substantially compliant with all existing statutes and regulations applicable to our business, different interpretations and enforcement policies of these laws and regulations could subject our current practices to allegations of impropriety or illegality, or could require us to make significant changes to our operations. In addition, we cannot predict the impact of future legislation and regulatory changes on our business or assure that we will be able to obtain or maintain the regulatory approvals required to operate our business.

As a result of political, economic, and regulatory influences, the healthcare delivery industry in the United States is under intense scrutiny and subject to fundamental changes. We cannot predict which reform proposals will be adopted, when they may be adopted, or what impact they may have on us.

The costs associated with complying with federal and state regulations could be significant and the failure to comply with any such legal requirements could have a material adverse effect on our financial condition, results of operations, and liquidity.

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Pharmaceutical products can develop unexpected safety or efficacy concerns.

Unexpected safety or efficacy concerns can arise with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales. If we fail to or do not promptly withdraw pharmaceutical products upon a recall by a drug manufacturer, our business and results of operations could be negatively impacted.

Legal and regulatory changes reducing reimbursement rates for pharmaceuticals and/or medical treatments or services may reduce our profitability.

Both our own profit margins and the profit margins of our customers may be adversely affected by laws and regulations reducing reimbursement rates and charges. The sources and amounts of our revenues are determined by a number of factors, including licensed bed capacity and occupancy rates of our customers, the number of drugs administered to patients, the mix of pharmaceuticals dispensed, whether the drugs are brand or generic, and the rates of reimbursement among payers. Changes in the number of drugs administered to patients, as well as payer mix among private pay, Medicare and Medicaid, in our customers’ facilities will significantly affect our earnings and cash flow.

Further modifications to the Medicare Part D program may reduce revenue and impose additional costs to the industry.

The Medicare Prescription Drug Improvement and Modernization Act of 2003 or MMA included a major expansion of the Medicare program with the addition of a prescription drug benefit under the new Medicare Part D program. The continued impact of these regulations depends upon a variety of factors, including our ongoing relationships with the Part D Plans and the patient mix of our customers. Future modifications to the Medicare Part D program may reduce revenue and impose additional costs to the industry. In addition, we cannot assure you that Medicare Part D and the regulations promulgated under Medicare Part D will not have a material adverse effect on our institutional pharmacy business.

Possible changes in, or our failure to satisfy our manufacturers’ rebate programs could adversely affect our results of operations.

There can be no assurance that pharmaceutical manufacturers will continue to offer these rebates or that they will not change the terms upon which rebates are offered. A decrease in prescription volumes dispensed or a decrease in the number of brand or generic drugs which participate in rebate programs and are used by the geriatric population could affect our ability to satisfy our manufacturers’ rebate programs. The termination of such programs or our failure to satisfy the criterion for earning rebates may have an adverse affect on our cost of goods sold, financial condition, results of operations and liquidity.

Changes in Medicaid reimbursement may reduce our revenue.

The 2010 Health Care Reform Legislation amended DRA to change the definition of the FUL by requiring the calculation of the FUL as no less than 175% of the weighted average, based on utilization, of the most recently reported monthly AMP for pharmaceutically and therapeutically equivalent multi-source drugs available through retail community pharmacies nationally.

In addition, the definition of AMP changed to reflect net sales only to drug wholesalers that distribute to retail community pharmacies and to retail community pharmacies that directly purchase from drug manufacturers. Further, the 2010 Health Care Reform Legislation continues the current statutory exclusion of prompt pay discounts offered to wholesalers and adds three other exclusions to the AMP definition: i) bona fide services fees; ii) reimbursement for unsalable returned goods (recalled, expired, damaged, etc.); and iii) payments from and rebates/discounts to certain entities not conducting business as a wholesaler or retail community pharmacy. In addition to reporting monthly, the manufacturers are required to report the total number of units used to calculate each monthly AMP. CMS will use this information when it establishes FULs as a result of the new volume-weighted requirements pursuant to the 2010 Health Care Reform Legislation.

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Adverse results in material litigation matters or governmental inquiries could have a material adverse effect upon the Corporation’s business.

The Corporation may from time to time become subject in the ordinary course of business to material legal action related to, among other things, intellectual property disputes, professional liability and employee-related matters, as well as inquiries from governmental agencies and Medicare or Medicaid carriers requesting comment and information on allegations of billing irregularities and other matters that are brought to their attention through billing audits, third parties or other sources. The healthcare industry is subject to substantial federal and state government regulation and audit. Legal actions could result in substantial monetary damages as well as damage to the Corporation’s reputation with customers, which could have a material adverse effect upon our financial condition, results of operations, and liquidity.

If we or our customers fail to comply with Medicare and Medicaid regulations, we may be subjected to penalties or loss of eligibility to participate in these programs.

The Medicare and Medicaid programs are highly regulated. These programs are also subject to frequent and substantial changes. If we or our customers’ facilities fail to comply with applicable reimbursement laws and regulations, whether purposely or inadvertently, our reimbursement under these programs could be curtailed or reduced and our eligibility to continue to participate in these programs could be adversely affected. Federal or state governments may also impose other penalties on us for failure to comply with the applicable reimbursement regulations. Failure by our customers to comply with these or future laws and regulations could result in our inability to provide pharmacy services to these customers and their residents. We do not believe that we have taken any actions that could subject us to material penalties under these rules and regulations.

Among these laws is the federal anti-kickback statute. This statute prohibits anyone from knowingly and willfully soliciting, receiving, offering or paying any remuneration with the intent to refer, or to arrange for the referral or order of, services or items payable under a federal healthcare program. Courts have interpreted this statute broadly. Violations of the anti-kickback statute may be punished by a criminal fine of up to $25,000 for each violation or imprisonment, civil money penalties of up to $50,000 per violation and damages of up to three times the total amount of the remuneration and/or exclusion from participation in federal healthcare programs, including Medicare and Medicaid. This law impacts the relationships that we may have with potential referral sources. We have a variety of relationships with potential referral sources, including hospitals and skilled nursing facilities with which we have contracted to provide pharmacy services. The OIG, among other regulatory agencies, is responsible for identifying and eliminating fraud, abuse or waste. The OIG carries out this responsibility through a nationwide program of audits, investigations and inspections. The OIG has promulgated safe harbor regulations that outline practices that are deemed protected from prosecution under the anti-kickback statute. While we endeavor to comply with the applicable safe harbors, certain of our current arrangements may not qualify for safe harbor protection. Failure to meet a safe harbor does not mean that the arrangement necessarily violates the anti-kickback statute, but may subject the arrangement to greater scrutiny. It cannot be assured that practices outside of a safe harbor will not be found to violate the anti-kickback statute.

The anti-kickback statute and similar state laws and regulations are expansive. We do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality, or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. A determination that we have violated these laws, or the public announcement that we are being investigated for possible violations of these laws, could have a material adverse effect on our business, financial condition, results of operations or prospects and our business reputation could suffer significantly. If we fail to comply with the anti-kickback statute or other applicable laws and regulations, we could be subjected to liabilities, including criminal penalties, civil penalties (including the loss of our licenses to operate one or more facilities), and exclusion of one or more facilities from participation in the Medicare, Medicaid and other federal and state healthcare programs. In addition, we are unable to predict whether other legislation or regulations at the federal or state level will be adopted, what form such legislation or regulations may take or their impact.

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

We could be adversely affected by the continuing efforts of government and private payers to contain healthcare costs. To reduce healthcare costs, payers seek to lower reimbursement rates, limit the scope of covered services and negotiate reduced or capped pricing arrangements. While many of the proposed policy changes would require congressional approval to implement, we cannot assure you that reimbursement payments under governmental and private third party payer programs will remain at levels comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement under these programs. Any changes that lower reimbursement rates under Medicare, Medicaid or private pay programs could result in a substantial reduction in our net operating revenues. Our operating margins may continue to be under pressure because of deterioration in reimbursement, changes in payer mix and growth in operating expenses in excess of increases, if any, in payments by third party payers.

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Healthcare reform could adversely affect the liquidity of our customers which would have an adverse effect on their ability to make timely payments to us for our products and services.

Healthcare reform and legislation may have an adverse effect on our business through decreasing funds available to our customers. Limitations or restrictions on Medicare and Medicaid payments to our customers could adversely impact the liquidity of our customers, resulting in their inability to pay us, or to timely pay us, for our products and services. This inability could have a material adverse effect on our financial condition, results of operations, and liquidity.

The changing U.S. healthcare industry and increasing enforcement environment may negatively impact our business.

Our products and services are part of the structure of the healthcare financing and reimbursement system currently existing in the United States. In recent years, the healthcare industry has undergone significant changes in an effort to reduce costs and government spending. These changes include an increased reliance on managed care, cuts in Medicare funding affecting our healthcare provider customer base and consolidation of competitors, suppliers and customers.

We expect the healthcare industry to continue to change significantly in the future. Some of these potential changes, such as a reduction in governmental support of healthcare services or adverse changes in legislation or regulations governing prescription drug pricing, healthcare services or mandated benefits, may cause healthcare providers to reduce the amount of our products and services they purchase or the price they are willing to pay for our products and services. If we are unable to adjust to changes in the healthcare environment, it could have a material adverse effect on our financial condition, results of operations and liquidity.

Further, both federal and state government agencies have increased their focus on and coordination of civil and criminal enforcement efforts in the healthcare area. The OIG and the U.S. Department of Justice have, from time to time, established national enforcement initiatives, targeting all providers of a particular type, that focus on specific billing practices or other suspected areas of abuse. In addition, under the federal False Claims Act, private parties have the right to bring “qui tam” whistleblower lawsuits against companies that submit false claims for payments to the government. A number of states have adopted similar state whistleblower and false claims provisions. We do not believe that we have taken any actions that could subject us to material penalties under these provisions.

Further consolidation of managed care organizations and other third-party payers may adversely affect our profits.

Managed care organizations and other third-party payers have continued to consolidate in order to enhance their ability to influence the delivery of healthcare services. Consequently, the healthcare needs of a large percentage of the U.S. population are increasingly served by a small number of managed care organizations. These organizations generally enter into service agreements with a limited number of providers for needed services. In addition, private payers, including managed care payers, increasingly are demanding discounted fee structures. To the extent that these organizations terminate us as a preferred provider, engage our competitors as a preferred or exclusive provider or demand discounted fee structures, our liquidity and results of operations could be materially and adversely affected.

If we or our customers fail to comply with licensure requirements, laws and regulations in respect of healthcare fraud or other applicable laws and regulations, we could suffer penalties or be required to make significant changes to our operations.

Our pharmacies must be licensed by the state board of pharmacy in the state in which they operate. Many states also regulate out-of-state pharmacies that are delivering prescription products to patients or residents in their states. The failure to obtain or renew any required regulatory approvals or licenses could adversely impact the operation of our business. In addition, the healthcare facilities we service are also subject to extensive federal, state and local regulations and are required to be licensed in the states in which they are located. The failure by these healthcare facilities to comply with these or future regulations or to obtain or renew any required licenses could result in our inability to provide pharmacy services to these facilities and their residents and could have a material adverse effect on our financial condition, results of operations and liquidity.

While we believe that we are in substantial compliance with all applicable laws, many of the regulations applicable to us, including those relating to marketing incentives offered by pharmaceutical suppliers, and rebates paid by pharmaceutical manufacturers are vague or indefinite and have not been interpreted by the courts. They may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations. These changes may be material and may require the expenditure of material funds to implement. We believe that the regulatory environment surrounding most segments of the healthcare industry remains intense. Federal and state governments continue to impose intensive enforcement policies resulting in a significant number of inspections, citations of regulatory deficiencies and other regulatory sanctions including demands for refund of overpayments, terminations from the Medicare and Medicaid programs, bans on Medicare and Medicaid payments and fines. If we or our customers fail to comply with the extensive applicable laws and regulations, we could become ineligible to receive government program reimbursement, suffer civil or criminal penalties or be required to make significant changes to our operations. In addition, we could be forced to expend considerable resources responding to an investigation or other enforcement action under these laws or regulations regardless of whether we have actually been involved in any violations or wrong-doing.

Index

Federal and state medical privacy regulations may increase the costs of operations and expose us to civil and criminal sanctions.

We must comply with extensive federal and state requirements regarding the transmission and retention of health information. The Health Insurance Portability and Accountability Act of 1996 and its implementing regulations, referred to as HIPAA, was enacted to ensure that employees can retain and at times transfer their health insurance when they change jobs, to enhance the privacy and security of personal health information and to simplify healthcare administrative processes. HIPAA requires the adoption of standards for the exchange of electronic health information.

The HITECH, part of the American Recovery and Reinvestment Act of 2009, changed several aspects of HIPAA including, without limitation, the following: (i) applies HIPAA security provisions and penalties directly to business associates of covered entities; (ii) requires certain notifications in the event of a security breach involving PHI; (iii) restricts certain unauthorized disclosures; (iv) changes the treatment of certain marketing activities; and (v) strengthens enforcement activities. In addition, the Secretary of Health and Human Services issued an interim final rule on August 24, 2009 that requires notifications for certain unpermitted disclosures of PHI. The final rule was issued on January 17, 2013.

Failure to comply with either HIPAA or HITECH could result in fines and penalties that could have a material adverse effect on our results of operations, financial condition, and liquidity.

Acquisitions, investments and strategic alliances that we have made or may make in the future may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities.

We have made and anticipate that we may continue to make acquisitions of, investments in and strategic alliances with complementary businesses to enable us to capitalize on our position in the geographic markets in which we operate and to expand our businesses in new geographic markets. At any particular time, we may be in various stages of assessment, discussion and negotiation with regard to one or more potential acquisitions, investments or strategic alliances, not all of which, if any, will be consummated. Our acquisition program and strategy has and may lead us to contemplate acquisitions of companies in bankruptcy or financial distress, all of which entail additional risks and uncertainties. Such risks and uncertainties include, without limitation, that, before assets may be acquired, customers may leave in search of more stable providers and vendors may terminate key relationships. Also, assets are generally acquired on an “as is” basis, with no recourse to the seller if the assets are not as valuable as may be represented. Finally, while bankrupt companies may be acquired for comparatively little money, the cost of continuing the operations may significantly exceed expectations. Our growth plans rely, in part, on the successful completion of future acquisitions. If we are unsuccessful, our business would suffer.

We intend to make public disclosure of pending and completed acquisitions when appropriate or required by applicable securities laws and regulations. Acquisitions may involve significant cash expenditures, debt incurrence, additional operating losses, amortization of certain intangible assets of acquired companies, and expenses that could have a material adverse effect on our financial condition, results of operations and liquidity. Acquisitions involve numerous risks and uncertainties, including, without limitation:

•

difficulties integrating acquired operations, personnel and information systems, or in realizing projected efficiencies and cost savings;

•

diversion of management’s time from existing operations;

•

potential loss of key employees or customers of acquired companies;

•

inaccurate assessment of assets and liabilities and exposure to undisclosed or unforeseen liabilities of acquired companies, including liabilities for failure to comply with healthcare laws;

•

increases in our indebtedness and a limitation on our ability to access additional capital when needed; and

•

failure to operate acquired facilities profitably or to achieve improvements in their financial performance.

Index

Risks generally associated with our sophisticated information systems may adversely affect our results of operations.

We rely on sophisticated information systems in our business to obtain, rapidly process, analyze, and manage data to facilitate the dispensing of prescription and non-prescription pharmaceuticals in accordance with physician orders and deliver those medications to patients and long-term care residents on a timely basis; to manage the accurate billing and collections for thousands of customers; and to process payments to suppliers. Our business and results of operations may be materially adversely affected if these systems are interrupted for any reason, including cyber security threats, or damaged or if they fail for an extended period of time. Significant disruptions to our infrastructure or any of our facilities due to failure of technology or some other catastrophic event could adversely impact our business.

We purchase a significant portion of our pharmaceutical products from one supplier.

We are required to purchase a substantial amount of our pharmaceutical products from ABDC, pursuant to the Amended PVA. If ABDC fails to deliver products in accordance with the Amended PVA, there can be no assurance that our operations would not be disrupted or that we could obtain the products at similar cost or at all. In this event, failure to satisfy our customers’ requirements would result in defaults under these customer contracts subjecting us to damages and the potential termination of those contracts. Such events could have a material adverse effect on our financial condition, results of operations and liquidity. In addition, under the terms of the Amended PVA, the Corporation is limited in our ability to negotiate potentially better pricing and other terms with other drug distributors, which could negatively impact our competitive position. On March 2, 2015, we provided ABDC with a notice of termination of the Amended PVA effective April 1, 2015. We have entered into a new Prime Vendor Agreement with Cardinal Health effective April 1, 2015. See Item 9B below.

A loss in rebates and other pricing terms under the Amended PVA may adversely impact our financial results.

On January 4, 2011, the Corporation entered into the Amended PVA for Long-Term Care Pharmacies. On January 25, 2013 the Corporation renegotiated its Amended PVA with ABDC effective January 1, 2013. The Amended PVA modifies the previous agreement, which was set to expire September 30, 2013 and extends its term until September 30, 2016. The First Amendment requires the Corporation to purchase certain levels of brand and non-injectable generic drugs from ABDC. The Amended PVA does provide the flexibility for the Corporation to contract with other suppliers. If the Corporation fails to adhere to the contractual purchase provisions ABDC has the ability to increase the Corporation's drug pricing under the terms of the Amended PVA. On September 10, 2014, the Corporation filed a Complaint in Jefferson Circuit Court in Louisville, Kentucky against ABDC for breach of the Amended PVA. The Corporation subsequently filed a First Amended Complaint asserting additional breaches of the Amended PVA. The amounts disputed by ABDC generally relate to certain rebates owed by ABDC under the Amended PVA, which are $8.5 million, $12.3 million, and $20.0 million for the second quarter of 2014, the third quarter of 2014 and the fourth quarter of 2014, respectively. The Corporation believes the aggregate amount of its claims were $40.8 million as of December 31, 2014 which is reflected as a receivable and included in prepaids and other assets in the accompanying consolidated balance sheet. The Corporation will have claims for additional damages resulting from ABDC's breaches of the Amended PVA. The Corporation intends to vigorously pursue its claims. The Corporation is unable to determine the ultimate impact of these litigation proceedings on its consolidated financial condition, results of operations, or liquidity. The litigation with ABDC could continue for an extended period of time, likely longer than 12 months. The Corporation cannot provide any assurances about the outcome of the litigation. A loss in rebates and/or other pricing terms under the Amended PVA may adversely impact our financial results. On March 2, 2015, the Corporation provided ABDC with a notice of termination of the Amended PVA effective April 1, 2015. We have entered into a new Prime Vendor Agreement with Cardinal Health effective April 1, 2015. See Item 9B below.

Prescription volumes may decline, and our net revenues and profitability may be negatively impacted, if products are withdrawn from the market or if increased safety risk profiles of specific drugs result in utilization decreases.

We dispense significant volumes of drugs from our pharmacies. These volumes are the basis for our net revenues and profitability. When increased safety risk profiles of specific drugs or classes of drugs result in utilization decreases, physicians may cease writing or reduce the numbers of prescriptions written for these drugs. Additionally, negative press regarding drugs with higher safety risk profiles may result in reduced consumer demand for such drugs. On occasion, products are withdrawn by their manufacturers. In cases where there are no acceptable prescription drug equivalents or alternatives for these prescription drugs, our volumes, net revenues, profitability and cash flows may decline.

Index

We could be required to record a material non-cash charge to income if our recorded goodwill or intangible assets are impaired, or if we shorten intangible asset useful lives.

We have $317.7 million of goodwill and $177.6 million of recorded intangible assets on our consolidated balance sheet as of December 31, 2014. Our intangible assets primarily represent the value of client relationships that were recorded from past acquisitions. Under current accounting rules, intangible assets are amortized over their useful lives. These assets may become impaired with the loss of significant clients. If the carrying amount of the assets exceeds the undiscounted pre-tax expected future cash flows from the lowest appropriate asset grouping, we would be required to record a non-cash impairment charge to our consolidated income statements in the amount the carrying value of these assets exceeds its fair value. In addition, while the intangible assets may not be impaired, the useful lives are subject to continual assessment, taking into account historical and expected losses of relationships that were in the base at time of acquisition. This assessment may result in a reduction of the remaining weighted average useful life of these assets, resulting in potentially significant increases to non-cash amortization expense that is charged to our consolidated income statements. A goodwill or intangible asset impairment charge, or a reduction of useful lives, could have a material effect on our results of operations.

We are highly dependent on our senior management team and our pharmacy professionals.

We are highly dependent upon the members of our senior management and our pharmacists and other pharmacy professionals. Our business is managed by a small number of senior management personnel. If we were unable to retain these persons, we might be materially adversely affected due to the limited pool of senior management personnel with significant experience in our industry. Accordingly, we believe we could experience significant difficulty in replacing key management personnel. We expect that any employment contracts we enter into with our key management personnel will be subject to termination without cause by either party. Moreover, although the majority of the members of our senior management team have significant experience in the industry, they will need time to fully assess and understand our business and operations. We can offer no assurance how long these members of senior management will choose to remain with us.

In addition, our continued success depends on our ability to attract and retain pharmacists and other pharmacy professionals. Competition for qualified pharmacists and other pharmacy professionals is intense. The loss of pharmacy personnel or the inability to attract or retain sufficient numbers of qualified pharmacy professionals could adversely affect our business. Although we generally have been able to meet our staffing requirements for pharmacists and other pharmacy professionals, our inability to do so in the future could have a material adverse effect on our financial condition, results of operations and liquidity.

Our revenues and volume trends may be adversely affected by certain factors relevant to the markets in which we have pharmacies, including weather conditions and other natural disasters, some of which may not be covered by insurance.

Our revenues and volume trends will be predicated on many factors, including physicians’ pharmaceutical decisions on patients, payer programs, seasonal and severe weather conditions including the effects of extreme low temperatures, hurricanes and tornadoes, earthquakes, current local economic and demographic changes, some of which may not be covered by insurance. Any of these factors could have a material adverse effect on our revenues and volume trends, and many of these factors will not be within the control of our management. These factors may also have an effect on our customers and their ability to continue to operate. For further discussion, see Note 9.

There are inherent uncertainties involved in estimates, judgments, and assumptions used in the determination of our litigation-related accruals and the preparation of financial statements in accordance with generally accepted accounting principles in the United States (U.S. GAAP). Any changes in estimates, judgments, and assumptions could have a material adverse effect on the Company's financial position, results of operations, or cash flows.

Our financial statements filed with the SEC are prepared in accordance with U.S. GAAP, and the preparation of such financial statements includes making estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, and related reserves, revenues, expenses, and income. We evaluate our exposure to legal proceedings and establish reserves for the estimated liabilities in accordance with U.S. GAAP. Assessing and predicting the outcome of these matters involves substantial uncertainties. Unexpected outcomes in these legal proceedings, or changes in management's evaluations or predictions and accompanying changes in established reserves, could have a material adverse impact on our financial results. Estimates are inherently subject to change in the future, and such changes could result in corresponding changes to the amounts of assets, liabilities, income, or expenses and likewise could have an adverse effect on our financial position, results of operations, or cash flows.

Index

Risk Factors Relating to Ownership of Our Common Stock and Our Senior Secured Credit Facility

Certain provisions of our certificate of incorporation and bylaws and provisions of Delaware law could delay or prevent a change of control that stockholders favor.

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or other change of control that stockholders may consider favorable or may impede the ability of the holders of our common stock to change our management and Board of Directors. The provisions of our certificate of incorporation and bylaws, among other things:

•

prohibit stockholder action except at an annual or special meeting. Specifically, this means our stockholders are unable to act by written consent;

•

regulate how stockholders may present proposals or nominate directors for election at annual meetings of stockholders. Advance notice of such proposals or nominations is required;

•

regulate how special meetings of stockholders may be called. Our stockholders do not have the right to call special meetings;

•

authorize our board of directors to issue preferred stock in one or more series, without stockholder approval. Under this authority, our Board of Directors adopted the Rights Agreement which could ensure continuity of management by rendering it more difficult for a potential acquirer to obtain control of us; and

•

require an affirmative vote of the holders of three-quarters or more of the combined voting power of our common stock entitled to vote in the election of our directors in order for the stockholders to amend our bylaws.

In addition, because we have not chosen to be exempt from Section 203 of the Delaware General Corporation Law (“DGCL”), this provision could also delay or prevent a change of control that some stockholders may view as favorable. Section 203 provides that unless board and/or stockholder approval is obtained pursuant to the requirements of the statute, persons that acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which that person or its affiliate becomes the holder of more than 15% of the corporation’s outstanding voting stock.

The market price and trading volume of our common stock may be volatile.

The market price of our common stock could fluctuate significantly for many reasons, including, without limitation the following:

•

as a result of the risk factors listed in this document;

•

actual or anticipated fluctuations in our results of operations;

•

for reasons unrelated to our specific performance, such as reports by industry analysts, investor perceptions, or negative announcements by our customers or competitors regarding their own performance;

•

regulatory changes that could impact our business or that of our customers; and

•

general economic and industry conditions.

In addition, when the market price of a company’s common stock drops significantly, stockholders often institute securities class action lawsuits against the company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources.

Acquisitions, investments and strategic alliances we may make in the future may need to be financed by borrowings under the Credit Agreement for which funds may not be made available by certain participants.

Index

We are exposed to interest rate changes.

We are exposed to market risk related to changes in interest rates. As of December 31, 2014, we had outstanding debt of $350.0 million outstanding under our Credit Agreement and revolver, all of which was subject to variable rates of interest. See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.”

We have indebtedness, which restricts our ability to pay cash dividends and has a negative impact on our financing options and liquidity.

We have $350.0 million in indebtedness outstanding as of December 31, 2014 under our Credit Agreement and revolver. We also have $1.3 million in capital lease obligations at December 31, 2014.

On September 17, 2014, the Corporation entered into a Credit Agreement by and among the Corporation, the lenders named therein, Bank of America, N.A., as administrative agent, JP Morgan Chase Bank N.A., as syndication agent, and U.S. Bank, National Association, Citibank, N.A., MUFG Union Bank, N.A., BBVA Compass Bank and SunTrust Bank as co-documentation agents (the "Credit Agreement"). The Credit Agreement replaced the $450.0 million five-year credit agreement dated as of May 2, 2011, among the Corporation, Citibank, N.A., as Administrative Agent, and certain lenders. The Credit Agreement consists of a $225.0 million term loan facility and a $310.0 million revolving credit facility. The terms and conditions of the Credit Agreement are customary to facilities of this nature. Unless terminated earlier, the Credit Agreement will mature on September 17, 2019, and the principal amount outstanding thereunder, together with all accrued unpaid interest and other amounts owed thereunder, if any, will be payable in full on such date. The Credit Agreement also contains financial covenants that require us to satisfy certain financial tests and maintain certain financial ratios, including a maximum of debt to EBITDA ratio. The Credit Agreement limits our ability to declare and pay dividends or other distributions on our shares of common stock. If our lenders permit us to declare dividends, the dividend amounts, if any, will be determined by our Board of Directors, which will consider a number of factors, including our financial condition, capital requirements, funds generated from operations, future business prospects, applicable contractual restrictions and any other factors our Board of Directors may deem relevant. The amount of this outstanding indebtedness could limit our ability to pay cash dividends and to obtain additional financing in the future for working capital, capital expenditure and acquisition purposes. A significant portion of our cash flows will be dedicated to debt service and will be unavailable for investment, capital expenditures or other operating expenses.

As a result of these and other factors, we cannot assure you that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in amounts sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. If we do not generate or are unable to borrow sufficient amounts of cash on satisfactory terms to meet these needs, we may need to seek to refinance all or a portion of our indebtedness on or before maturity, sell assets, curtail discretionary capital expenditures or seek additional capital. There can be no assurance that additional capital will be available to us on acceptable terms, or at all, which could adversely impact our business, results of operations, liquidity, capital resources, and financial condition.

We anticipate that future earnings will be used principally to support operations and finance the growth of our business. Thus, we do not intend to pay dividends or other cash distributions on our common stock in the foreseeable future. See Part II, Item 5 “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Item 1B.

Unresolved Staff Comments

None.

Index

Item 2.

Properties

We have facilities including offices and key operating facilities in various locations throughout the United States. The Corporation’s corporate headquarters are located in Louisville, Kentucky. In addition to the pharmacies listed below, the Corporation also has multiple facilities throughout the nation with several overhead and administrative functions. As of December 31, 2014, all facilities were leased. We consider all of these facilities to be suitable and adequate.

The following table presents certain information with respect to operating leases of our pharmacies identified by the Corporation as properties as of December 31, 2014:

Property	# of Facilities	Square Footage		Property	# of Facilities	Square Footage

Alabama	3		33,594	Mississippi	1		11,600
Arizona	5		31,249	Missouri	1		4,090
Arkansas	1		6,850	Montana	1		2,440
California	9		91,151	Nebraska	1		5,120
Colorado	4		32,054	Nevada	2		8,250
Connecticut	1		15,600	New Hamphire	1		7,500
Delaware	1		5,739	New Jersey	1		14,309
Florida	6		64,530	New Mexico	1		4,798
Georgia	2		33,202	New York	4		81,431
Hawaii	5		15,506	North Carolina	3		21,250
Idaho	1		4,031	Ohio	2		28,050
Illinois	1		15,495	Oklahoma	2		12,786
Indiana	1		20,386	Pennsylvania	12		79,062
Iowa	1		6,250	Rhode Island	1		9,415
Kansas	1		9,977	South Carolina	2		20,350
Kentucky	2		43,500	South Dakota	2		11,050
Louisiana	1		4,914	Tennessee	5		47,919
Maine	1		10,200	Texas	13		92,320
Maryland	2		7,700	Utah	3		18,002
Massachusetts	2		33,722	Virginia	2		15,807
Michigan	2		13,720	Washington	2		12,973
Minnesota	1		6,727	West Virginia	1		8,900
				Wisconsin	1		3,750

Item 3.

Legal Proceedings

On March 4, 2011, a relator, Mark Silver, on behalf of the U.S. Government and various state governments, filed a complaint in the United States District Court for the District of New Jersey against the Coiporation alleging that the Corporation violated the FCA and Federal Anti-Kickback Statute through its agreements to provide prescription drugs to nursing homes under certain Medicare and Medicaid programs. On February 19, 2013, the U.S. Government declined to intervene in the case. The complaint has been amended several times, most recently on November 12, 2013, and thereafter served upon the Corporation. On December 6, 2013, the Corporation moved to dismiss the amended complaint for failure to state a claim upon which relief may be granted and on September 29, 2014, the court declined to dismiss the case, but limited the relevant time period for which claims could be brought against the Corporation. The Corporation intends to vigorously defend itself against these allegations.

Index

On March 6, 2012, a relator, Fox, a former Part D Plan Sponsor, filed a complaint against the Corporation in the United States District Court for the Southern District of Ohio. Fox filed an amended complaint on October 2,2012. The case was transferred to the United States District Court for the Western District of Virginia on March 27, 2013. Fox alleged that the Corporation engaged in a variety of schemes relating to the dispensing of atypical antipsychotics and the drug Depakote, including allegedly dispensing drugs for unapproved uses, allegedly receiving illegal kickbacks in the form of rebates, and other alleged violations. Fox also alleges that the Corporation improperly inflated dispensing fees by splitting prescriptions into partial fills. The United States declined to intervene on September 8, 2014. Fox voluntarily dismissed its complaint on December 15, 2014.

On June 10, 2013, the United States District Court for the Eastern District of Wisconsin unsealed two consolidated qui tam complaints filed in 2009 and 2011 by relators who are former employees of the Corporation and a company acquired by the Corporation. The United States, acting through the U.S. Attorney's Office in Wisconsin, intervened in part and declined to intervene in part and filed its complaint in intervention on August 9, 2013, when the matter was formally brought to the Corporation's attention. The Government's complaint seeks statutory fines for the Corporation's alleged dispensing of Schedule II controlled substances without a valid prescription in violation of the CSA. It also seeks monetary damages and equitable relief alleging that this conduct caused false claims to be submitted in violation of the Federal False Claims Act (the "FCA"). The Corporation moved to dismiss the government's complaint for failure to state a claim upon which relief may be granted but the Court denied the Corporation's motion on September 3, 2014. With regard to the portion of the relators' complaint on which the Government did not intervene, on November 15, 2013, the relators dismissed their claims against the Corporation alleging that the Corporation submitted false claims to Medicare Part D and to Medicaid for drugs in connection with which the Corporation allegedly received kickbacks from the manufacturer in the form of market share rebates and other remuneration, all in violation of the Federal Anti Kickback Statute (the "AKS/FCA" claims). The United States stipulated to the dismissal of those and other non-intervened counts, and the Court approved the dismissal without prejudice of those counts on November 20, 2013. The relators pursued their claim under the retaliatory termination provisions of the FCA. On September 3, 2014, the Court denied the Corporation's motion to dismiss the relators' retaliatory termination claim. The Corporation intends to vigorously defend itself in both matters.

On November 20, 2013 the complaint filed by a relator, Robert Gadbois, on behalf of the U.S. Government and various state governments, was unsealed by the United States District Court for the District of Rhode Island against the Corporation alleging that the Corporation dispensed controlled and non-controlled substances in violation of the CSA and in violation of state dispensing laws. Relator alleges that, as a result, the dispenses were not eligible for payment and that the claims the Corporation submitted to the Government were false within the meaning of the FCA. The U.S. Government and the various state governments declined to intervene in this case. On October 3, 2014, the Corporation's motion to dismiss was granted by the court. The relator has appealed the court's decision. The Corporation intends to continue to defend the case vigorously.

On October 29, 2013, a complaint was filed in the United States District Court for the Southern District of Florida by Pines Nursing Homes (77), Inc. as a putative class action against the Corporation. The complaint alleged that the Corporation sent unsolicited advertisements promoting the Corporation's goods or services by facsimile to individuals or entities, and that such communications did not include an opt-out clause, all in violation of the federal Telephone Consumer Protection Act ("TCPA"). The Complaint did not specify the amount of damages sought, but the TCPA provides a statutory remedy of $500 per facsimile communication sent in violation of the statute, which may be trebled in the event of a willful violation. On August 18, 2014, the Corporation entered into a Settlement Agreement with the putative class and class counsel resolving all claims raised in the complaint. The parties moved on September 8, 2014 for, among other things, certification of the putative class for the purposes of effectuating the settlement and preliminary approval of the parties' settlement, and have requested a hearing on that motion. No hearing has yet been set on that motion and the Corporation awaits a decision on the motion for preliminary approval of the settlement.

Index

On January 31, 2014, a relator, Frank Kurnik, on behalf of the U.S. Government and various state governments served its complaint filed in the United States District Court for the District of South Carolina alleging that the Corporation solicited and received remuneration in violation of the Federal Anti-Kickback Statute from drug manufacturer Amgen in exchange for preferring and promoting Amgen's drug Aranesp over a competing drug called Procrit. The U.S. Government and the various states declined to intervene in the case. On April 7, 2014, the Corporation moved to dismiss the complaint and on July 23, 2014, the motion was denied. The Corporation again moved to dismiss the case on jurisdictional grounds on January 13, 2015. That motion is pending. The Corporation intends to vigorously defend itself against these allegations.

The U.S. Department of Justice, through the U.S. Attorney's Office for the Western District of Virginia, is investigating whether the Corporation's activities in connection with the agreements it had with the manufacturer of the pharmaceutical Depakote violated the Anti-Kickback Statute and, hence, that certain claims for Depakote that the Corporation submitted to federal health care programs violated the Federal False Claims Act. The Corporation is cooperating with this investigation and believes it has complied with all applicable laws and regulations. On May 29, 2014, the United States District Court for the Western District of Virginia entered an order (the "May 29 Order") unsealing two previously partially sealed qui tam complaints, entitled United States, et al., ex rel. Spetter v. Abbott Laboratories. Inc., Omnicare, Inc., and PharMerica Corp., No. l:07-cv-00006 and United States, et al., ex rel. McCoyd v. Abbott Laboratories, Omnicare, Inc., PharMerica Corp., and Miles White, No. l:07-cv-0008. The May 29 Order also unsealed the government's notice of intervention and granted the Government 120 days to serve its Complaint in Intervention. That deadline has since been extended to March 23, 2015 as to PharMerica only. As was indicated during the investigation, the complaints allege that certain agreements that the Corporation had with the manufacturer of Depakote violated the Anti-Kickback Statute and, hence, those certain claims for Depakote that the Corporation submitted to federal health care programs violated the Federal False Claims Act and the analogous statutes of 27 states. The Corporation intends to vigorously defend itself.

On September 10, 2014 the Corporation filed a Complaint in Jefferson Circuit Court in Louisville, Kentucky against ABDC for breach of the Amended PVA. The Corporation subsequently filed a First Amended Complaint asserting additional breaches of the Amended PVA and filed a motion seeking a preliminary injunction enjoining ABDC from instituting certain drug substitution programs. On September 10, 2014, ABDC filed suit in the Court of Chancery of the State of Delaware seeking a declaration that it is not in breach of the Amended PVA. The Delaware proceeding was voluntarily dismissed on November 20, 2014. On November 24, 2014, the Jefferson Circuit Court issued a temporary injunction against ABDC. That order was subsequently over-ruled by the Court of Appeals on February 13, 2015. The Corporation has appealed the decision of the Court of Appeals to the Kentucky Supreme Court. On February 24, 2015, the Kentucky Supreme Court stayed the Appellate Court's ruling until the Kentucky Supreme Court has an opportunity to rule on the matter. The amounts disputed by ABDC generally relate to certain rebates owed by ABDC under the Amended PVA. Rebates receivable from ABDC are $8.5 million, $12.3 million, and $20.0 million for the second quarter of 2014, the third quarter of 2014, and the fourth quarter of 2014, respectively, in the aggregate total $40.8 million at December 31, 2014. The Corporation will have claims for additional damages resulting from ABDC's breaches of the Amended PVA. On March 2, 2015, the Corporation provided ABDC with a notice of termination of the Amended PVA effective April 1, 2015. The Corporation intends to vigorously pursue its claims. The Corporation is unable to determine the ultimate impact of these litigation proceedings on its consolidated financial condition, results of operations, or liquidity. The litigation proceedings with ABDC could continue for an extended period of time, likely longer than 12 months. The Corporation cannot provide any assurances about the outcome of the litigation.

Item 4.

Mine Safety Disclosures

Not applicable.

Index

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our only class of common equity is our $0.01 par value common stock, which trades on the NYSE under the symbol “PMC.”

The following table sets forth the high and low prices per share during the period and the closing price as of the last day of each period of our common stock as reported by the NYSE for the fiscal periods indicated.

	High		Low		Close

Fiscal 2013
First Quarter	$	15.42	$	13.39	$	14.00
Second Quarter	$	16.45	$	12.22	$	13.86
Third Quarter	$	15.80	$	11.84	$	13.27
Fourth Quarter	$	22.85	$	13.24	$	21.50

Fiscal 2014
First Quarter	$	28.35	$	20.01	$	27.98
Second Quarter	$	30.48	$	25.56	$	28.59
Third Quarter	$	29.73	$	24.12	$	24.43
Fourth Quarter	$	30.00	$	19.42	$	20.71

Stockholders

As of January 31, 2015, we had approximately 2,600 stockholders of record of the Corporation’s common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

Cash Dividends

The Corporation has never paid a cash dividend on its common stock and does not expect to pay cash dividends on its common stock in the foreseeable future. Our Credit Agreement also limits our ability to declare and pay dividends or other distributions on our shares of common stock. Management believes the stockholders are better served if all of the Corporation’s earnings are retained for expansion of the business.

Securities authorized for issuance under equity compensation plans

The Corporation has adopted the Amended and Restated PharMerica Corporation 2007 Omnibus Incentive Plan (as amended and restated, “Omnibus Plan”) under which the Corporation is authorized to grant equity-based and other awards to its employees, officers, directors and consultants. In connection with the Corporation’s 2010 Annual Meeting of Stockholders, the stockholders of the Corporation approved and adopted the amended and restated Omnibus Plan to, among other things, implement a “fungible share pool” effective as of January 1, 2010, and preserve preferential tax treatment as “qualified performance-based compensation” under Section 162(m) of the Internal Revenue Code.

The Corporation has reserved 7,237,000 shares of its common stock for awards to be granted under the Omnibus Plan plus 534,642 shares reserved for substitute equity awards. Under the “fungible share pool,” one share of stock will be subtracted from the share limit for each share of stock covered by a stock option or stock appreciation right award and 1.65 shares of stock will be subtracted from the share limit for each share of stock covered by any full-value award, including restricted share awards, restricted stock units and performance share awards at target. The following shares are not available for re-grant under the Omnibus Plan: (i) shares tendered by a participant or withheld by the Corporation to pay the purchase price of a stock option award or to satisfy taxes owed with respect to an award, (ii) shares subject to a stock appreciation right that are not issued in connection with such award’s settlement upon the exercise thereof, and (iii) shares reacquired by the Corporation using cash proceeds received by the Corporation from the exercise of stock options. Effective January 1, 2010, shares subject to an award that is forfeited, expired or settled for cash, are available for re-grant under the Omnibus Plan as one share of stock for each share of stock covered by a stock option or appreciation right and 1.65 shares of stock for each share of stock covered by any other type of award.

Index

The following table sets forth equity compensation plan information as of December 31, 2014:

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)			(c)
Equity compensation plans approved by stockholders	1,854,779	(1)	$	14.62	(2)		2,865,608	(3)

(1) Includes the following:

•

913,209 shares of common stock to be issued upon exercise of outstanding stock options granted under the Omnibus Plan;

•

446,833 shares of common stock to be issued upon vesting of performance share units under the Omnibus Plan;

•

7,831 shares of common stock to be issued upon vesting of restricted stock awards under the Omnibus Plan; and

•

486,906 shares of common stock to be issued upon vesting of restricted stock units under the Omnibus Plan.

(2) The weighted average exercise price in column (b) does not take into account the 941,570 shares of common stock potentially to be issued under restricted stock awards, performance share units and restricted stock units.

(3) The 2,865,608 shares does not take into consideration the dilution of 1.65 shares of stock for any full-value award, including restricted stock awards, restricted stock units and performance share units at target. The number of shares remaining available for future issuance calculated under the fungible share pool would be 1,737,623.

See Note 10 to the Consolidated Financial Statements included in this Report for information regarding the material features of the Omnibus Plan.

Index

Stock Performance Graph

The following graph compares the cumulative total return on a $100 investment in each of the Common Stock of the Corporation, the Standard & Poor’s 500 Stock Index and the Standard & Poor’s Healthcare Index for the period from December 31, 2009 to December 31, 2014. This graph assumes an investment in the Corporation’s common stock and the indices of $100 on December 31, 2009 and that all dividends were reinvested:

	PharMerica Corporation		S&P 500	S&P Healthcare
December 31, 2009		100.00	100.00		100.00
March 31, 2010		114.74	104.87		102.89
June 30, 2010		92.32	92.43		90.24
September 30, 2010		60.01	102.34		97.66
December 31, 2010		72.10	112.78		100.71
March 31, 2011		72.04	118.90		105.74
June 30, 2011		80.35	118.43		113.45
September 30, 2011		89.86	101.46		101.52
December 31, 2011		95.59	112.78		110.95
March 31, 2012		78.27	126.31		120.30
June 30, 2012		68.77	122.16		121.68
September 30, 2012		79.72	129.20		128.45
December 31, 2012		89.67	127.90		127.81
March 31, 2013		88.16	140.72		147.26
June 30, 2013		87.28	144.05		152.17
September 30, 2013		83.56	150.80		161.79
December 31, 2013		135.39	165.76		177.32
March 31, 2014		176.20	167.91		186.91
June 30, 2014		180.04	175.79		194.50
September 30, 2014		153.84	176.87		204.28
December 31, 2014		130.42	184.64		218.64

Recent Sales of Unregistered Securities

None.

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On August 24, 2010, the Corporation announced a stock repurchase program where the Corporation is authorized to repurchase up to $25.0 million of the Corporation’s common stock, of which $10.5 million was used to purchase the Corporation’s common stock. On July 2, 2012, the Board of Directors authorized an increase to the existing stock repurchase program that will allow the Corporation to again purchase back up to a maximum of $25.0 million of the Corporation’s common stock. Approximately $19.7 million remained available under the program as of December 31, 2014. The stock repurchase program does not have an expiration date and may be limited, terminated or extended at any time without prior notice. The Corporation did not repurchase shares under this program for the three months ended December 31, 2014.

Additionally, the Corporation may redeem shares from employees upon vesting of the Corporation’s stock awards for minimum statutory tax withholding purposes and exercise cost of stock options. The Corporation redeemed no shares of vested awards during the three months ended December 31, 2014.

Index

Item 6.

Selected Financial Data

The following table presents our selected historical consolidated financial and operating data. The selected historical financial and operating data should be read in conjunction with, and is qualified in its entirety by reference to, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K (in millions, except where indicated):

Index

	Years Ended December 31,
	2010			2011			2012			2013			2014
Income statement data:
Revenues	$	1,847.3		$	2,081.1		$	1,832.6		$	1,757.9		$	1,894.5
Cost of goods sold		1,604.8			1,786.2			1,532.4			1,430.7			1,555.2
Gross profit		242.5			294.9			300.2			327.2			339.3
Selling, general and administrative		182.8			216.5			214.7			225.3			236.3
Amortization expense		9.3			11.0			12.3			15.4			20.1
Impairment of intangible assets		-			5.1			-			-			-
Merger, acquisition, integration costs and other charges		14.6			16.8			17.8			8.1			13.6
Settlement, litigation and other related charges		-			(1.5	)		2.1			19.6			37.3
Restructuring and impairment charges		-			-			-			4.4			3.3
Hurricane Sandy disaster costs		-			-			4.5			(1.4	)		(1.7	)
Operating income (1)	$	35.8		$	47.0		$	48.8		$	55.8		$	30.4
Net income (7)	$	19.2		$	23.4		$	22.9		$	18.9		$	6.8
Earnings per common share: (2)
Basic	$	0.64		$	0.80		$	0.78		$	0.64		$	0.23
Diluted	$	0.64		$	0.79		$	0.77		$	0.63		$	0.22
Adjusted earnings per diluted common share (3)	$	1.03		$	1.32		$	1.41		$	1.83		$	1.67
Shares used in computing earnings per common share:
Basic		30.0			29.3			29.5			29.6			30.0
Diluted		30.1			29.5			29.9			30.1			30.6

Balance sheet data:
Cash and cash equivalents	$	10.8		$	17.4		$	12.3		$	24.2		$	33.3
Working capital (4)	$	280.9		$	348.4		$	322.1		$	259.6		$	321.5
Goodwill (4)	$	179.4		$	214.9		$	269.4		$	282.8		$	317.7
Intangible assets, net	$	102.2		$	100.2		$	121.9		$	136.3		$	177.6
Total assets (4)	$	759.7		$	834.0		$	886.3		$	900.8		$	1,068.1
Long-term debt, including current portion	$	245.6		$	300.0		$	315.5		$	231.3		$	351.3
Total stockholder's equity	$	384.4		$	413.8		$	442.6		$	462.5		$	478.1

Supplemental information:
Adjusted EBITDA (3)	$	83.7		$	104.5		$	111.2		$	132.8		$	130.6
Adjusted EBITDA Margin (3)		4.5	%		5.0	%		6.1	%		7.5	%		6.9	%
Adjusted EBITDA per prescription dispensed (3)	$	2.21		$	2.51		$	2.84		$	3.52		$	3.73
Net cash provided by operating activities	$	98.2		$	26.8		$	85.7		$	155.7		$	48.4
Net cash used by investing activities	$	(133.2	)	$	(64.0	)	$	(105.3	)	$	(53.7	)	$	(157.0	)
Net cash (used in) provided by financing activities	$	(5.4	)	$	43.8		$	14.5		$	(90.1	)	$	117.7

Statistical information (in whole numbers except where indicated)
Pharmacy
Volume information:
Prescriptions dispensed (in thousands)		37,826			41,677			39,212			37,731			35,003
Revenue per prescription dispensed (6)	$	48.84		$	49.93		$	46.74		$	46.67		$	54.12
Gross profit per prescription dispensed (6)	$	6.41		$	7.08		$	7.66		$	8.75		$	9.69
Gross profit margin (6)		13.1	%		14.2	%		16.4	%		18.8	%		17.9	%
Generic drug dispensing rate (5)		76.5	%		79.6	%		83.3	%		83.4	%		84.9	%

(1) Includes depreciation expense of $18.8 million, $20.1 million, $18.6 million, $19.3 million and $20.3 million for the years ended December 31, 2010, 2011, 2012, 2013 and 2014, respectively.

(2) The Corporation has never declared a cash dividend. Earnings per share in whole dollars and cents.

(3) See “Use of Non GAAP Measures for Measuring Annual Results” for a definition and reconciliation of Adjusted earnings per diluted common share to Earnings per diluted common share and for reconciliation of net income to Adjusted EBITDA and Adjusted EBITDA Margin.

(4) As adjusted, see Note 2 - Acquisitions in the Consolidated Financial Statements

(5) Single source generic drugs, previously classified as brand drugs, are now being classified as generics for purposes of the generic dispensing rate calculation in all periods.

(6) Amounts in 2013 do not include the $2.9 million California Medicaid estimated recoupment.

(7) Amounts in 2014 reflect a $4.3 million loss on extinguishment of debt in the third quarter 2014.

Index

Use of Non-GAAP Measures for Measuring Annual Results

The Corporation calculates Adjusted EBITDA as provided in the reconciliation below and calculates Adjusted EBITDA Margin by taking Adjusted EBITDA and dividing it by revenues adjusted for the contractual amounts associated with the California Medicaid estimated recoupment. The Corporation calculates and uses Adjusted EBITDA as an indicator of its ability to generate cash from reported operating results. The measurement is used in concert with net income and cash flows from operating activities, which measure actual cash generated in the period. In addition, the Corporation believes that Adjusted EBITDA and Adjusted EBITDA Margin are supplemental measurement tools used by analysts and investors to help evaluate overall operating performance and the ability to incur and service debt and make capital expenditures. In addition, Adjusted EBITDA, as defined in the Credit Agreement, is used in conjunction with the Corporation’s debt leverage ratio and this calculation sets the applicable margin for the quarterly interest charge. Adjusted EBITDA, as defined in the Credit Agreement, is not the same calculation as this Adjusted EBITDA table. Adjusted EBITDA does not represent funds available for the Corporation’s discretionary use and is not intended to represent or to be used as a substitute for net income or cash flows from operating activities data as measured under U.S. generally accepted accounting principles (“U.S. GAAP”). The items excluded from Adjusted EBITDA but included in the calculation of the Corporation’s reported net income and cash flows from operating activities are significant components of the accompanying consolidated income statements and cash flows, and must be considered in performing a comprehensive assessment of overall financial performance. The Corporation’s calculation of Adjusted EBITDA may not be consistent with calculations of EBITDA used by other companies. The following are reconciliations of Adjusted EBITDA to the Corporation’s net income and net operating cash flows for the periods presented.

The Corporation calculates and uses adjusted diluted earnings per share, which is exclusive of the impact of merger, acquisition, integration costs and other charges, settlement, litigation and other related costs and charges, impairment of intangible assets, restructuring and impairment charges, California Medicaid estimated recoupment, loss on debt extinguishment, Hurricane Sandy disaster costs, stock-based compensation and deferred compensation, and impacts of discrete items on tax provision (the “Excluded Items”) as an indicator of its core operating results. The measurement is used in concert with net income and diluted earnings per share, which measure actual earnings per share generated in the period. The Corporation believes the exclusion of these charges in expressing earnings per share provides management with a useful measure to assess period to period comparability and is useful to investors in evaluating the Corporation’s operating results from period to period. Adjusted diluted earnings per share after giving effect to the Excluded Items does not represent the amount that effectively accrues directly to stockholders (i.e., such costs are a reduction in earnings and stockholders’ equity) and is not intended to represent or to be used as a substitute for diluted earnings per share as measured under U.S. GAAP. The Excluded Items are significant components of the accompanying consolidated income statements and must be considered in performing a comprehensive assessment of overall financial performance. The following is a reconciliation of adjusted diluted earnings per share to the Corporation’s U.S. GAAP earnings per diluted common share for the periods presented.

Index

Reconciliation of Net Income to Adjusted EBITDA

	Years Ended December 31,
	2010			2011			2012			2013			2014
Net income	$	19.2		$	23.4		$	22.9		$	18.9		$	6.8
Add:
Interest expense, net		3.6			8.8			10.0			10.6			9.9
Merger, acquisition, integration costs and other charges		14.6			16.8			17.8			8.1			12.9
Settlement, litigation and other related charges		-			(1.5	)		2.1			19.6			37.3
California Medicaid estimated recoupment		-			-			-			2.9			-
Restructuring and impairment charges		-			-			-			4.4			3.3
Loss on extinguishment of debt		-			-			-			-			4.3
Hurricane Sandy disaster costs		-			-			4.5			(1.4	)		(1.7	)
Stock-based compensation and deferred compensation		5.2			6.0			7.1			8.7			8.0
Provision for income taxes		13.0			14.8			15.9			26.3			9.4
Impairment of intangible assets		-			5.1			-			-			-
Depreciation and amortization expense		28.1			31.1			30.9			34.7			40.4
Adjusted EBITDA	$	83.7		$	104.5		$	111.2		$	132.8		$	130.6
Adjusted EBITDA Margin		4.5	%		5.0	%		6.1	%		7.5	%		6.9	%

Index

Reconciliation of Adjusted EBITDA to Net Operating Cash Flows

	Years Ended December 31,
	2010			2011			2012			2013			2014

Adjusted EBITDA	$	83.7		$	104.5		$	111.2		$	132.8		$	130.6
Interest expense, net		(3.6	)		(8.8	)		(10.0	)		(10.6	)		(9.9	)
Merger, acquisition, integration costs and other charges		(14.0	)		(15.3	)		(16.5	)		(8.1	)		(52.8	)
Provision for bad debt		18.5			24.8			25.2			22.5			23.2
Amortization of deferred financing fees		0.6			0.8			1.0			2.3			1.9
Loss on disposition of equipment		0.3			0.1			0.1			0.6			-
Gain on acquisition		-			-			-			(1.3	)		(0.2	)
Provision for income taxes		(13.0	)		(14.8	)		(15.9	)		(26.3	)		(9.4	)
Deferred income taxes		12.3			13.9			2.8			12.0			(2.3	)
Changes in federal and state income tax payable		(0.1	)		0.2			1.1			-			7.2
Excess tax benefit from stock-based compensation		-			-			-			(0.4	)		(3.4	)
Changes in assets and liabilities		13.5			(78.8	)		(13.5	)		32.2			(36.9	)
Other		-			0.2			0.2			-			0.4
Net Cash Flows from Operating Activities	$	98.2		$	26.8		$	85.7		$	155.7		$	48.4

Reconciliation of Diluted Earnings Per Share to Adjusted Diluted Earnings Per Share

	Years Ended December 31,
	2010		2011			2012		2013			2014

Diluted earnings per share	$	0.64	$	0.79		$	0.77	$	0.63		$	0.22
Add:
Diluted earnings per share impact of:
Impairment of intangible assets		-		0.11			-		-			-
Merger, acquisition, integration costs and other charges		0.29		0.35			0.36		0.17			0.27
Settlement, litigation and other related charges		-		(0.03	)		0.04		0.62			0.77
California Medicaid estimated recoupment		-		-			-		0.06			-
Loss on extinguishment of debt		-		-			-		-			0.09
Restructuring and impairment charges		-		-			-		0.09			0.07
Hurricane Sandy disaster costs		-		-			0.09		(0.03	)		(0.04	)
Stock-based compensation and deferred compensation		0.10		0.12			0.14		0.18			0.17
Impact of discrete items on tax provision		-		(0.02	)		0.01		0.11			0.12
Adjusted diluted earnings per share	$	1.03	$	1.32		$	1.41	$	1.83		$	1.67

Index

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the Corporation’s current estimates, expectations and projections about the Corporation’s future results, performance, prospects and opportunities. Forward looking statements include, among other things, the information concerning the Corporation’s possible future results of operations including revenue, costs of goods sold, operating expenses, gross profit, and business and growth strategies, financing plans, the Corporation’s competitive position and the effects of competition, the projected growth of the industries in which we operate, and the Corporation’s ability to consummate strategic acquisitions. Forward-looking statements include statements that are not historical facts and can be identified by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “plan,” “may,” “should,” “will,” “would,” “project,” and similar expressions. These forward-looking statements are based upon information currently available to the Corporation and are subject to a number of risks, uncertainties and other factors that could cause the Corporation’s actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Important factors that could cause the Corporation’s actual results to differ materially from the results referred to in the forward-looking statements the Corporation makes in this report include:

•

the Corporation’s access to capital, credit ratings, indebtedness, and ability to raise additional financings and operate under the terms of the Corporation’s debt obligations;

•

anti-takeover provisions of the Delaware General Corporation Law, which in concert with our certificate of incorporation and our by-laws could delay or deter a change in control;

•

the effects of adverse economic trends or intense competition in the markets in which we operate;

•

the Corporation’s risk of loss of revenues due to a customer or owner of skilled nursing facility entering the institutional pharmacy business;

•

the effects of the loss of a large customer and the Corporation's ability to adequately restructure its operations to offset the loss;

•

the demand for the Corporation’s products and services;

•

the risk of retaining existing customers and service contracts and the Corporation’s ability to attract new customers for growth of the Corporation’s business;

•

the effects of renegotiating contract pricing relating to significant customers and suppliers, including the hospital pharmacy business which is substantially dependent on service provided to one customer;

•

the impacts of cyber security risks and/or incidents;

•

the effects of a failure in the security or stability of our technology infrastructure, or the infrastructure of one or more of our key vendors, or a significant failure or disruption in service;

•

the effects of an increase in credit risk, loss or bankruptcy of or default by any significant customer, supplier, or other entity relevant to the Corporation’s operations;

•

the Corporation’s ability to successfully pursue the Corporation’s development and acquisition activities and successfully integrate new operations and systems, including the realization of anticipated revenues, economies of scale, cost savings, and productivity gains associated with such operations;

•

the Corporation’s ability to control costs, particularly labor and employee benefit costs, rising pharmaceutical costs, and regulatory compliance costs;

•

the effects of healthcare reform and government regulations, including interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare and institutional pharmacy services industries including the dispensing of antipsychotic prescriptions;

•

changes in the reimbursement rates or methods of payment from Medicare and Medicaid and other third party payers to both us and our customers;

•

the potential impact of state government budget shortfalls and their ability to pay the Corporation and its customers for services provided;

•

the Corporation’s ability, and the ability of the Corporation’s customers, to comply with Medicare or Medicaid reimbursement regulations or other applicable laws;

•

the effects of changes in the interest rate on the Corporation’s outstanding floating rate debt instrument and the increases in interest expense, including increases in interest rate terms on any new debt financing;

•

further consolidation of managed care organizations and other third party payers;

•

political and economic conditions nationally, regionally, and in the markets in which the Corporation operates;

•

natural disasters, war, civil unrest, terrorism, fire, floods, tornadoes, earthquakes, hurricanes, epidemic, pandemic, catastrophic event or other matters beyond the Corporation’s control;

Index

•

increases in energy costs, including state and federal taxes, and the impact on the costs of delivery expenses and utility expenses;

•

elimination of, changes in, or the Corporation’s failure to satisfy pharmaceutical manufacturers’ rebate programs;

•

the Corporation’s ability to attract and retain key executives, pharmacists, and other healthcare personnel;

•

the Corporation’s risk of loss not covered by insurance;

•

the outcome of litigation to which the Corporation is a party from time to time, including adverse results in material litigation or governmental inquiries including the possible insufficiency of any accruals established by the Corporation from time to time;

•

changes in accounting rules and standards, audits, compliance with the Sarbanes-Oxley Act, and regulatory investigations;

•

changes in market conditions that would result in the impairment of goodwill or other assets of the Corporation;

•

changes in market conditions in which we operate that would influence the value of the Corporation’s stock;

•

the uncertainty as to the long-term value of the Corporation’s common stock;

•

the Corporation’s ability to anticipate a shift in demand for generic drug equivalents and the impact on the financial results including the negative impact on brand drug rebates;

•

the effect on prescription volumes and the Corporation’s net revenues and profitability if the safety risk profiles of drugs increase or if drugs are withdrawn from the market, including as a result of manufacturing issues, or if prescription drugs transition to over-the-counter products;

•

the effects on the Corporation’s results of operations related to interpretations of accounting principles by the SEC staff that may differ from those of management;

•

the potential impact of the litigation proceedings with ABDC regarding the Amended PVA;

•

changes in tax laws and regulations;

•

the effects of changes to critical accounting estimates; and

•

other factors, risks and uncertainties referenced in the Corporation’s filings with the Commission, including the “Risk Factors” set forth in this Report on Form 10-K for the year ended December 31, 2014.

YOU ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS, ALL OF WHICH SPEAK ONLY AS OF THE DATE OF THIS ANNUAL REPORT. EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR RELEASE ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS ANNUAL REPORT OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US OR ANY PERSON ACTING ON THE CORPORATION’S BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS CONTAINED OR REFERRED TO IN THIS SECTION AND IN OUR RISK FACTORS SET FORTH IN PART I, ITEM 1A OF THIS REPORT ON FORM 10-K AND IN OTHER REPORTS FILED WITH THE SEC BY THE CORPORATION.

The Corporation’s Business and Industry Trends

PharMerica Corporation together with its subsidiaries, (the “Corporation”) is a pharmacy services company that services healthcare facilities, provides pharmacy management services to hospitals, provides specialty infusion services to patients outside a hospital setting, and offers the only national oncology pharmacy in the United States. The Corporation is the second largest institutional pharmacy services company in the United States based on revenues and customer licensed beds under contract, operating 98 institutional pharmacies, 14 specialty infusion pharmacies and 5 specialty oncology pharmacies in 45 states. The Corporation’s customers are typically institutional healthcare providers, such as skilled nursing facilities, nursing centers, assisted living facilities, hospitals, individuals receiving in-home care and other long-term alternative care providers. The Corporation is generally the primary source of supply of pharmaceuticals to its customers. The Corporation also provides pharmacy management services to 89 hospitals in the United States.

The institutional pharmacy services business is highly competitive. Competition is a significant factor that can impact the Corporation’s overall financial results, pricing to customers, and bed retention. In each geographic market, there are national, regional and local institutional pharmacies that provide services comparable to those offered by the Corporation’s pharmacies. These pharmacies may have greater financial and other resources than we do and may be more established in the markets they serve than we are. The Corporation also competes against regional and local pharmacies that specialize in the highly-fragmented long-term care markets. In the future, some of the Corporation’s customers may seek to in-source the provision of pharmaceuticals to patients in their facilities by establishing an internal pharmacy.

Index

A variety of factors are affecting the institutional pharmacy industry. With an aging population and the extension of drug coverage to a greater number of individuals through Medicare Part D, the consumption of pharmaceuticals by residents of long-term care facilities is likely to increase in the future. In addition, individuals are expected to enter assisted living facilities, independent living facilities and continuing care retirement communities at increasing rates. Under Medicare Part D, eligible individuals may choose to enroll in various Medicare Part D Plans to receive prescription drug coverage. Each Medicare Part D Plan determines a distinct formulary for the long-term care residents enrolled in its plan. Accordingly, institutional pharmacies have incurred increased administrative costs to manage each Part D Plan’s formulary, reimbursement and administrative processes for their long-term care enrollees. Institutional pharmacies may continue to experience increased administrative burdens and costs due to the greater complexity of the requirements for drug reimbursement. Medicare Part D also requires increased choices for patients with respect to complex drug categories and therapeutic interchange opportunities. Institutional pharmacies may realize increased revenue by providing long-term care residents with specialized services in these areas. Continued industry consolidation may also impact the dynamics of the institutional pharmacy market.

In addition, our continued success depends on our ability to attract and retain pharmacists and other pharmacy professionals. Competition for qualified pharmacists and other pharmacy professionals is strong. The loss of pharmacy personnel or the inability to attract, retain or motivate sufficient numbers of qualified pharmacy professionals could adversely affect our business. Although we generally have been able to meet our staffing requirements for pharmacists and other pharmacy professionals in the past, our inability to do so in the future could have a material adverse impact on us.

Acquisitions During the Periods Presented

For a discussion of acquisitions by the Corporation during the periods presented see Note 2 “Acquisitions” to our Consolidated Financial Statements included elsewhere in this Report.

Index

Critical Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Management considers an accounting estimate to be critical if:

•

It requires assumptions to be made that were uncertain at the time the estimate was made; and

•

Changes in the estimate or different estimates could have a material impact on our consolidated results of operations or financial condition.

The Corporation’s management has discussed the development and selection of these critical accounting estimates with the Audit Committee of the Board of Directors and with the Corporation’s independent registered public accounting firm, and they both have reviewed the disclosure presented below relating to critical accounting estimates.

The summary of critical accounting estimates is not intended to be a comprehensive list of all of the Corporation’s accounting policies that require estimates. Management believes that of the significant accounting policies, as discussed in Note 1 of the consolidated financial statements included elsewhere in this report, the estimates discussed below involve a higher degree of judgment and complexity. Management believes the current assumptions and other considerations used to estimate amounts reflected in the consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in the consolidated financial statements, the resulting changes could have a material effect on the consolidated results of operations and financial condition of the Corporation.

The following paragraphs present information about our critical accounting estimates, as well as the effects of hypothetical changes in the material assumptions used to develop each estimate. Our sensitivity analysis was performed assuming the assumptions listed, based upon the actual results of the Corporation for the year ended December 31, 2014, and the actual diluted shares.

Allowance for doubtful accounts and provision for doubtful accounts

Accounts receivable primarily consist of amounts due from PDP’s under Medicaid Part D, long-term care institutions, the respective state Medicaid programs, private payers and third party insurance companies. Our ability to collect outstanding receivables is critical to our results of operations and cash flows. We establish an allowance for doubtful accounts to reduce the carrying value of our receivables to their estimated net realizable value. In addition, certain drugs dispensed are subject to being returned, and the responsible paying party is due a credit for such returns.

Our allowance for doubtful accounts, included in our balance sheets at December 31, 2013 and 2014, was $56.7 million and $58.1 million, respectively.

Our quarterly provision for doubtful accounts included in our income statements was as follows (dollars in millions):

	2012						2013						2014
	Amount			% of Revenues			Amount			% of Revenues			Amount		% of Revenues

First Quarter	$	6.2			1.2	%	$	5.3	*		1.2	%	$	5.6		1.2	%
Second Quarter		6.2			1.4			5.2			1.2			5.7		1.3
Third Quarter		7.3			1.7			5.2			1.2			5.3		1.1
Fourth Quarter		5.5	*		1.3			6.8			1.5			6.6		1.3

*Excludes a $0.7 million and $0.2 million expense related to Hurricane Sandy for the Fourth Quarter 2012 and the First Quarter 2013, respectively. See further discussion in Note 9.

Index

The following table shows our revenue days outstanding reflected in our net accounts receivable as of the quarters indicated:

	2012		2013		2014
First Quarter		42.8		41.6		37.7
Second Quarter		45.4		41.6		37.0
Third Quarter		44.1		39.8		36.7
Fourth Quarter		42.8		39.0		34.9

The following table shows our summarized aging categories by quarter:

	2012												2013												2014
	First			Second			Third			Fourth			First			Second			Third			Fourth			First			Second			Third			Fourth
0 to 60 days		61.5	%		58.0	%		58.6	%		58.8	%		58.0	%		58.0	%		56.5	%		55.5	%		56.7	%		53.9	%		57.3	%		58.8	%
61 to 120 days		17.3			17.7			15.7			17.1			15.8			18.2			18.0			18.8			17.7			17.3			16.9			17.2
Over 120 Days		21.2			24.3			25.7			24.1			26.2			23.8			25.5			25.7			25.6			28.8			25.8			24.0

The following table shows our allowance for doubtful accounts as a percent of gross accounts receivable (dollars in millions):

	2012							2013							2014
	Allowance		Gross Accounts Receivable		% of Gross Accounts Receivable			Allowance		Gross Accounts Receivable		% of Gross Accounts Receivable			Allowance		Gross Accounts Receivable		% of Gross Accounts Receivable

First Quarter	$	52.1	$	296.4		17.6	%	$	55.8	$	262.1		21.3	%	$	57.7	$	242.2		23.8	%
Second Quarter		52.8		272.1		19.4			54.8		249.5		22.0			60.3		246.5		24.5
Third Quarter		56.1		266.0		21.1			54.6		243.1		22.5			57.4		272.4		21.1
Fourth Quarter		56.4		261.6		21.6			56.7		255.4		22.2			58.1		253.8		22.9

If our provision as a percent of revenue increases 0.10%, our after tax income would decrease by approximately $1.2 million or $0.04 per diluted share.

This is only one example of reasonably possible sensitivity scenarios. The process of determining the allowance requires us to estimate uncollectible accounts that are highly uncertain and requires a high degree of judgment. Our estimates may be impacted by economic conditions, success in collections, payer mix and trends in federal and state regulations.

Index

Revenue recognition/Allowance for contractual discounts

We recognize revenues at the time services are provided or products are delivered.

Our sources of revenues for the quarters ended March 31, June 30, September 30, and December 31, 2012, 2013, and 2014 are as follows:

	Three Months Ended March 31,									Three Months Ended June 30,
	2012			2013			2014			2012			2013			2014
Medicare Part D		48.2	%		44.1	%		44.8	%		48.1	%		47.0	%		44.8	%
Institutional healthcare providers		30.0			31.2			25.3			30.2			29.9			25.0
Medicaid		9.6			9.5			9.5			9.2			8.8			9.0
Private and other		4.7			4.8			4.6			4.7			3.9			4.2
Insured		4.1			5.9			11.5			4.1			5.8			12.6
Medicare		0.2			0.8			1.1			0.2			0.9			1.2
Hospital management fees		3.2			3.7			3.2			3.5			3.7			3.2
Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

	Three Months Ended September 30,									Three Months Ended December 31,
	2012			2013			2014			2012			2013			2014
Medicare Part D		47.4	%		47.5	%		45.6	%		46.8	%		46.6	%		47.3	%
Institutional healthcare providers		31.3			29.3			23.5			31.1			27.8			23.4
Medicaid		8.7			8.0			8.4			8.7			9.4			8.4
Private and other		4.4			4.6			4.1			4.6			4.3			4.4
Insured		4.4			6.2			13.8			4.9			7.7			12.6
Medicare		0.2			0.8			1.3			0.3			1.0			1.1
Hospital management fees		3.6			3.6			3.3			3.6			3.2			2.8
Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

If our reimbursement declined or was negatively impacted by 0.25% of revenues, the negative impact on net income would be $3.0 million or $0.10 per diluted common share.

Inventory and cost of drugs dispensed

We have inventory located at each of our institutional pharmacy, specialty infusion, and specialty oncology locations. Our inventory is valued at the lower of first-in, first-out cost or market. The inventory consists of prescription drugs, over the counter products and intravenous solutions. Our inventory relating to controlled substances is maintained on a manually prepared perpetual system to the extent required by the Drug Enforcement Agency and state board of pharmacies. All other inventory is maintained on a periodic system, through the performance of, at a minimum, quarterly physical inventories at the end of each quarter. All inventory counts are reconciled to the balance sheet account and differences are adjusted through cost of goods sold. In addition, we record an amount of potential returns of prescription drugs based on historical rates of returns and record an estimate for rebates associated with inventory remaining at the end of each period.

At December 31, 2013 (as adjusted) and 2014, our inventories on our consolidated balance sheets were $110.2 million and $135.7 million, respectively.

Index

Our inventory days on hand were as follows:

	2012		2013		2014
First Quarter		22.2		25.4		26.0
Second Quarter		25.9		29.6		35.1
Third Quarter		24.6		18.1		31.7
Fourth Quarter		34.9		26.2		29.1

Please refer to Note 1 to our consolidated financial statements included elsewhere in this report for a detailed discussion of our inventory.

Actual inventory counts may include estimates based on amounts that may be dispensed from an open container. In addition, items are reviewed for potential obsolescence.

A 1.0% error rate in the inventory value would impact net income $0.9 million or $0.03 per diluted common share.

Goodwill and other intangible assets

Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired companies. Our intangible assets are comprised primarily of trade names, customer relationship assets, and non-compete agreements.

Our goodwill included in our accompanying consolidated balance sheets as of December 31, 2013 (as adjusted) and 2014 was $282.8 million and $317.7 million, respectively.

The Corporation’s policy is to perform a quantitative assessment of its institutional pharmacy and specialty infusion reporting units to determine whether it is more likely than not (defined as having a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. The Corporation performed a quantitative assessment as of December 31, 2014. The institutional pharmacy and specialty infusion reporting unit’s fair value as calculated for the analysis were approximately 48.2% and 13.1%, respectively, greater than current book value. While the excess on the specialty infusion reporting unit is not significant, the business was recently acquired in the fourth quarter 2012 and is performing to our expectations. In addition, if we were to assume a 100 basis point change in the key assumption, a reduction in the long-term growth rate or an increase in the discount rate used, to determine the fair value of the specialty infusion reporting unit as of December 31, 2014, the quantitative assessment of the specialty infusion reporting unit would still result in fair value in excess of the carrying value. The specialty infusion reporting unit has goodwill with a carrying value of $57.7 million. The Corporation also performed a qualitative assessment of its specialty oncology reporting unit as of December 31, 2014 and did not find it necessary to perform the first step of the two-step impairment test based on that analysis.

Please refer to Note 4 to our consolidated financial statements included elsewhere in this report for a detailed roll forward of our goodwill and intangible assets.

We performed our annual testing for goodwill impairment as of 2013 and 2014 and determined that no goodwill impairment existed, as described above. If actual future results are not consistent with our assumptions and estimates, we may be required to record goodwill impairment charges in the future. Our estimate of fair value of acquired assets and assumed liabilities are based upon assumptions believed to be reasonable based upon current facts and circumstances.

Accounting for income taxes

The provision for income taxes is based upon the Corporation’s annual income or loss for each respective accounting period. The Corporation recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets generally represent items that will result in a tax deduction in future years for which we have already recorded the tax benefit in the accompanying consolidated income statements. The Corporation also recognizes as deferred tax assets the future tax benefits from net operating and capital loss carryforwards. Please refer to Note 11 to our consolidated financial statements included elsewhere in this report for a detailed discussion of our accounting for income taxes.

We assess the likelihood that deferred tax assets will be realized from future taxable income. A valuation allowance is provided for deferred tax assets if it is more-likely-than-not that some portion or all of the net deferred tax assets will not be realized. Our deferred tax asset balances in our consolidated balance sheets as of December 31, 2013 and 2014 were $18.2 million and $30.6 million, respectively. Our valuation allowances for state deferred tax assets in our consolidated balance sheets as of the years ended December 31, 2013 and 2014 were $4.1 million.

Index

The first step in determining the deferred tax asset valuation allowance is identifying reporting jurisdictions where we have a history of tax and operating losses or are projected to have losses in future periods as a result of changes in operational performance. We then determine if a valuation allowance should be established against the deferred tax assets for that reporting jurisdiction. The second step is to determine the amount of valuation allowance. We will generally establish a valuation allowance equal to the net deferred tax asset (deferred tax assets less deferred tax liabilities) related to the jurisdiction identified in step one of the analysis. In certain cases, we may not reduce the valuation allowance by the amount of the deferred tax liabilities depending on the nature and timing of future taxable income attributable to deferred tax liabilities.

With respect to net deferred tax assets, the Corporation considers all available positive and negative evidence to determine whether a valuation allowance is needed. This includes an analysis of net operating loss carryforwards available under law, anticipated future income or loss, as well as tax planning strategies. If the cumulative weight of evidence suggests that it is more-likely-than-not that all or some portion of the net deferred tax assets will not be realized, a full or partial valuation allowance will be recognized based upon the qualitative and quantitative evidence examined.

Our deferred tax assets exceeded our deferred tax liabilities by $30.6 million as of December 31, 2014 including the impact of valuation allowances. Historically, we have produced taxable income and we expect to generate taxable income in future years. Therefore, we believe that the likelihood of our not realizing the tax benefit of our net deferred tax assets is remote.

While we have generated taxable income in recent years and expect to continue to do so in the future, we have deferred tax assets in select states and for federal tax purposes for tax loss carryforwards that we expect to expire before we are able to fully use them to offset taxable income. We have recorded a valuation allowance against these deferred tax assets. If our conclusion about our ability to realize these deferred tax assets is incorrect, then our deferred tax assets would be understated or overstated at December 31, 2014.

Tax benefits from uncertain tax positions are recognized in the Corporation’s consolidated financial statements if it is more-likely-than-not that the position is sustainable based on the technical merits of the position. In evaluating whether the position has met this recognition threshold, the Corporation assumes that the appropriate taxing authority has full knowledge of all relevant information. The amount of benefit recognized in the Corporation’s consolidated financial statements for a tax position meeting the recognition threshold is determined by a measurement of the largest amount of benefit that is more than 50 percent likely to be realized upon ultimate settlement. Subsequent recognition, de-recognition and measurement of uncertain tax positions are based on management’s best judgment given the facts, circumstances, and information available at the reporting date.

The Internal Revenue Service (“IRS”) may propose adjustments for items we have failed to identify as tax contingencies. If the IRS were to propose and sustain assessments we would incur additional tax payments for 2012 through 2014 plus the applicable penalties and interest.

The federal statute of limitations remains open for tax years 2012 through 2014. The IRS examination of the Corporation’s consolidated U.S. income tax returns for 2010 and 2011 was finalized in 2014, and the resulting adjustments have been accounted for in the 2014 provision for income taxes. State tax jurisdictions generally have statutes of limitations ranging from three to five years. The Corporation is no longer subject to state and local tax examinations by tax authorities for years before 2009.

Index

Definitions

Listed below are definitions of terms used by the Corporation in managing the business. The definitions are necessary to the understanding of the Management’s Discussion and Analysis section of this document.

Gross profit per prescription dispensed: Represents the gross profit divided by the total prescriptions dispensed.

Gross profit margin: Represents the gross profit per prescription dispensed divided by the revenue per prescription dispensed.

Prescriptions dispensed: Represents a prescription filled for an individual patient. A prescription will usually be for a 14 or 30 day period and will include only one drug type.

Revenue per prescription dispensed: Represents the revenue divided by the total prescriptions dispensed.

Index

Results of Operations

The following table presents selected consolidated comparative results of operations and statistical information for the periods presented (dollars in millions, except per prescription and per patient amounts, and prescriptions in thousands):

	Years Ended December 31,
	2012						Increase (Decrease)					2013						Increase (Decrease)					2014
	Amount			% of Revenues								Amount			% of Revenues								Amount			% of Revenues
Revenues	$	1,832.6			100.0	%	$	(74.7	)	(4.1	)%	$	1,757.9			100.0	%	$	136.6		7.8	%	$	1,894.5			100.0	%
Cost of goods sold		1,532.4			83.6			(101.7	)	(6.6	)		1,430.7			81.4			124.5		8.7			1,555.2			82.1
Gross profit		300.2			16.4	%	$	27.0		9.0	%		327.2			18.6	%	$	12.1		3.7	%		339.3			17.9	%
California Medicaid estimated recoupment		-			-								2.9			0.2								-			-
Adjusted gross profit	$	300.2			16.4	%						$	330.1			18.8	%						$	339.3			17.9	%

Pharmacy (in whole numbers except where indicated)
Financial data
Prescriptions dispensed (in thousands)		39,212						(1,481	)	(3.8	)%		37,731						(2,728	)	(7.2	) %		35,003
Revenue per prescription dispensed (1)	$	46.74					$	(0.07	)	-	%	$	46.67					$	7.45		16.0	%	$	54.12
Gross profit per prescription dispensed (1)	$	7.66					$	1.09		14.2	%	$	8.75					$	0.94		10.7	%	$	9.69
Gross profit margin (1)		16.4	%					2.4	%	14.6	%		18.8	%					(0.9	)	(4.8	) %		17.9	%
Generic dispensing rate		83.3	%					0.1	%	0.1	%		83.4	%					1.5		1.8	%		84.9	%

(1) Amounts in 2013 do not include the $2.9 million California Medicaid estimated recoupment.

Revenues

Revenues increased $136.6 million for the year ended December 31, 2014 compared to the year ended December 31, 2013 as a result of the inclusion of a full year of revenues from the five acquisitions of long-term care businesses in 2013 (the “2013 Acquisitions”) and the acquisition of OncoMed Specialty, LLC (“Onco”); in addition, revenues increased as a result of the acquisitions of four long-term care businesses and one infusion business (collectively, the “2014 Acquisitions”). The increases from the 2013 Acquisitions and 2014 Acquisitions were partially offset by decreases in revenues due to the loss of Kindred as a customer. Excluding the $2.9 million California Medicaid estimated recoupment recognized in the third quarter of 2013, the remaining increase of $133.7 million is comprised of a favorable rate variance of approximately $261.0 million or $7.45 increase per prescription dispensed, partially offset by an unfavorable volume variance of $127.3 million or 2,728,000 less prescriptions dispensed. The increase in revenue per prescription dispensed is due to the Onco acquisition along with brand inflation.

Revenues decreased $74.7 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 due to the decrease in prescriptions dispensed, resulting from the decrease in the number of customer licensed beds serviced. The decline was partially offset by the acquisition of Amerita Inc. ("Amerita") in the fourth quarter of 2012. Excluding the $2.9 million California Medicaid estimated recoupment recorded in the third quarter of 2013, the remaining decrease of $71.8 million is comprised of an unfavorable volume variance of approximately $69.2 million or 1,481,000 less prescriptions dispensed, along with an unfavorable rate variance of approximately $2.6 million or a $0.07 decrease per prescription dispensed.

Gross Profit

Gross profit for the year ended December 31, 2014 was $339.3 million or $9.69 per prescription dispensed compared to $330.1 million or $8.75 per prescription dispensed, excluding the $2.9 million California Medicaid estimated recoupment, for the year ended December 31, 2013. Gross profit was favorably impacted by improved purchasing flexibility under the PVA resulting in lower costs, the 2014 Acquisitions, and the Corporation’s restructuring incentives. Gross profit margin for the year ended December 31, 2014 was 17.9% compared to 18.8%, adjusted for the California Medicaid estimated recoupment, for the year ended December 31, 2013. While gross profit margin was adversely impacted by lower margins in the Corporation’s Onco oncology business, the gross profit per prescription dispensed is favorably impacted by the acquisition of Onco on December 6, 2013.

Gross profit for the year ended December 31, 2013, excluding the $2.9 million California Medicaid estimated recoupment, was $330.1 million or $8.75 per prescription dispensed compared to $300.2 million or $7.66 per prescription dispensed for the year ended December 31, 2012. Gross profit margin for the year ended December 31, 2013 was 18.8%, adjusted for the California Medicaid estimated recoupment, compared to 16.4% for the year ended December 31, 2012. Gross profit margin was positively impacted by the effects of the Corporation’s purchasing strategies.

Index

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $236.3 million for the year ended December 31, 2014 compared to $225.3 million for the year ended December 31, 2013. The increase of $11.0 million is primarily due to the 2014 Acquisitions, as well as the 2013 acquisition of Onco, along with an increase in contract labor and employee benefit costs.

Selling, general and administrative expenses were $225.3 million for the year ended December 31, 2013 compared to $214.7 million for the year ended December 31, 2012. The increase of $10.6 million is due primarily to an increase of $15.8 million in labor costs, of which $12.5 million is related to the Amerita acquisition, along with a $2.3 million increase in professional fees. These increases are partially offset by a $7.1 million decrease in contracted services and $2.7 million decrease in bad debt expense. All other costs included in selling, general and administrative expenses increased approximately $2.3 million.

Depreciation and Amortization

Depreciation expense was $20.3 million for the year ended December 31, 2014 compared to $19.3 million for the year ended December 31, 2013. The increase of $1.0 million is due primarily to depreciation expense recognized as a result of the 2014 Acquisitions.

Amortization expense was $20.1 million for the year ended December 31, 2014 compared to $15.4 million for the year ended December 31, 2013. The increase of $4.7 million of amortization expense is a result of intangible amortization related to the 2013 and 2014 Acquisitions.

Depreciation expense was $19.3 million for the year ended December 31, 2013 compared to $18.6 million for the year ended December 31, 2012. The increase of $0.7 million is due primarily to depreciation expense recognized on assets acquired with Amerita and computer hardware additions purchased in the fourth quarter 2012 related to the transition of IT services from one vendor to another.

Amortization expense was $15.4 million for the year ended December 31, 2013 compared to $12.3 million for the year ended December 31, 2012. The increase of $3.1 million is due primarily to the amortization expense recognized on intangibles acquired through the Amerita acquisition on December 13, 2012.

Settlements, Litigation and Other Related Charges

Settlements, litigation and other related charges were $37.3 million for the year ended December 31, 2014 compared to $19.6 million for the year ended December 31, 2013. These costs relate to the Corporation being the subject of certain investigations and defenses in a number of cases for which the outcome of the litigation is uncertain, which is described more fully in Note 6.

Settlements, litigation and other related charges were $19.6 million for the year ended December 31, 2013 compared to $2.1 million for the year ended December 31, 2012. The costs in 2012 were previously classified under merger, acquisition costs and other charges in the Corporation’s consolidated income statements.

Restructuring and Impairment Charges

Restructuring and impairment charges were $3.3 million for the year ended December 31, 2014 compared to $4.4 million for the year ended December 31, 2013. The decrease of $1.1 million is due to a decrease in costs associated with the Corporation’s restructuring plan as a result of the loss of two of the Corporation’s significant customers effective December 31, 2013. These costs are expected to continue to decline in 2015.

Restructuring and impairment charges were $4.4 million for the year ended December 31, 2013. There were no similar expenses in the comparable period of the prior year.

Merger, Acquisition, Integration Costs and Other Charges

Merger, acquisition, integration costs and other charges were $13.6 million, $8.1 million and $17.8 million for the years ended December 31, 2014, 2013 and 2012, respectively.

The component of these charges related to integrating acquisitions into our business for the years ended December 31, 2014, 2013, and 2012 were $0.3 million, $3.7 million, and $7.1 million, respectively. The component of these charges related to acquiring new businesses for the years ended December 31, 2014, 2013, and 2012 were $13.3 million, $4.4 million, and $10.7 million, respectively.

Index

Hurricane Sandy disaster costs

In October 2012, Hurricane Sandy caused significant damage on Long Island, New York and surrounding areas. The financial impacts of the storm to the Corporation’s Long Beach facility as well as damage and disruption at our customer’s facilities included lower revenue estimated at $8.6 million due to the inability to operate at full capacity during the recovery period. Hurricane Sandy disasters costs were $(1.7) million, $(1.4) million, and $4.5 million for the years ended December 31, 2014, 2013, and 2012, respectively.

The Corporation expects a portion of the cost associated with Hurricane Sandy to be covered by insurance. While the exact amount has not been determined, the Corporation’s current estimate of covered losses, net of its deductible, is approximately $7.3 million. After consideration of a $7.2 million advance by the insurance carrier, the Corporation has recorded a receivable for $0.1 million which is included in prepaids and other assets in the consolidated balance sheet. The actual recovery will vary depending on the outcome of the insurance loss adjustment process. Accordingly, no offsetting benefit for insurance recoveries above the amount of the cumulative loss has been recorded. Additionally, the Corporation allocated $1.4 million of certain operating costs and $1.0 million in bad debt expense and contractual revenue adjustments in 2012, associated with lost business and customers to Hurricane Sandy disaster costs in the consolidated income statements.

Interest Expense

Interest expense was $9.9 million for the year ended December 31, 2014 compared to $10.6 million for the year ended December 31, 2013. The decrease was primarily due to lower interest rates on the term loan and lower amortization of deferred financing costs, both associated with the new Credit Agreement executed in the third quarter of 2014. These decreases are partially offset by larger borrowings on the revolving credit facility in 2014. Long-term debt, including the current portion, was $351.3 million and $231.3 million as of December 31, 2014 and December 31, 2013, respectively.

Interest expense was $10.6 million for the year ended December 31, 2013 compared to $10.0 million for the year ended December 31, 2012. The increase was primarily due to a higher amortization of deferred financing costs, partially offset by lower interest rates on long-term debt and lower debt levels. Long-term debt, including the current portion, was $231.3 million and $315.5 million as of December 31, 2013 and December 31, 2012, respectively.

Debt Extinguishment

As a result of the Prior Credit Agreement, the Corporation recorded a loss on debt extinguishment of $4.3 million in the Consolidated Income Statements for the year ended December 31, 2014. The loss recorded consisted primarily of deferred financing fees associated with the Prior Credit Agreement.

Tax Provision

The effective tax rate for the year ended December 31, 2014 was 58.0%, which was comprised of the 35.0% federal rate, 4.0% for the state rate, and 19.0% for other permanent differences. The rate for the year ended December 31, 2014 was unfavorably impacted by the Corporation’s accrued legal settlements discussed in Note 6. For purposes of the tax provision for the year ended December 31, 2014, the Corporation has made an assumption in the absence of more definitive information that $31.5 million of the legal accrual of $45.5 million is permanently non-deductible while $14 million will likely be deductible when the lawsuits are settled. Of the $31.5 million permanently non-deductible accrual, $17 million was accrued in 2013 and $14.5 million was accrued in 2014. Accordingly, this resulted in an increase in the twelve month tax provision of approximately $5.1 million, or approximately 31.5% of pre-tax income. Ultimate amounts may differ from the estimate. The effective tax rate was favorably impacted by the Domestic Production Activities Deduction of 10.4% and federal research and development credits of 5.6%. Excluding the impact of the legal settlement accruals and other discrete items, the 2014 provision for income taxes as a percentage of pre-tax income would have been 36.5%, comprised of 35.0% federal rate, 3.1% for the state rate and (1.6%) for permanent differences. When compared to the adjusted rate for 2013 of 37.0%, as described below, the 0.5% decrease is primarily attributable to a decrease in the state rate combined with increased favorable impacts from the research and development credits and the Domestic Production Activities Deduction.

The effective tax rate for the year ended December 31, 2013 was 58.2%, which was comprised of the 35.0% federal rate, 4.3% for the state rate, and 18.9% for other permanent differences. The rate for the year ended December 31, 2013 was unfavorably impacted by the Corporation’s accrued legal settlement with the Department of Justice and an increase in the valuation allowance primarily related to the deferred tax asset for state net operating losses. Exclusive of these adjustments, the effective rate for the period ended December 31, 2013 would have been 37.0%, comprised of 35.0% federal rate, 4.3% for the state rate and (2.3)% for permanent differences.

Index

Liquidity and Capital Resources

The primary sources of liquidity for the Corporation are cash flows from operations and the availability under the Credit Agreement. Historically, the Corporation has used substantially all of its’ available cash to make acquisitions. Based upon our existing cash levels, expected operating cash flows, capital spending, potential future acquisitions, and the availability of funds under our revolving credit facility, we believe that we have the necessary financial resources to satisfy our expected short-term and long-term liquidity needs.

Cash Flows—The following table presents selected data from our consolidated statements of cash flows for the periods presented (dollars in millions):

	Years Ended December 31,
	2012			2013			2014

Net cash provided by operating activities	$	85.7		$	155.7		$	48.4
Net cash used in investing activities		(105.3	)		(53.7	)		(157.0	)
Net cash provided by (used in) financing activities		14.5			(90.1	)		117.7
Net increase (decrease) in cash and cash equivalents		(5.1	)		11.9			9.1
Cash and cash equivalents at beginning of year		17.4			12.3			24.2
Cash and cash equivalents at end of year	$	12.3		$	24.2		$	33.3

Operating Activities – Cash provided by operating activities aggregated $48.4 million for the year ended December 31, 2014 compared to $155.7 million for the year ended December 31, 2013. The decrease in cash provided by operating activities is due to an increase in inventory purchasing reflecting the Corporation’s purchasing strategies, an increase in accumulated rebates receivable as a result of the ABDC dispute, as discussed in Note 6, along with an increase in cash used in payment of accounts payable.

Cash provided by operating activities aggregated $155.7 million for the year ended December 31, 2013 compared to $85.7 million for the year ended December 31, 2012. The increase in cash provided by operating activities is due to an overall improvement in working capital, primarily enhanced inventory management.

Investing Activities – Cash used in investing activities aggregated $157.0 million for the year ended December 31, 2014 compared to $53.7 million for the year ended December 31, 2013. The increase in cash used in investing activities is primarily due to the five businesses the Corporation acquired in 2014, partially offset by a decrease in capital expenditures.

Cash used in investing activities aggregated $53.7 million for the year ended December 31, 2013 compared to $105.3 million for the year ended December 31, 2012. The decrease in cash used in investing activities is due to the decrease of cash used for acquisitions partially offset by an increase in capital expenditures.

Financing Activities – Cash provided by financing activities aggregated $117.7 million for the year ended December 31, 2014 compared to cash used in financing activities of $90.1 million for the year ended December 31, 2013. The increase in cash provided by financing activities is due primarily to borrowings on the revolving credit facility the Corporation used to complete business acquisitions in 2014.

Cash used in financing activities aggregated $90.1 million for the year ended December 31, 2013 compared to cash provided by financing activities of $14.5 million for the year ended December 31, 2012. The increase in cash used in financing activities is due to the increase in term loan debt and revolving credit facility repayments during 2013 along with an increase in treasury stock repurchases. The Corporation had no amounts outstanding on its revolving credit facility at December 31, 2013.

Index

Credit Agreement

On September 17, 2014, the Corporation entered into a credit agreement with Bank of America, N.A. as administrative agent (the “Credit Agreement”). The Credit Agreement replaced the $450.0 million five-year credit agreement dated as of May 2, 2011, among the Corporation, Citibank, N.A., as Administrative Agent, and certain lenders. The Credit Agreement consists of a $225.0 million term loan facility and a $310.0 million revolving credit facility. The terms and conditions of the Credit Agreement are customary to facilities of this nature. Unless terminated earlier, the Credit Agreement will mature on September 17, 2019, and the principal amount outstanding thereunder, together with all accrued unpaid interest and other amounts owed thereunder, if any, will be payable in full on such date.

The Credit Agreement requires quarterly term loan principal payments in an amount of $2.8 million beginning September 2015 through September 2019. The final principal repayment of the term loan shall be repaid on the term maturity date, September 17, 2019. In addition, the term loan is subject to certain prepayment obligations relating to certain asset sales, certain casualty losses and the incurrence of certain indebtedness.

The Corporation had a total of $225.0 million of term debt outstanding under the Credit Agreement and $125.0 million outstanding under the revolving portion of the Credit Agreement as of December 31, 2014. The Credit Agreement provides for the issuance of letters of credit which, when issued, constitute usage and reduce availability on the revolving portion of the Credit Agreement. The amount of letters of credit outstanding as of December 31, 2014 was $2.5 million. After giving effect to the letters of credit and amounts outstanding under the revolving credit agreement, total availability under the revolving credit facility was $182.5 million as of December 31, 2014.

The Credit Agreement also contains financial covenants that require us to satisfy certain financial tests and maintain certain financial ratios, including a maximum of debt to EBITDA ratio. The Corporation was compliant with all debt covenant requirements at December 31, 2014.

The obligations under the Credit Agreement are guaranteed by certain domestic subsidiaries of the Corporation and secured by liens on substantially all of the Corporation's assets.

Drug Wholesaler Agreements

On January 25, 2013 the Corporation renegotiated its Amended PVA with ABDC effective January 1, 2013. The Amended PVA modified the previous agreement, which was set to expire September 30, 2013 and extended its term until September 30, 2016.

The Amended PVA requires the Corporation to purchase certain levels of brand and non-injectable generic drugs from ABDC. The Amended PVA does provide the flexibility for the Corporation to contract with other suppliers. If the Corporation fails to adhere to the contractual purchase provisions, ABDC has the ability to increase the Corporation's drug pricing under the terms of the Amended PVA.

The Corporation and ABDC are parties to certain legal proceedings with respect to the Amended PVA as further described in Note 6.

On March 2, 2015, the Corporation provided ABDC with a notice of termination of the Amended PVA effective April 1, 2015. We have entered into a new Prime Vendor Agreement with Cardinal Health effective April 1, 2015. See Item 9B below.

The Corporation also obtains pharmaceutical and other products from contracts negotiated directly with pharmaceutical manufacturers for discounted prices. While the loss of a supplier could adversely affect our business if alternate sources of supply are unavailable, numerous sources of supply are generally available to us and we have not experienced any difficulty in obtaining pharmaceuticals or other products and supplies to conduct our business.

The Corporation seeks to maintain an on-site inventory of pharmaceuticals and supplies to ensure prompt delivery to our customers. ABDC maintains local distribution facilities in most major geographic markets in which we operate.

Index

Treasury Stock

In August 2010, the Board of Directors authorized a share repurchase of up to $25.0 million of the Corporation’s common stock, of which $10.5 million was used. On July 2, 2012, the Board of Directors authorized an increase to the remaining portion of the existing stock repurchase program that allows the Corporation to again repurchase up to a maximum of $25.0 million of the Corporation’s common stock. Approximately $19.7 million remained available under the program as of December 31, 2014. Share repurchases under this authorization may be made in the open market through unsolicited or solicited privately negotiated transactions, or in such other appropriate manner, and may be funded from available cash and the revolving credit facility. The amount and timing of the repurchases, if any, would be determined by the Corporation’s management and would depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions. Common stock acquired through the stock repurchase program would be held as treasury shares and may be used for general corporate purposes, including reissuances in connection with acquisitions, employee stock option exercises or other employee stock plans. The share repurchase program does not have an expiration date and may be limited, terminated or extended at any time without prior notice. The Corporation purchased no shares under the program during the year ended December 31, 2014.

The Corporation may redeem shares from employees upon the vesting of the Corporation’s stock awards for minimum statutory tax withholding purposes and to cover option exercise costs. The Corporation redeemed 200,334 shares of certain vested awards and the exercise of certain stock options for an aggregate price of approximately $5.1 million during the year ended December 31, 2014. These shares have also been designated by the Corporation as treasury stock.

As of December 31, 2014, the Corporation had a total of 2,617,305 shares held as treasury stock.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, other than purchase commitments and lease obligations. See “Contractual Obligations” below.

Contractual Obligations

The Corporation is obligated to make future payments under various contracts such as long-term purchase obligations, debt agreements, and lease agreements, and has certain commitments. The Corporation has grouped these contractual obligations and off-balance sheet arrangements into operating activities, financing activities, and investing activities in the same manner as they are classified in the Consolidated Statements of Cash Flows in order to provide a better understanding of the nature of the obligations and arrangements and to provide a basis for comparison to historical information.

The table below provides a summary of contractual obligations and off-balance sheet arrangements as of December 31, 2014 (dollars in millions):

	2015		2016		2017		2018		2019		Thereafter
Operating activities:
Amended Prime Vendor Agreement (1)	$	-	$	-	$	-	$	-	$	-	$	-
Non-cancelable operating leases		15.5		11.9		7.7		5.8		5.8		1.5
Financing activities:
Debt payments		5.6		11.3		11.3		11.3		310.5		-
Interest payments (2)		6.1		4.7		4.5		4.2		3.0		-
Totals	$	27.2	$	27.9	$	23.5	$	21.3	$	319.3	$	1.5

(1)

Under the First Amendment to the Amended PVA the Corporation is required to purchase a certain percentage of its drug purchases through ABDC through September 30, 2016. On March 2, 2015, the Corporation provided ABDC with a notice of termination of the Amended PVA effective April 1, 2015. We have entered into a new Prime Vendor Agreement with Cardinal Health effective April 1, 2015. See Item 9B below.

(2)	Estimated interest amounts do not include interest on the revolving credit facility, as the timing and amounts are uncertain.

Index

Supplemental Quarterly Information

The following tables represent the results of the Corporation’s quarterly operations for the years ended December 31, 2013 and 2014 (in millions, except where indicated):

	2013 Quarters												2014 Quarters
	First			Second			Third			Fourth			First			Second			Third			Fourth
Revenues	$	439.8		$	430.8		$	436.8		$	450.5		$	452.2		$	448.6		$	470.2		$	523.5
Cost of goods sold		355.5			348.2			357.6			369.4			372.2			366.7			387.2			429.1
Gross profit		84.3			82.6			79.2			81.1			80.0			81.9			83.0			94.4
Selling, general and administrative		56.7			55.5			55.5			57.6			57.2			57.9			56.0			65.2
Amortization expense		4.1			3.9			3.7			3.7			4.4			4.3			4.9			6.5
Merger, acquisition, integration costs, and other charges		2.8			2.7			1.1			1.5			5.0			1.5			3.8			3.3
Settlement, litigation and other related charges		0.1			0.1			17.2			2.2			1.2			26.6			1.1			8.4
Restructuring and impairment charges		-			-			1.0			3.4			1.9			1.2			0.1			0.1
Hurricane Sandy disaster costs		0.6			(0.9	)		0.1			(1.2	)		-			0.1			-			(1.8	)
Operating income (loss)		20.0			21.3			0.6			13.9			10.3			(9.7	)		17.1			12.7
Interest expense, net		2.6			2.9			2.6			2.5			2.5			2.3			2.1			3.0
Loss on debt extinguishment		-			-			-			-			-			-			4.3			-
Income (loss) before income taxes		17.4			18.4			(2.0	)		11.4			7.8			(12.0	)		10.7			9.7
Provision (benefit) for income taxes		6.9			8.2			4.2			7.0			3.0			(2.3	)		2.2			6.5
Net income (loss)	$	10.5		$	10.2		$	(6.2	)	$	4.4		$	4.8		$	(9.7	)	$	8.5		$	3.2

Earnings (loss) per share (1):
Basic	$	0.36		$	0.34		$	(0.21	)	$	0.15		$	0.16		$	(0.32	)	$	0.28		$	0.11
Diluted	$	0.35		$	0.34		$	(0.21	)	$	0.15		$	0.16		$	(0.32	)	$	0.28		$	0.10

Adjusted diluted earnings per diluted share (1)(2):	$	0.46		$	0.44		$	0.49		$	0.44		$	0.37		$	0.40		$	0.45		$	0.45

Shares used in computing earnings (loss) per share:
Basic		29.6			29.7			29.7			29.5			29.8			30.0			30.1			30.1
Diluted		30.1			30.1			29.7			30.2			30.4			30.0			30.6			30.7

Balance sheet data:
Cash and cash equivalents	$	7.8		$	12.3		$	52.4		$	24.2		$	12.7		$	11.1		$	7.1		$	33.3
Working capital (3)	$	291.9		$	291.8		$	281.8		$	259.6		$	273.4		$	310.3		$	335.1		$	321.5
Goodwill (3)	$	269.4		$	269.4		$	269.4		$	282.8		$	282.7		$	286.9		$	319.5		$	317.7
Intangible assets, net	$	120.1		$	116.3		$	114.4		$	136.3		$	131.9		$	130.4		$	184.1		$	177.6
Total assets (3)	$	840.9		$	850.3		$	845.1		$	900.8		$	868.6		$	922.5		$	1,045.5		$	1,068.1
Long-term debt	$	271.7		$	257.1		$	234.4		$	231.3		$	230.9		$	268.9		$	360.9		$	351.3
Total stockholders' equity	$	453.6		$	465.4		$	456.7		$	462.5		$	470.0		$	462.2		$	472.7		$	478.1

Supplemental information:
Adjusted EBITDA(2)	$	34.6		$	33.7		$	33.9		$	30.6		$	29.7		$	30.6		$	33.0		$	37.3
Adjusted EBITDA Margin (2)		7.9	%		7.8	%		7.7	%		6.8	%		6.6	%		6.8	%		7.0	%		7.1	%
Adjusted EBITDA per prescription dispensed (2)	$	3.56		$	3.58		$	3.64		$	3.30		$	3.45		$	3.64		$	3.89		$	3.93
Net cash provided by (used in) operating activities	$	47.5		$	26.4		$	78.1		$	3.7		$	4.4		$	(26.5	)	$	19.7		$	50.8
Net cash used in investing activities	$	(7.2	)	$	(7.2	)	$	(11.0	)	$	(28.3	)	$	(16.3	)	$	(13.6	)	$	(113.4	)	$	(13.7	)
Net cash (used in) provided by financing activities	$	(44.8	)	$	(14.7	)	$	(27.0	)	$	(3.6	)	$	0.4		$	38.5		$	89.7		$	(10.9	)

Statistical information (in whole numbers except where indicated)
Volume information
Prescriptions dispensed (in thousands)		9,711			9,420			9,320			9,280			8,608			8,411			8,492			9,491
Revenue per prescription dispensed (4)	$	45.29		$	45.73		$	47.18		$	48.87		$	52.53		$	53.33		$	55.37		$	55.16
Gross profit per prescription dispensed (4)	$	8.68		$	8.77		$	8.81		$	9.06		$	9.29		$	9.74		$	9.77		$	9.95
Gross profit margin (4)		19.2	%		19.2	%		18.7	%		18.5	%		17.7	%		18.3	%		17.7	%		18.0	%
Generic drug dispensing rate		83.3	%		83.3	%		83.3	%		83.7	%		84.5	%		85.0	%		85.1	%		84.9	%
Inventory days on hand		25.4			29.6			18.1			26.2			26.0			35.1			31.7			29.1
Revenue days outstanding		41.6			41.6			39.8			39.0			37.7			37.0			36.7			34.9

(1) The Corporation has never declared a cash dividend. Earnings per common share are in actual cents.

(2) See “Use of Non-GAAP Measures For Measuring Quarterly Results” for a definition and Reconciliation of Adjusted Earnings Per Diluted Common Share to Earnings Per Diluted Common Share, and for Reconciliation of Net Income to Adjusted EBITDA and Adjusted EBITDA Margin.

(3) As adjusted, see Note 2—Acquisitions in the Consolidated Financial Statements.

(4) The third quarter 2013 amounts do not include the $2.9 million California Medicaid estimated recoupment.

Index

Use of Non-GAAP Measures for Measuring Quarterly Results

The Corporation calculates Adjusted EBITDA as provided in the reconciliation below and calculates Adjusted EBITDA Margin by taking Adjusted EBITDA and dividing it by revenues adjusted for the contractual amount associated with the California Medicaid estimated recoupment. The Corporation calculates and uses Adjusted EBITDA as an indicator of its ability to generate cash from reported operating results. The measurement is used in concert with net income and cash flows from operating activities, which measure actual cash generated in the period. In addition, the Corporation believes that Adjusted EBITDA and Adjusted EBITDA Margin are supplemental measurement tools used by analysts and investors to help evaluate overall operating performance and the ability to incur and service debt and make capital expenditures. In addition, Adjusted EBITDA, as defined in the Credit Agreement, is used in conjunction with the Corporation’s debt leverage ratio and this calculation sets the applicable margin for the quarterly interest charge. Adjusted EBITDA, as defined in the Credit Agreement, is not the same calculation as this Adjusted EBITDA table. Adjusted EBITDA presented herein does not represent funds available for the Corporation’s discretionary use and is not intended to represent or to be used as a substitute for net income or cash flows from operating activities data as measured under U.S. GAAP. The items excluded from Adjusted EBITDA but included in the calculation of the Corporation’s reported net income and cash flows from operating activities are significant components of the accompanying consolidated operating income statements and cash flows, and must be considered in performing a comprehensive assessment of overall financial performance. The Corporation’s calculation of Adjusted EBITDA may not be consistent with calculations of EBITDA used by other companies. The following are reconciliations of Adjusted EBITDA to the Corporation’s net income (loss) and net operating cash flows for the periods presented.

The Corporation calculates and uses adjusted diluted earnings per share, which is exclusive of the impact of merger, acquisition, integration costs and other charges, settlement, litigation costs and other charges, Hurricane Sandy disaster costs, restructuring and impairment charges, California Medicaid estimated recoupment, stock-based compensation and deferred compensation, loss on debt extinguishment, and impact of discrete items on tax provision (“the Excluded Items”) as an indicator of its core operating results. The measurement is used in concert with net income and diluted earnings per share, which measure actual earnings per share generated in the period. The Corporation believes the exclusion of these charges in expressing earnings per share provides management with a useful measure to assess period to period comparability and is useful to investors in evaluating the Corporation’s operating results from period to period. Adjusted diluted earnings per share after giving effect to the Excluded Items does not represent the amount that effectively accrues directly to stockholders (i.e., such costs are a reduction in earnings and stockholders’ equity) and is not intended to represent or to be used as a substitute for diluted earnings per share as measured under U.S. GAAP. The Excluded Items are significant components of the accompanying consolidated statements of operations and must be considered in performing a comprehensive assessment of overall financial performance. The following is a reconciliation of adjusted diluted earnings per share to the Corporation’s U.S. GAAP earnings (loss) per diluted common share for the periods presented.

Index

Unaudited Reconciliation of Net Income (Loss) to Adjusted EBITDA

	2013 Quarters												2014 Quarters
	First			Second			Third			Fourth			First			Second			Third			Fourth
Net income (loss)	$	10.5		$	10.2		$	(6.2	)	$	4.4		$	4.8		$	(9.7	)	$	8.5		$	3.2
Add:
Interest expense, net		2.6			2.9			2.6			2.5			2.5			2.3			2.1			3.0
Merger, acquisition, integration costs and other charges		2.8			2.7			1.1			1.5			5.0			1.5			3.1			3.3
Settlement, litigation and other related charges		0.1			0.1			17.2			2.2			1.2			26.6			1.1			8.4
California Medicaid estimated recoupment		-			-			2.9			-			-			-			-			-
Restructuring and impairment charges		-			-			1.0			3.4			1.9			1.2			0.1			0.1
Loss on extinguishment of debt		-			-			-			-			-			-			4.3			-
Hurricane Sandy disaster costs		0.6			(0.9	)		0.1			(1.2	)		-			0.1			-			(1.8	)
Stock-based compensation and deferred compensation		2.2			1.8			2.4			2.3			2.1			1.8			1.8			2.3
Provision for income taxes		6.9			8.2			4.2			7.0			3.0			(2.3	)		2.2			6.5
Depreciation and amortization expense		8.9			8.7			8.6			8.5			9.2			9.1			9.8			12.3
Adjusted EBITDA	$	34.6		$	33.7		$	33.9		$	30.6		$	29.7		$	30.6		$	33.0		$	37.3
Adjusted EBITDA Margin		7.9	%		7.8	%		7.7	%		6.8	%		6.6	%		6.8	%		7.0	%		7.1	%

Unaudited Reconciliation of Adjusted EBITDA to Net Operating Cash Flows

	2013 Quarters												2014 Quarters
	First			Second			Third			Fourth			First			Second			Third			Fourth
Adjusted EBITDA	$	34.6		$	33.7		$	33.9		$	30.6		$	29.7		$	30.6		$	33.0		$	37.3
Interest expense, net		(2.6	)		(2.9	)		(2.6	)		(2.5	)		(2.5	)		(2.3	)		(2.1	)		(3.0	)
Merger, acquisition, integration costs and other charges		(2.9	)		(2.8	)		(1.3	)		(5.8	)		(5.6	)		(29.4	)		(4.3	)		(11.8	)
Provision for bad debt		5.3			5.2			5.2			6.8			5.6			5.7			5.3			6.6
Amortization of deferred financing fees		0.3			0.7			0.6			0.7			0.7			0.6			0.5			0.1
Loss (gain) on disposition of equipment		-			(0.1	)		0.4			0.3			(0.1	)		-			-			-
Gain on acquisition		-			-			-			(1.3	)		(0.3	)		-			0.1			-
Provision for income taxes		(6.9	)		(8.2	)		(4.2	)		(7.0	)		(3.0	)		2.3			(2.2	)		(6.5	)
Deferred income taxes		3.6			(0.7	)		3.5			5.6			4.0			(3.3	)		(4.0	)		1.0
Changes in federal and state income tax payable		2.9			3.2			(4.8	)		(1.3	)		(1.3	)		(2.8	)		3.7			7.6
Excess tax benefit from stock-based compensation		(0.2	)		(0.2	)		-			-			(2.7	)		(0.5	)		(0.2	)		-
Changes in assets and liabilities		13.3			(1.7	)		47.6			(22.2	)		(20.2	)		(27.4	)		(10.1	)		19.1
Other		0.1			0.2			(0.2	)		(0.2	)		0.1			-			-			0.4
Net Cash Flows Provided by (Used in) Operating Activities	$	47.5		$	26.4		$	78.1		$	3.7		$	4.4		$	(26.5	)	$	19.7		$	50.8

Unaudited Reconciliation of Diluted Earnings (Loss) Per Share to Adjusted Diluted Earnings Per Share

	2013 Quarters											2014 Quarters
	First		Second			Third			Fourth			First		Second			Third			Fourth

Diluted earnings (loss) per share	$	0.35	$	0.34		$	(0.21	)	$	0.15		$	0.16	$	(0.32	)	$	0.28		$	0.10
Add:
Diluted earnings per share impact of:
Merger, acquisition, integration costs and other charges		0.06		0.06			0.03			0.03			0.10		0.03			0.06			0.08
Settlement, litigation and other related charges		-		-			0.56			0.05			0.03		0.61			0.02			0.11
California Medicaid estimated recoupment		-		-			0.07			-			-		-			-			-
Restructuring and impairment charges		-		-			0.03			0.08			0.04		0.03			-			-
Loss on extinguishment of debt		-		-			-			-			-		-			0.09			-
Hurricane Sandy disaster costs		0.01		(0.02	)		-			(0.03	)		-		-			-			(0.04	)
Stock-based compensation and deferred compensation		0.04		0.03			0.06			0.05			0.04		0.04			0.04			0.05
Impact of discrete items on tax provision		-		0.03			(0.05	)		0.11			-		0.01			(0.04	)		0.15
Adjusted diluted earnings per share	$	0.46	$	0.44		$	0.49		$	0.44		$	0.37	$	0.40		$	0.45		$	0.45

Index

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

On September 17, 2014, the Corporation entered into the Credit Agreement. The Credit Agreement consists of a $225.0 million term loan facility and a $310.0 million revolving credit facility. Borrowings under the Credit Agreement bear interest at a floating rate equal to, at the Corporation's option, a base rate plus a margin between 0.50% and 1.25% per annum, or a Eurodollar Rate plus a margin between 1.50% and 2.25% per annum, in each case depending on the leverage ratio of the Corporation as defined by the Credit Agreement. The base rate is the greater of the prime lending rate in effect on such day, the federal funds effective rate plus 0.5%, and the Eurodollar Rate plus 1.0%. As of December 31, 2014, borrowings under the term loan bore interest at a rate of 2.2% per annum based upon the one month adjusted LIBO rate plus margin, and the revolving credit facility bore interest at a rate of 2.1% per annum based upon the LIBO rate plus applicable margin.

Based upon the amount of variable rate debt outstanding as of December 31, 2014, a 100 basis point change in interest rates would affect the Corporation's future pre-tax earnings by approximately $3.5 million on an annual basis. The estimated change to the Corporation's interest expense is determined by considering the impact of hypothetical interest rates on the Corporation's borrowing cost and debt balances. These analyses do not consider the effects, if any, of the potential changes in the Corporation's credit ratings or leverage and the overall level of economic activity of the Corporation. Further, in the event of a change of significant magnitude, the Corporation's management would expect to take actions intended to further mitigate its exposure to such change.

Index

Item 8.

Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm	F-2
Consolidated Income Statements for the years ended December 31, 2012, 2013 and 2014	F-3
Consolidated Balance Sheets as of December 31, 2013 and 2014	F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2013 and 2014	F-5
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2012, 2013 and 2014	F-6
Notes to Consolidated Financial Statements for the years ended December 31, 2012, 2013 and 2014	F-7

F-1

Index

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

PharMerica Corporation:

We have audited the accompanying consolidated balance sheets of PharMerica Corporation and subsidiaries (the Corporation) as of December 31, 2013 and 2014, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014. We also have audited the Corporation’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Corporation’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PharMerica Corporation and subsidiaries as of December 31, 2013 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, PharMerica Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

As described in Management’s Annual Report on Internal Control over Financial Reporting under Item 9A, management has excluded the 2014 Acquisitions from its assessment of internal control over financial reporting as of December 31, 2014 because they were acquired by the Corporation in 2014. We have also excluded the 2014 Acquisitions from our audit of internal control over financial reporting. The total assets and total revenues of the 2014 Acquisitions represent approximately 3.8% and 3.6%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2014.

/s/ KPMG LLP

Louisville, Kentucky

March 2, 2015

F-2

Index

PHARMERICA CORPORATION

CONSOLIDATED INCOME STATEMENTS

For the Years Ended December 31, 2012, 2013 and 2014

(In millions, except share and per share amounts)

	2012		2013			2014
Revenues	$	1,832.6	$	1,757.9		$	1,894.5
Cost of goods sold		1,532.4		1,430.7			1,555.2
Gross profit		300.2		327.2			339.3
Selling, general and administrative expenses		214.7		225.3			236.3
Amortization expense		12.3		15.4			20.1
Merger, acquisition, integration costs and other charges		17.8		8.1			13.6
Settlement, litigation and other related charges		2.1		19.6			37.3
Restructuring and impairment charges		-		4.4			3.3
Hurricane Sandy disaster costs		4.5		(1.4	)		(1.7	)
Operating income		48.8		55.8			30.4
Interest expense, net		10.0		10.6			9.9
Loss on extinguishment of debt		-		-			4.3
Income before income taxes		38.8		45.2			16.2
Provision for income taxes		15.9		26.3			9.4
Net income	$	22.9	$	18.9		$	6.8

Earnings per common share:
Basic	$	0.78	$	0.64		$	0.23
Diluted	$	0.77	$	0.63		$	0.22

Shares used in computing earnings per common share:
Basic		29,471,734		29,601,199			29,983,428
Diluted		29,901,896		30,075,699			30,649,131

See accompanying Notes to Consolidated Financial Statements

F-3

Index

PHARMERICA CORPORATION

CONSOLIDATED BALANCE SHEETS

As of December 31, 2013 and 2014

(In millions, except share and per share amounts)

	(As Adjusted)
	December 31,			December 31,
	2013			2014

ASSETS
Current assets:
Cash and cash equivalents	$	24.2		$	33.3
Accounts receivable, net		198.6			195.7
Inventory		110.2			135.7
Deferred tax assets, net		36.9			42.2
Income taxes receivable		1.9			-
Prepaids and other assets (See Note 6)		38.8			90.4
		410.6			497.3

Equipment and leasehold improvements		179.4			196.4
Accumulated depreciation		(117.6	)		(125.0	)
		61.8			71.4

Goodwill		282.8			317.7
Intangible assets, net		136.3			177.6
Other		9.3			4.1
	$	900.8		$	1,068.1
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	78.8		$	95.5
Salaries, wages and other compensation		38.7			35.1
Current portion of long-term debt		12.5			6.4
Income taxes payable		-			2.3
Other accrued liabilities		21.0			36.5
		151.0			175.8

Long-term debt		218.8			344.9
Other long-term liabilities		49.8			57.7
Deferred tax liabilities		18.7			11.6
Commitments and contingencies (See Note 6)
Stockholders' equity:
Preferred stock, $0.01 par value per share; 1,000,000 shares authorized and no shares issued, December 31, 2013 and 2014		-			-
Common stock, $0.01 par value per share; 175,000,000 shares authorized;31,954,264 and 32,725,786 shares issued as of December 31, 2013 and 2014, respectively		0.3			0.3
Capital in excess of par value		380.2			394.1
Retained earnings		110.2			117.0
Treasury stock at cost, 2,416,971 and 2,617,305 shares at December 31, 2013 and December 31, 2014, respectively		(28.2	)		(33.3	)
		462.5			478.1
	$	900.8		$	1,068.1

See accompanying Notes to Consolidated Financial Statements

F-4

Index

PHARMERICA CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2012, 2013 and 2014

(In millions)

	2012			2013			2014
Cash flows provided by (used in) operating activities:
Net income	$	22.9		$	18.9		$	6.8
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		18.6			19.3			20.3
Amortization		12.3			15.4			20.1
Impairment charge		-			0.1			-
Merger, acquisition, integration costs and other charges		1.3			-			2.5
Hurricane Sandy disaster costs		1.5			0.2			(1.8	)
Stock-based compensation and deferred compensation		7.1			8.7			8.0
Amortization of deferred financing fees		1.0			2.3			1.9
Deferred income taxes		2.8			12.0			(2.3	)
Loss on disposition of equipment		0.1			0.6			-
Gain on acquisition/disposition		-			(1.3	)		(0.2	)
Loss on debt extinguishment		-			-			4.3
Other		0.2			(0.1	)		0.4
Change in operating assets and liabilities:
Accounts receivable, net		35.8			16.5			29.1
Inventory		(4.7	)		32.7			(18.8	)
Prepaids and other assets		(1.3	)		(1.4	)		(49.2	)
Accounts payable		(9.3	)		17.1			(2.9	)
Salaries, wages and other compensation		(3.4	)		(4.2	)		(4.9	)
Other accrued and long-term liabilities		(0.3	)		19.3			31.3
Change in income taxes payable (receivable)		1.1			-			7.2
Excess tax benefit from stock-based compensation		-			(0.4	)		(3.4	)
Net cash provided by operating activities		85.7			155.7			48.4

Cash flows provided by (used in) investing activities:
Purchase of equipment and leasehold improvements		(20.8	)		(27.3	)		(25.6	)
Acquisitions, net of cash acquired		(84.8	)		(26.5	)		(133.7	)
Cash proceeds from the sale of assets		0.3			0.1			0.1
Cash proceeds from dispositions, including insurance		-			-			2.2
Net cash used in investing activities		(105.3	)		(53.7	)		(157.0	)

Cash flows provided by (used in) financing activities:
Repayments of long-term debt		(6.3	)		(12.5	)		(231.3	)
Proceeds from long-term debt		-			-			225.0
Net activity of long-term revolving credit facility		21.7			(71.7	)		125.0
Payment of debt issuance costs		-			-			(2.7	)
Repayments of capital lease obligations		(0.1	)		-			-
Issuance of common stock		0.4			9.9			3.4
Treasury stock at cost		(1.2	)		(16.2	)		(5.1	)
Excess tax benefit from stock-based compensation		-			0.4			3.4
Net cash provided by (used in) financing activities		14.5			(90.1	)		117.7

Change in cash and cash equivalents		(5.1	)		11.9			9.1
Cash and cash equivalents at beginning of year		17.4			12.3			24.2

Cash and cash equivalents at end of year	$	12.3		$	24.2		$	33.3

Supplemental information:
Cash paid for interest	$	9.3		$	8.4		$	7.8
Cash paid for taxes	$	12.6		$	18.1		$	5.3

See accompanying Notes to Consolidated Financial Statements

F-5

Index

PHARMERICA CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2012, 2013 and 2014

(In millions, except share amounts)

						Capital in
	Common Stock					Excess of		Retained		Treasury
	Shares			Amount		Par Value		Earnings		Stock			Total
Balance at December 31, 2011		29,443,872		$	0.3	$	355.9	$	68.4	$	(10.8	)	$	413.8
Net income									22.9					22.9
Exercise of stock options and tax components of stock-based awards, net		40,468			-		0.4		-		-			0.4
Vested restricted stock units		109,280			-		-		-		-			-
Treasury stock at cost		(106,165	)		-		-		-		(1.2	)		(1.2	)
Stock-based compensation -non-vested restricted stock		-			-		5.1		-		-			5.1
Stock-based compensation -stock options		-			-		1.6		-		-			1.6
Balance at December 31, 2012		29,487,455		$	0.3	$	363.0	$	91.3	$	(12.0	)	$	442.6
Net income									18.9					18.9
Exercise of stock options and tax components of stock-based awards, net		622,712			-		10.0		-		-			10.0
Vested restricted stock units		325,257			-		-		-		-			-
Vested performance share units		62,547			-		-		-		-			-
Treasury stock at cost		(960,678	)		-		-		-		(16.2	)		(16.2	)
Stock-based compensation -non-vested restricted stock		-			-		6.2		-		-			6.2
Stock-based compensation -stock options		-			-		1.0		-		-			1.0
Balance at December 31, 2013		29,537,293		$	0.3	$	380.2	$	110.2	$	(28.2	)	$	462.5
Net income									6.8					6.8
Exercise of stock options and tax components of stock-based awards, net		283,809			-		6.5		-		-			6.5
Vested restricted stock units		288,076			-		-		-		-			-
Vested performance share units		199,637			-		-		-		-			-
Treasury stock at cost		(200,334	)		-		-		-		(5.1	)		(5.1	)
Stock-based compensation -non-vested restricted stock		-			-		6.8		-		-			6.8
Stock-based compensation -stock options		-			-		0.6		-		-			0.6
Balance at December 31, 2014		30,108,481		$	0.3	$	394.1	$	117.0	$	(33.3	)	$	478.1

See accompanying Notes to Consolidated Financial Statements

F-6

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

PharMerica Corporation together with its subsidiaries, (the “Corporation”), is a pharmacy services company that services healthcare facilities, provides pharmacy management services to hospitals, provides specialty infusion services to patients outside a hospital setting, and offers the only national oncology pharmacy in the United States. The Corporation is the second largest institutional pharmacy services company in the United States based on revenues and customer licensed beds under contract, operating 98 institutional pharmacies, 14 specialty infusion pharmacies, and 5 specialty oncology pharmacies in 45 states. The Corporation’s customers are typically institutional healthcare providers, such as skilled nursing facilities, nursing centers, assisted living facilities, hospitals, individuals receiving in-home care and other long-term alternative care providers. The Corporation is generally the primary source of supply of pharmaceuticals to its customers. The Corporation also provides pharmacy management services to 89 hospitals in the United States.

Operating Segments

The Corporation consists of three operating segments: institutional pharmacy, specialty infusion services and specialty oncology pharmacy. Management believes the nature of the products and services are similar, the payers for the products and services are common among the segments and all segments operate in the healthcare regulatory environment. In addition, the segments are economically similar. Accordingly, management has aggregated the three operating segments into one reporting segment.

Principles of Consolidation

All intercompany transactions have been eliminated.

Use of Estimates

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) which requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates are involved in collectability of accounts receivable, revenue recognition, inventory valuation, supplier rebates, the valuation of long-lived assets and goodwill and accounting for income taxes. Actual amounts may differ from these estimates.

Potential risks and uncertainties, many of which are beyond the control of the Corporation, include, but are not necessarily limited to, such factors as overall economic, financial and business conditions; the overall condition of the Corporation’s customers and suppliers; the intense competition in the Corporation’s industry; the loss of one or more key pharmaceutical manufacturers; changes in manufacturers’ rebate programs; the risk of loss of revenues due to the loss of certain customers or a customer or owner of a skilled nursing facility entering the institutional pharmacy business; the effects of the loss of a large customer and the Corporation's ability to adequately restructure its operations to offset the loss; the home infusion joint ventures formed with hospitals could adversely affect the Corporation’s financial results; the decline in operating revenues and profitability with an increase in the Corporation’s generic dispensing rate; the loss of prescription volumes and revenue from pharmaceutical products that develop unexpected safety or efficacy concerns; reduction in reimbursement rates for the Corporation’s products and/or medical treatments or services may reduce profitability; modifications to the Medicare Part D program which may reduce revenue or impose additional costs; changes in Medicaid reimbursement which may reduce revenue; the payments of significant penalties and damages for failure to comply with complex and rapidly evolving laws and regulations, as well as licensure requirements; the adverse results from material litigation or governmental inquires including the possible insufficiency of any accruals established by the Corporation could have a material impact on the Corporation’s business; failure to comply with Medicare and Medicaid regulations could result in loss of eligibility to participate in these programs; efforts by payers to control costs; healthcare reform adversely impacting the liquidity of the Corporation’s customers thus affecting their ability to make timely payments to the Corporation; increasing enforcement in the U.S. healthcare industry negatively impacting the Corporation’s business; further consolidation of managed care organizations and other third-party payers adversely affecting the Corporation’s profits; Federal and state medical privacy regulations increasing costs of operations and expose the Corporation’s to civil and criminal sanctions; interruption or damage to the Corporation’s sophisticated information systems; purchasing a significant portion of the Corporation’s pharmaceutical products from one supplier; attracting and retaining key executives, pharmacists, and other healthcare personnel; revenues and volumes adversely affected by certain factors in markets in which the Corporation operates, including weather; the provisions in the Corporation’s certification of incorporation and bylaws could delay or prevent a change of control that stockholders favor; changes in volatility of the Corporation’s stock price; successfully pursuing development and acquisition activities; indebtedness that restricts the Corporation’s ability to pay cash dividends and has a negative impact on the Corporation’s financing options; exposure to changes in interest rates; the potential impact of the litigation proceedings with ABDC regarding the Amended Prime Vendor Agreement and collection of the $40.8 million included in prepaids and other assets on the consolidated balance sheets; changes to critical accounting estimates and changes in and interpretations of accounting rules and standards.

F-7

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and cash equivalents with original maturities of three months or less. The Corporation places its cash in financial institutions that are federally insured. As of December 31, 2013 and 2014, the Corporation did not hold a material amount of funds in cash equivalent money market accounts. Management believes it effectively safeguards cash assets.

Fair Value of Financial Instruments

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the Corporation follows a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1:

Observable inputs such as quoted prices in active markets;

Level 2:

Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3:

Unobservable inputs for which there is little or no market data, which require the Corporation to develop its own assumptions.

Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques:

Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).

Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).

F-8

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Financial liabilities and non-financial assets recorded at fair value at December 31, 2013 and 2014, are set forth in the tables below (dollars in millions):

As of December 31, 2013	Asset/(Liability)				Level 1			Level 2				Level 3				Valuation Technique
Financial Liability
Deferred Compensation Plan		$	(6.9	)		$	-		$	(6.9	)		$	-			A
Contingent Consideration		$	(0.7	)		$	-		$	-			$	(0.7	)		C
Mandatorily Redeemable Interest		$	(8.2	)		$	-		$	-			$	(8.2	)		C

As of December 31, 2014	Asset/(Liability)				Level 1			Level 2				Level 3				Valuation Technique
Financial Liability
Deferred Compensation Plan		$	(8.0	)		$	-		$	(8.0	)		$	-			A
Contingent Consideration		$	(1.1	)		$	-		$	-			$	(1.1	)		C
Mandatorily Redeemable Interest		$	(8.3	)		$	-		$	-			$	(8.3	)		C

The deferred compensation plan liability represents an unfunded obligation associated with the deferred compensation plan offered to eligible employees and members of the Board of Directors of the Corporation. The fair value of the liability associated with the deferred compensation plan is derived using pricing and other relevant information for investments in phantom shares of certain available investment options, primarily mutual funds. This liability is classified as other long-term liabilities in the accompanying consolidated balance sheets.

The contingent consideration represents future earn-outs associated with the Corporation’s acquisition of an institutional pharmacy business purchased in 2013 and an infusion business purchased in 2014. The fair values of the liabilities associated with the contingent consideration were derived using the income approach with unobservable inputs, which included future gross profit forecasts and present value assumptions, and there was little or no market data. The Corporation assessed the fair values of the liabilities as of the acquisition date and will assess quarterly thereafter until settlement. These liabilities are classified as other long-term liabilities in the accompanying consolidated balance sheets.

The mandatorily redeemable interest represents a future obligation associated with the Corporation's acquisition of a specialty pharmacy business, OncoMed Specialty, LLC ("Onco") purchased on December 6, 2013. The mandatorily redeemable interest is classified as a long-term liability and measured at fair value. The fair value was derived using the income approach with unobservable inputs, which included a future gross profit forecast and present value assumptions, and there was little or no market data. The Corporation assessed and adjusted the mandatorily redeemable interest’s fair value of the liability at December 31, 2014.

For the years ended December 31, 2013 and December 31, 2014, there were no transfers between the valuation hierarchy Levels 1, 2 and 3. The following table summarizes the change in fair value of the Corporation’s contingent consideration and mandatorily redeemable interest identified as Level 3 for the years ended December 31, 2013 and December 31, 2014 (in millions):

	Contingent Consideration			Mandatorily Redeemable Interest

Beginning balance, December 31, 2012	$	-		$	-
Additions from business acquisitions		0.7			8.2
Balance, December 31, 2013		0.7			8.2
Additions from business acquisitions		1.1			-
Change in fair value		(0.7	)		0.1
Balance, December 31, 2014	$	1.1		$	8.3

F-9

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 1—ORGANIZATION ND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The carrying amounts reported in the accompanying consolidated balance sheets for cash and cash equivalents, accounts receivable, inventory and accounts payable approximate fair value because of the short-term maturity of these instruments. The Corporation’s debt approximates fair value due to the terms of the interest being set at variable market interest rates (Level 2).

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable primarily consist of amounts due from Prescription Drug Plans (“PDPs”) under Medicare Part D, institutional healthcare providers, the respective state Medicaid programs, third party insurance companies, and private payers. The Corporation’s ability to collect outstanding receivables is critical to its results of operations and cash flows. To provide for accounts receivable that could become uncollectible in the future, the Corporation establishes an allowance for doubtful accounts to reduce the carrying value of such receivables to the extent it is probable that a portion or all of a particular account will not be collected.

The Corporation has an established process to determine the adequacy of the allowance for doubtful accounts, which relies on analytical tools, specific identification, and benchmarks to arrive at a reasonable allowance. No single statistic or measurement determines the adequacy of the allowance for doubtful accounts. The Corporation monitors and reviews trends by payer classification along with the composition of the Corporation’s accounts receivable aging. This review is focused primarily on trends in private and other payers, PDP’s, dual eligible co-payments, historic payment patterns of long-term care institutions, and monitoring respective credit risks. In addition, the Corporation analyzes other factors such as revenue days in accounts receivables, denial trends by payer types, payment patterns by payer types, subsequent cash collections, and current events that may impact payment patterns of the Corporation’s long-term care institution customers. Accounts receivable are written off after collection efforts have been completed in accordance with the Corporation’s policies.

The Corporation’s accounts receivable and summarized aging categories are as follows (dollars in millions):

	December 31,
	2013			2014
Institutional healthcare providers	$	160.9		$	153.5
Medicare Part D		30.9			30.5
Private payer and other		29.1			30.6
Insured		20.0			24.5
Medicaid		11.9			11.7
Medicare		2.5			3.0
Allowance for doubtful accounts		(56.7	)		(58.1	)
	$	198.6		$	195.7

0 to 60 days		55.5	%		58.8	%
61 to 120 days		18.8	%		17.2	%
Over 120 days		25.7	%		24.0	%
		100.0	%		100.0	%

The following is a summary of activity in the Corporation’s allowance for doubtful accounts (dollars in millions):

	Beginning		Charges to Costs and					Ending
	Balance		Expenses		Write-offs			Balance
Allowance for doubtful accounts:
Year Ended December 31, 2012	$	48.6	$	25.9	$	(18.1	)	$	56.4
Year Ended December 31, 2013	$	56.4	$	22.7	$	(22.4	)	$	56.7
Year Ended December 31, 2014	$	56.7	$	23.2	$	(21.8	)	$	58.1

F-10

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Deferred Financing Fees

The Corporation capitalizes financing fees related to acquiring or issuing new debt instruments. These expenditures include bank fees and premiums, legal costs, and filing fees. The Corporation amortizes these deferred financing fees using the effective interest method.

Inventory

Inventory is primarily located at the Corporation’s pharmacy locations. Inventory consists solely of finished products (primarily prescription drugs) and is valued at the lower of first-in, first-out cost (“FIFO”) or market. Physical inventories are performed at a minimum on a quarterly basis at the end of the quarter at all pharmacy sites. Cost of goods sold is adjusted based upon the results of the physical inventory counts.

Equipment and Leasehold Improvements

Equipment and leasehold improvements are recorded at cost on the acquisition date and are depreciated using the straight-line method over their estimated useful lives or lease term, if shorter, as follows (in years):

	Estimated
	Useful Lives
Leasehold improvements		1-7
Equipment and software		3-10

Expenditures for maintenance, repairs and renewals of minor items are expensed as incurred. Major rebuilds and improvements are capitalized. For the years ended December 31, 2012, 2013 and 2014, maintenance and repairs were $8.1 million, $10.0 million and $11.1 million, respectively.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of long-lived assets is assessed by a comparison of the carrying amount of the asset or asset group to the estimated future undiscounted net cash flows expected to be generated by the asset or group of assets. If estimated future undiscounted net cash flows are less than the carrying amount of the asset or group of assets, the asset is considered impaired and an expense is recorded in an amount required to reduce the carrying amount of the asset or asset group to its then fair value. The Corporation incurred no fixed asset impairment charges for the year ended December 31, 2014 and $0.1 million for the year ended December 31, 2013 associated with the Corporation's restructuring plan. The Corporation recorded $1.6 million in charges related to Hurricane Sandy for fixed assets which were destroyed in the year ended December 31, 2012. See Note 9.

The Corporation’s equipment and leasehold improvements are further described in Note 3.

Capitalization of Internal Software Costs

The Corporation capitalizes the costs incurred during the application development stage, which includes costs to design the software configuration and interfaces, coding, installation, and testing. Costs incurred during the preliminary project stage along with post-implementation stages of internal use computer software are expensed as incurred. Capitalized development costs are amortized generally over three years and are subject to impairment evaluations. Costs incurred to maintain existing software development are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs requires judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life. For the years ended December 31, 2013 and 2014, the Corporation capitalized internally developed software costs of $13.3 million and $14.7 million, respectively. As of December 31, 2013 and 2014, net capitalized software costs, including acquired assets and amounts for projects which have not been completed, totaled $23.1 million and $29.4 million, respectively.

F-11

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Goodwill and Other Intangibles

The Corporation’s finite-lived intangible assets are comprised primarily of trade names, customer relationship assets, limited distributor relationships, doctor and insurer relationships and non-compete agreements. Finite-lived intangible assets are amortized on a straight-line basis over the course of their lives ranging from 5 to 20 years. For impairment reviews, intangible assets are reviewed on a specific pharmacy basis or as a group of pharmacies depending on the intangible assets under review. The Corporation’s goodwill and intangible assets are further described in Note 4.

Self-Insured Employee Health Benefits

The Corporation is self-insured for the majority of its employee health benefits. The Corporation’s self-insurance for employee health benefits includes a stop-loss policy to limit the maximum potential liability of the Corporation for both individual and aggregate claims per year. The Corporation records a monthly expense for self-insurance based on historical claims data and inputs from third-party administrators. For years ended December 31, 2012, 2013 and 2014, the expense for employee health benefits was $23.6 million, $22.3 million and $15.5 million, respectively, the majority of which was related to its self-insured plans. As of December 31, 2013 and 2014, the Corporation had $3.2 million and $2.2 million, respectively, recorded as a liability for self-insured employee health benefits.

Supplier Rebates

The Corporation receives rebates on purchases from its vendors and suppliers for achieving market share or purchase volumes. Rebates for brand name products are generally based upon achieving a defined market share tier within a therapeutic class and can be based on either purchasing volumes or actual prescriptions dispensed. Rebates for generic products are primarily based on achieving purchasing volume requirements. The Corporation generally accounts for these rebates and other incentives received from its vendors and suppliers, relating to the purchase or distribution of inventory, on an accrual basis as an estimated reduction of cost of goods sold and inventory. The estimated accrual is adjusted, if necessary, after the third party validates the appropriate data and notifies the Corporation of its agreement under the terms of the contract. The Corporation considers these rebates to represent product discounts, and as a result, the rebates are allocated as a reduction of product cost and relieved through cost of goods sold upon the sale of the related inventory or as a reduction of inventory for drugs which have not yet been sold.

Delivery Expenses

The Corporation incurred delivery expenses of $63.2 million, $62.0 million and $60.8 million for the years ended December 31, 2012, 2013, and 2014, respectively, to deliver products sold to its customers. Delivery expenses are reported as a component of cost of goods sold in the accompanying consolidated income statements.

Stock Option Accounting

The measurement and recognition of compensation cost for all share-based payment awards made to employees and non-employee directors is based on the fair value of the award. The Corporation recognizes share-based compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award (see Note 10).

F-12

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Restructuring and Impairment Charges

Restructuring and impairment charges in the consolidated financial statements represent amounts expensed for purposes of realigning corporate and pharmacy locations.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Corporation accrues for tax obligations, as appropriate, based on facts and circumstances in the various regulatory environments. Deferred tax assets and liabilities are more fully described in Note 11.

Mandatorily Redeemable Interest

The Corporation acquired 37.5% of the membership interests of OncoMed Specialty, LLC (the “Onco Acquisition") while also obtaining control of the business. As further discussed in Note 2, the subsidiary is consolidated in the Corporation's consolidated financial statements and the mandatorily redeemable interest is classified as debt within other long-term liabilities in the consolidated balance sheets.

Measurement Period Adjustments

For the year ended December 31, 2014, the Corporation has adjusted certain amounts on the consolidated balance sheet as of December 31, 2013 as a result of measurement period adjustments related to the acquisitions occurring in 2013 (See Note 2).

Recently Issued Accounting Pronouncements

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 Corporation on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Corporation is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Corporation has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

On August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which requires management of the Corporation to evaluate whether there is substantial doubt about the Company's ability to continue as a going concern. ASU 2014-15 is effective for the Company in our first quarter of fiscal 2017, with early adoption permitted. The Corporation does not expect this standard to have an impact on the consolidated financial statements upon adoption.

F-13

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 2—ACQUISITIONS

2014 Acquisitions

During the year ended December 31, 2014, the Corporation completed acquisitions of four long-term care businesses and one infusion business (collectively the "2014 Acquisitions"), none of which were individually significant to the Corporation. The 2014 Acquisitions required cash payments of approximately $114.4 million in the aggregate. The resulting amount of goodwill and identifiable intangibles related to these transactions in the aggregate were $34.9 million and $61.4 million, respectively. The Corporation believes the resulting amount of goodwill reflects its expectation of synergistic benefits of the acquisitions. Tax deductible goodwill associated with the 2014 Acquisitions was $29.8 million as of December 31, 2014. The net assets and operating results of the 2014 Acquisitions have been included in the Company's consolidated financial statements from their respective dates of acquisition.

Amounts contingently payable related to the 2014 Acquisitions, representing payments originating from an earn-out provision of the infusion acquisition, were $1.1 million as of December 31, 2014.

The amounts recognized as of the acquisition dates for the 2014 Acquisitions, on a combined basis, for assets acquired and liabilities assumed are as follows:

	Amounts Recognized as of Acquisition Date

Accounts receivable	$	24.7
Inventory		8.8
Deferred tax assets - current		1.8
Other current assets		3.1
Equipment and leasehold improvements		4.8
Deferred tax assets		8.2
Identifiable intangibles		61.4
Goodwill		34.9
Total Assets		147.7

Current liabilities*		26.4
Other long-term liabilities*		6.9
Total Liabilities		33.3

Total purchase price, less cash acquired	$	114.4

* Included in current liabilities and other long-term liabilities are $0.8 million and $0.5 million, respectively, of capital lease obligations acquired as a part of the 2014 acquisitions.

The acquisitions on a combined basis had a $63.0 million impact on the consolidated revenues and $0.6 million impact on consolidated pre-tax income for the year ended December 31, 2014.

Pro Forma

The following unaudited pro forma condensed consolidated financial information is not intended to represent or be indicative of the condensed consolidated results of operations or financial condition of the Corporation that would have been reported had the acquisitions been completed as of the date or for the periods presented, and should not be taken as representative of the future consolidated results of operations or financial condition of the Corporation.

F-14

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 2—ACQUISITIONS (Continued)

The unaudited pro forma results, which include the historical results of the Corporation as well as the effect of the acquisitions, assuming the acquisitions occurred on January 1, 2013. The results may not be indicative of future results and do not include any synergistic benefits which the Corporation may realize. Assuming an effective tax rate exclusive of discrete items for the years ended December 31, 2013 and December 31, 2014, the pro forma results would be as follows (dollars in millions, except per share amounts):

	For the years ended December 31,
	2013		2014
Revenues	$	1,988.4	$	2,045.4
Net income	$	14.3	$	1.3

Earnings per common share:
Basic	$	0.48	$	0.04
Diluted	$	0.48	$	0.04

2013 Acquisitions

During the year ended December 31, 2013, the Corporation completed five acquisitions of long-term care businesses (the “2013 Acquisitions”), none of which were, individually or in the aggregate, significant to the Corporation. Acquisitions of businesses required cash payments of approximately $25.8 million. The resulting amount of goodwill and identifiable intangibles related to these transactions in the aggregate was $8.0 million and $10.3 million, respectively. The net assets and operating results of acquisitions have been included in the Company’s consolidated financial statements from their respective dates of acquisition.

The Corporation also recognized a bargain purchase gain related to one of the 2013 Acquisitions in the amount of $1.3 million as a result of certain deferred tax assets acquired through the business combination. This gain was recorded in selling, general and administrative expenses in the accompanying consolidated income statements.

Amounts contingently payable related to the 2013 Acquisitions, representing payments originating from earnout provisions of acquisitions, were reduced to less than $0.1 million as of December 31, 2014.

On December 6, 2013 the Corporation through one of its wholly owned subsidiaries, acquired 37.5% of the issued share capital of Onco for $10.8 million, net of cash acquired. The Corporation’s primary purpose in acquiring Onco was to continue to expand pharmacy services through the addition of specialty pharmacy services. The total purchase price, as determined by an independent valuation of 100% of Onco, was allocated to the net tangible and identifiable intangible assets based upon their fair values on December 6, 2013 which resulted in identifiable intangible assets of $17.3 million and goodwill of $5.2 million. The Corporation believes the resulting amount of goodwill reflects its expectation of the synergistic benefits of the acquisition. Provisions in the acquisition agreement include a mandatorily redeemable interest whereby the Corporation is required to purchase the remaining capital of Onco on the fifth anniversary of the agreement, if not purchased earlier under the provisions of the acquisition agreement. The Corporation is accounting for the mandatorily redeemable interest of $8.3 million as a debt obligation and subsequently measuring that obligation at fair value. Changes in the fair value of the related debt will be recorded as interest expense in our consolidated income statements for the respective periods. In addition, net operating profit or loss of Onco subsequent to the acquisition is recognized based upon the Corporation’s ownership interest. In addition, Onco’s results are consolidated by the Corporation with 62.5% of the net operating profit or loss subsequent to the acquisition recognized as an adjustment to interest expense on the mandatorily redeemable interest.

Total measurement period adjustments for the year ended December 31, 2014 resulted in a net adjustment to goodwill of $0.5 million and were related to the 2013 Acquisitions and Onco.

Pro forma financial statements are not presented on the 2013 Acquisitions and Onco, as the results are not material to the Corporation’s consolidated financial statements.

F-15

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 2—ACQUISITIONS (Continued)

Other

For the years ended December 31, 2012, 2013 and 2014, the Corporation incurred $10.7 million, $4.4 million, and $13.3 million, respectively, of acquisition related costs, which have been classified as a component of merger, acquisition, integration costs and other charges.

NOTE 3—EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following (dollars in millions):

	December 31,
	2013			2014

Leasehold improvements	$	17.8		$	19.6
Equipment and software		154.1			166.1
Construction in progress		7.5			10.7
		179.4			196.4
Accumulated depreciation		(117.6	)		(125.0	)
Total equipment and leasehold improvements	$	61.8		$	71.4

Depreciation expense totaled $18.6 million, $19.3 million, and $20.3 million for the years ended December 31, 2012, 2013, and 2014, respectively.

NOTE 4—GOODWILL AND INTANGIBLES

The following table presents the changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2014 (dollars in millions):

Balance at December 31, 2012 as adjusted	$	269.4
Goodwill acquired from 2013 acquisitions, as adjusted		13.4
Balance at December 31, 2013, as adjusted		282.8
Goodwill acquired from 2014 acquisitions		34.9
Balance at December 31, 2014	$	317.7

The following table presents the components of the Corporation’s intangible assets (dollars in millions):

	Balance at						Balance at						Balance at
Finite Lived Intangible Assets	2012			Additions			2013			Additions			2014
Customer relationships	$	98.8		$	22.4		$	121.2		$	56.3		$	177.5
Trade name		57.0			3.2			60.2			2.0			62.2
Non-compete agreements		12.5			4.3			16.8			3.1			19.9
Sub Total		168.3			29.9			198.2			61.4			259.6
Accumulated amortization		(46.5	)		(15.4	)		(61.9	)		(20.1	)		(82.0	)
Net intangible assets	$	121.8		$	14.5		$	136.3		$	41.3		$	177.6

Amortization expense relating to finite-lived intangible assets was $12.3 million, $15.4 million, and $20.1 million for the years ended December 31, 2012, 2013 and 2014, respectively.

F-16

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 4—GOODWILL AND INTANGIBLES (Continued)

Total estimated amortization expense for the Corporation’s finite-lived intangible assets for the next five years and thereafter are as follows (dollars in millions):

Year Ending December 31,
2015	$	26.5
2016		25.4
2017		23.8
2018		22.8
2019		19.1
Thereafter		60.0
	$	177.6

NOTE 5—CREDIT AGREEMENT

On September 17, 2014, the Corporation entered into a credit agreement by and among the Corporation, the lenders named therein (the "Lenders"), Bank of America, N.A., as administrative agent, JP Morgan Chase Bank N.A., as syndication agent, and U.S. Bank, National Association, Citibank, N.A., MUFG Union Bank, N.A., BBVA Compass Bank and SunTrust Bank as co-documentation agents (the "Credit Agreement"). The Credit Agreement replaced the $450.0 million five-year credit agreement dated as of May 2, 2011, among the Corporation, Citibank, N.A., as Administrative Agent, and certain lenders (the "Prior Credit Agreement"). The Credit Agreement consists of a $225.0 million term loan facility and a $310.0 million revolving credit facility. The terms and conditions of the Credit Agreement are customary to facilities of this nature.

As a result of the payoff of the Prior Credit Agreement, the Corporation recorded a loss on debt extinguishment of $4.3 million in the Consolidated Income Statements during the year ended December 31, 2014. The loss recorded consisted primarily of deferred financing fees associated with the Prior Credit Agreement.

As of December 31, 2014, $225.0 million was outstanding under the term loan facility and $125.0 million was outstanding under the revolving credit facility. Indebtedness under the Credit Agreement matures on September 17, 2019, at which time the commitments of the Lenders to make revolving loans also expire.

The table below summarizes the total outstanding debt of the Corporation (dollars in millions):

	December 31,		December 31,
	2013		2014
Term Debt - payable to lenders at LIBOR plus applicable margin (2.16% as of December 31, 2014), matures September 17, 2019	$	-	$	225.0
Term Debt - payable to lenders at LIBOR plus applicable margin (2.67% as of December 31, 2013), terminated September 17, 2014		231.3		-
Revolving Credit Facility payable to lenders, interest at LIBOR plus applicable margin (2.13% as of December 31, 2014), matures September 17, 2019		-		125.0
Revolving Credit Facility payable to lenders, interest plus applicable margin (4.75% as of December 31, 2013), terminated September 17, 2014		-		-
Capital lease obligations		-		1.3
Total debt		231.3		351.3
Less: Current portion of long-term debt		12.5		6.4
Total long-term debt	$	218.8	$	344.9

F-17

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 5—CREDIT AGREEMENT (Continued)

The Corporation’s indebtedness has the following maturities (dollars in millions):

Year Ending December 31,	Term Debt		Revolving Credit Facility		Capital Lease Obligations		Total Maturities
2015	$	5.6	$	-	$	0.8	$	6.4
2016		11.3		-		0.1		11.4
2017		11.3		-		0.1		11.4
2018		11.3		-		0.3		11.6
2019		185.5		125.0		-		310.5
	$	225.0	$	125.0	$	1.3	$	351.3

The Credit Agreement provides for the issuance of letters of credit which, when issued, reduce availability under the revolving credit facility. The aggregate amount of letters of credit outstanding as of December 31, 2014 was $2.5 million. After giving effect to the letters of credit, total availability under the revolving credit facility was $182.5 million as of December 31, 2014.

Borrowings under the Credit Agreement bear interest at a floating rate equal to, at the Corporation's option, a base rate plus a margin between 0.50% and 1.25% per annum, or a Eurodollar Rate plus a margin between 1.50% and 2.25% per annum, in each case depending on the leverage ratio of the Corporation as defined by the Credit Agreement. The base rate is the greater of the prime lending rate in effect on such day, the federal funds effective rate plus 0.5%, and the Eurodollar Rate plus 1.0%. The Credit Agreement also provides for letter of credit fees between 1.50% and 2.25% on the letter of credit exposure, depending on the leverage ratio of the Corporation, and 0.125% on the actual daily amount available to be drawn under such letter of credit. The Corporation will also pay fronting fees on the aggregate letter of credit exposure at a rate separately agreed upon between the Corporation and the issuing bank. The Credit Agreement also provides for a commitment fee payable on the unused portion of the revolving credit facility, which shall accrue at a rate per annum ranging from 0.25% to 0.35%, depending on the leverage ratio of the Corporation.

The Credit Agreement contains customary affirmative and negative covenants, as well as customary events of default. The Credit Agreement also requires the Corporation to satisfy an interest coverage ratio and a leverage ratio. The interest charge coverage ratio as of the last day of any fiscal quarter can be no less than: 3.00:1.00. The Leverage Ratio as of the last day of any fiscal quarter of the Corporation cannot exceed 3.75:1.00, subject to certain exceptions for permitted acquisitions. In addition, capital expenditures (other than those funded with proceeds of asset sales or insurance) are restricted in any fiscal year to 5.0% of revenues.

The Corporation was compliant with all debt covenant requirements at December 31, 2014.

The obligations under the Credit Agreement are guaranteed by certain domestic subsidiaries of the Corporation and secured by liens on substantially all of the Corporation's assets.

Deferred Financing Fees

The Corporation capitalized a total of $2.7 million in deferred financing fees associated with the Credit Agreement and recorded them as other assets in the accompanying consolidated balance sheets. As of December 31, 2014, the Corporation had $2.6 million of unamortized deferred financing fees.

F-18

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 6—COMMITMENTS AND CONTINGENCIES

Legal Action and Regulatory

The Corporation maintains liabilities for certain of its outstanding investigations and litigation. In accordance with the provisions of U.S. GAAP for contingencies, the Corporation accrues for a liability when it is probable that such a liability has been incurred and the amount of the loss can be reasonably estimated. The Corporation is the subject of certain investigations and is a defendant in a number of cases, including those discussed below.

On April 15, 2013, the U.S. Department of Justice, through the U.S. Attorney's Office for the Eastern District of Virginia, filed a complaint in the United States District Court for the Eastern District of Virginia against the Corporation's two pharmacies in Virginia Beach, Virginia and Fredericksburg, Virginia alleging that these two pharmacies failed to comply with the Controlled Substances Act ("CSA") by dispensing Schedule II drugs without a proper prescription. The parties reached a settlement in December 2013 and filed a stipulation for dismissal of the case in January 2014. Under the settlement, the Corporation paid a $1.0 million fine and will enter into a Memorandum of Agreement ("MOA") with the DEA through which it will agree to certain CSA compliance obligations. The precise terms of the MOA are currently being negotiated between the parties. In connection with the settlement, the Corporation did not admit liability for the alleged CSA violations.

On June 10, 2013, the United States District Court for the Eastern District of Wisconsin unsealed two consolidated qui tam complaints filed in 2009 and 2011 by relators who are former employees of the Corporation and a company acquired by the Corporation. The United States, acting through the U.S. Attorney's Office in Wisconsin, intervened in part and declined to intervene in part and filed its complaint in intervention on August 9, 2013, when the matter was formally brought to the Corporation's attention. The Government's complaint seeks statutory fines for the Corporation's alleged dispensing of Schedule II controlled substances without a valid prescription in violation of the CSA. It also seeks monetary damages and equitable relief alleging that this conduct caused false claims to be submitted in violation of the Federal False Claims Act (the "FCA"). The Corporation moved to dismiss the Government's complaint for failure to state a claim upon which relief may be granted but the Court denied the Corporation's motion on September 3, 2014. With regard to the portion of the relators' complaint on which the Government did not intervene, on November 15, 2013, the relators dismissed their claims against the Corporation alleging that the Corporation submitted false claims to Medicare Part D and to Medicaid for drugs in connection with which the Corporation allegedly received kickbacks from the manufacturer in the form of market share rebates and other remuneration, all in violation of the Federal Anti Kickback Statute. The United States stipulated to the dismissal of those and other non-intervened counts and the Court approved the dismissal without prejudice of those counts on November 20, 2013. The relators pursued their claim under the retaliatory termination provisions of the FCA. On September 3, 2014, the Court denied the Corporation's motion to dismiss the relators' retaliatory termination claim. The Corporation intends to vigorously defend itself in both matters.

F-19

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 6—COMMITMENTS AND CONTINGENCIES (Continued)

On November 12, 2013, a relator, Fox Rx, Inc. ("Fox"), on behalf of the U.S. Government and various state governments and the District of Columbia, filed a complaint in the United States District Court for the Southern District of New York against the Corporation alleging that the Corporation violated the FCA by submitting false claims to Fox, other Medicare Part D sponsors and to Medicaid, by allegedly billing for expired drugs or for brand drugs when generic drugs should have been substituted. The U.S. Government declined to intervene in the case. On August 12, 2014, the court granted the Corporation's motion to dismiss the complaint. Fox filed a stipulation of dismissal and the appeal was dismissed on September 30, 2014.

On November 20, 2013 the complaint filed by a relator, Robert Gadbois, on behalf of the U.S. Government and various state governments, was unsealed by the United States District for the District of Rhode Island against the Corporation alleging that the Corporation dispensed controlled and non-controlled substances in violation of the CSA and that, as a result, the dispenses were not eligible for payment and that the claims the Corporation submitted to the Government were false within the meaning of the FCA. The U.S. Government and the various state governments declined to intervene in this case. On October 3, 2014, the Corporation's motion to dismiss was granted by the court. The relator has appealed the court’s decision. The Corporation intends to continue to defend the case vigorously.

On March 4, 2011, a relator, Mark Silver, on behalf of the U.S. Government and various state governments, filed a complaint in the United States District Court for the District of New Jersey against the Corporation alleging that the Corporation violated the FCA and Federal Anti-Kickback Statute through its agreements to provide prescription drugs to nursing homes under certain Medicare and Medicaid programs. On February 19, 2013, the U.S. Government declined to intervene in the case. The complaint has been amended several times, most recently on November 12, 2013, and thereafter served upon the Corporation. On December 6, 2013, the Corporation moved to dismiss the amended complaint for failure to state a claim upon which relief may be granted and on September 29, 2014, the court declined to dismiss the case, but limited the relevant time period for which claims could be brought against the Corporation. The Corporation intends to vigorously defend itself against these allegations.

On January 31, 2014, a relator, Frank Kurnik, on behalf of the U.S. Government and various state governments served its complaint filed in the United States District for the District of South Carolina alleging that the Corporation solicited and received remuneration in violation of the Federal Anti-Kickback Statute from drug manufacturer Amgen in exchange for preferring and promoting Amgen's drug Aranesp over a competing drug called Procrit. The U.S. Government and the various states declined to intervene in the case. On April 7, 2014, the Corporation moved to dismiss the complaint and on July 23, 2014, the motion was denied. The Corporation intends to vigorously defend itself against these allegations.

The U.S. Department of Justice, through the U.S. Attorney's Office for the Western District of Virginia, is investigating whether the Corporation's activities in connection with the agreements it had with the manufacturer of the pharmaceutical Depakote violated the Anti-Kickback Statute and, hence, that certain claims for Depakote that the Corporation submitted to federal health care programs violated the Federal False Claims Act. The Corporation is cooperating with this investigation and believes it has complied with all applicable laws and regulations. On May 29, 2014, the United States District Court for the Western District of Virginia entered an order (the “May 29 Order”) unsealing two previously partially sealed qui tam complaints, entitled United States, et al., ex rel. Spetter v. Abbott Laboratories. Inc., Omnicare, Inc., and PharMerica Corp., No. 1:07-cv-00006 and United States, et al., ex rel. McCoyd v. Abbott Laboratories, Omnicare, Inc., PharMerica Corp., and Miles White, No. 1:07-cv-0008. The May 29 Order also unsealed the government’s notice of intervention and granted the Government 120 days to serve its Complaint in Intervention. That deadline has since been extended to March 23, 2015 as to PharMerica only. As was indicated during the investigation, the complaints allege that certain agreements that the Corporation had with the manufacturer of Depakote violated the Anti-Kickback Statute and, hence, those certain claims for Depakote that the Corporation submitted to federal health care programs violated the Federal False Claims Act and the analogous statutes of 27 states. The Corporation intends to vigorously defend itself.

F-20

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 6—COMMITMENTS AND CONTINGENCIES (Continued)

On September 10, 2014, the Corporation filed a Complaint in Jefferson Circuit Court in Louisville, Kentucky against ABDC for breach of the Amended Prime Vendor Agreement ("Amended PVA"). The Corporation subsequently filed a First Amended Complaint asserting additional breaches of the Amended PVA. On November 24, 2014, the Jefferson Circuit Court issued a temporary injunction against ABDC. That order was subsequently over-ruled by the Court of Appeals on February 13, 2015. The Corporation has appealed the decision of the Court of Appeals to the Kentucky Supreme Court. On February 24, 2015, the Kentucky Supreme Court stayed the Appellate Court’s ruling until the Kentucky Supreme Court has an opportunity to rule on the matter. The amounts disputed by ABDC generally relate to certain rebates owed by ABDC under the Amended PVA. Rebates receivable from ABDC are $8.5 million, $12.3 million, and $20.0 million for the second quarter of 2014, the third quarter of 2014, and the fourth quarter 2014, respectively, which in the aggregate total $40.8 million as of December 31, 2014, are reflected as a receivable and included in prepaids and other assets in the accompanying consolidated balance sheets. The Corporation will have claims for additional damages resulting from ABCD’s breaches of the Amended PVA. The Corporation intends to vigorously pursue its claims. At this time, the Corporation is unable to determine the ultimate impact of these litigation proceedings on its consolidated financial condition, results of operations, or liquidity. The litigation with ABDC could continue for an extended period of time, likely longer than 12 months. The Corporation cannot provide any assurances about the outcome of the litigation.

In addition, the Corporation is involved in certain legal actions and regulatory investigations arising in the ordinary course of business. At December 31, 2014, the Corporation had accrued approximately $45.5 million related to the legal actions and investigations.

California Medicaid

On August 14, 2013, the California Department of Health Care Service ("DHCS") announced its intent to implement a ten (10) percent reimbursement reduction for numerous healthcare providers, including long term care pharmacies.

The DHCS implemented the reduction prospectively beginning in the first quarter of 2014. In addition, the DHCS is expected to begin recouping a percentage of provider payments representing a ten percent (10%) reduction on certain drug reimbursements retroactive to June 1, 2011. The Corporation has previously recorded a $3.3 million liability and reduction of revenue for the expected amount of recoveries from June 1, 2011 through December 31, 2013.

FUL and AMP Changes

The reimbursement rates for pharmacy services under Medicaid are determined on a state-by-state basis subject to review by CMS and applicable federal law. Although Medicaid programs vary from state to state, they generally provide for the payment of certain pharmacy services, up to the established limits, at rates determined in accordance with each state's regulations. Federal regulations and the regulations of certain states establish "upper limits" for reimbursement of certain prescription drugs under Medicaid (these upper limits being the "FUL").

The 2010 Health Care Reform Legislation amended the Deficit Reduction Act of 2005 ("DRA") to change the definition of the FUL by requiring the calculation of the FUL as no less than 175 % of the weighted average, based on utilization, of the most recently reported monthly Average Manufacturer's Price ("AMP") for pharmaceutically and therapeutically equivalent multi-source drugs available through retail community pharmacies nationally. In addition, the definition of AMP changed to reflect net sales only to drug wholesalers that distribute to retail community pharmacies and to retail community pharmacies that directly purchase from drug manufacturers. Further, the 2010 Health Care Reform Legislation continues the current statutory exclusion of prompt pay discounts offered to wholesalers and adds three (3) other exclusions to the AMP definition: i) bona fide services fees; ii) reimbursement for unsalable returned goods (recalled, expired, damaged, etc.); and iii) payments from and rebates/discounts to certain entities not conducting business as a wholesaler or retail community pharmacy. In addition to reporting monthly, the manufacturers are required to report the total number of units used to calculate each monthly AMP. Centers for Medicare and Medicaid Services ("CMS") will use this information when it establishes FULs as a result of the new volume-weighted requirements pursuant to the 2010 Health Care Reform Legislation.

F-21

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 6—COMMITMENTS AND CONTINGENCIES (Continued)

In September 2011, CMS issued the first draft FUL reimbursement files for multiple source drugs, including the draft methodology used to calculate the FULs in accordance with the Health Care Legislation. CMS continues to release monthly data and a three-month rolling average and is expected to do so going forward. CMS has not posted monthly AMPs for individual drugs, but only posted the weighted average of monthly AMPs in a FUL group and the calculation methodology.

The Office of Information and Regulatory Affairs website states that the final rule was expected June 2014, but to date has not been released. Further, CMS has stated that AMP-based FULs will be published at or about the same time that CMS publishes the Medicaid Covered Outpatient Drug final rule, which, according to the latest unified agenda, is expected in April 2015. CMS will continue to post draft monthly FULs. The Corporation will continue to analyze the draft monthly FULs, including the relationship of those FULs to the National Average Drug Acquisition pricing.

Medicare Part D Changes

In a May 23, 2014 Final Rule entitled "Medicare Program: Contract Year 2015 Policy and Technical Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs," CMS finalized a requirement that effective June 1, 2015 and enforceable December 1, 2015, all prescribers of Part D covered drugs must be enrolled as Medicare providers (or be granted a valid opt-out affidavit on file with a Part A or Part B Medicare Administrative Contractor) in order for a claim to be covered under Medicare Part D. CMS also finalized several specific requirements to reduce prescriber fraud, waste, and abuse. The Corporation is unable to evaluate the full impact of these changes on its business at this time.

Acquisitions

The Corporation has historically acquired the stock or assets of businesses with prior operating histories. Acquired companies may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, medical and general professional liabilities, workers’ compensation liabilities, previous tax liabilities, and unacceptable business practices. Although the Corporation institutes policies designed to conform practices to its standards following completion of acquisitions, there can be no assurance the Corporation will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies. While the Corporation generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines. In the ordinary course of business, the Corporation enters into contracts containing standard indemnification provisions and indemnifications specific to a transaction such as business acquisitions and disposals of an operating facility. These indemnifications may cover claims against employment-related matters, governmental regulations, environmental issues, tax matters, as well as customer, third party payer, supplier, and contractual relationships. Obligations under these indemnities generally would be initiated by a breach of the terms of the contract or by a third party claim or event.

Drug Wholesaler Agreements

F-22

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 6—COMMITMENTS AND CONTINGENCIES (Continued)

The Corporation and ABDC are parties to certain legal proceedings with respect to the Amended PVA as further described above. On March 2, 2015, the Corporation provided ABDC with a notice of termination of the Amended PVA effective April 1, 2015. We have entered into a new Prime Vendor Agreement with Cardinal Health effective April 1, 2015. See Note 14 Subsequent Events.

Employment Agreements

The Corporation has entered into employment agreements with certain of its executive officers. During the employment period, certain executive officers will be eligible to (i) participate in any short-term and long-term incentive programs established or maintained by the Corporation, (ii) participate in all incentive, savings and retirement plans and programs of the Corporation, (iii) participate, along with their dependents, in all welfare benefit plans and programs provided by the Corporation, and (iv) receive four weeks of paid vacation per calendar year.

The type of compensation due to each of the executive officers in the event of the termination of their employment period varies depending on the nature of the termination. The employment agreements generally do not entitle the executive officers to any additional payment or benefits solely upon the occurrence of a change in control but do provide additional payments or benefits or both upon a termination of employment in connection with a change in control. Additionally, the vesting of certain equity based grants made to certain executive officers accelerate upon the occurrence of a change in control.

Leases

The Corporation leases real estate properties, buildings, vehicles, and equipment under cancelable and non-cancelable leases. The leases expire at various times and have various renewal options. Certain leases that meet the lease capitalization criteria have been recorded as an asset and liability at the net present value of the minimum lease payments at the inception of the lease. Interest rates used in computing the net present value of the lease payments are based on the Corporation’s incremental borrowing rate at the inception of the lease. The Corporation recorded the following lease expense for the periods presented (dollars in millions):

	2012		2013		2014
Pharmacy locations and administrative offices lease expense	$	14.4	$	15.2	$	15.8
Office equipment lease expense		2.4		2.1		2.3
Total lease expense	$	16.8	$	17.3	$	18.1

Future minimum lease payments for those leases having an initial or remaining non-cancelable lease term in excess of one year are as follows for the years indicated (dollars in millions):

Year Ending December 31,	Operating Leases		Capital Lease Obligations		Total
2015	$	15.5	$	0.8	$	16.3
2016		11.8		0.1		11.9
2017		7.6		0.1		7.7
2018		5.5		0.3		5.8
2019		5.5		-		5.5
Thereafter		1.5		-		1.5
Total	$	47.4	$	1.3	$	48.7

F-23

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 7—MERGER, ACQUISITION, INTEGRATION COSTS AND OTHER CHARGES

Merger, acquisition, integration costs and other charges were $17.8 million, $8.1 million and $13.6 million for the years ended December 31, 2012, 2013 and 2014, respectively.

Merger, integration costs and other charges for the years ended December 31, 2012, 2013, and 2014 were $7.1 million, $3.7 million, and $0.3 million, respectively. Acquisition related costs for the years ended December 31, 2012, 2013, and 2014 were $10.7 million, $4.4 million, and $13.3 million, respectively.

NOTE 8-RESTRUCTURING COSTS AND OTHER CHARGES

In July 2013, the Corporation commenced the implementation of its restructuring plan as a result of the loss of two of the Corporation's significant customers, Kindred Healthcare and Golden Living. The plan is a major initiative primarily designed to optimize operational efficiency while ensuring that the Corporation remains well-positioned to serve its clients and achieve sustainable, long-term growth. The Corporation’s restructuring plan includes steps to right size its cost structure by adjusting its workforce and facility plans to reflect anticipated business needs.

The Corporation recorded restructuring costs and other related charges of approximately $4.4 million and $3.3 million during the years ended December 31, 2013 and December 31, 2014, respectively. The restructuring charges primarily included severance pay, the buy-out of employment agreements, lease terminations, and other exit-related asset disposals, professional fees and facility exit costs.

The following table presents the components of the Corporation’s restructuring liability (dollars in millions):

	Balance at							Balance at
	December 31, 2013		Accrual		Utilized Amounts			December 31, 2014
Employee Severance and related costs	$	1.8	$	2.1	$	(3.6	)	$	0.3
Facility costs		0.8		1.2		(0.9	)		1.1
	$	2.6	$	3.3	$	(4.5	)	$	1.4

The liability at December 31, 2014 represents amounts not yet paid relating to actions taken in connection with the program (primarily lease payments and severance costs).

NOTE 9—HURRICANE SANDY DISASTER COSTS

In October 2012, Hurricane Sandy caused significant damage on Long Island, New York and surrounding areas. The financial impacts of the storm to the Corporation’s Long Beach facility as well as damage and disruption at the Corporation’s customers’ facilities have been recorded as a separate component in the consolidated income statements.

The Corporation has recovered certain losses associated with Hurricane Sandy from the insurance carrier, and continues to pursue the business interruption portion of its insurance claim. While the exact amount has not been determined, the Corporation’s current estimate of covered losses, net of its deductible, is approximately $7.3 million. After consideration of a $7.2 million advance by the insurance carrier, the Corporation has recorded a receivable for $0.1 million which is included in prepaids and other assets in the consolidated balance sheets. The actual recovery will vary depending on the outcome of the insurance loss adjustment process. Accordingly, no offsetting benefit for insurance recoveries above the amount of the cumulative loss has been recorded. For the years ended December 31, 2012, 2013 and 2014, Hurricane Sandy disaster costs were $4.5 million, $(1.4) million, and $(1.7) million, respectively. For the years ended December 31, 2013 and 2014, the Corporation realized income as the insurance carrier reimbursed the Corporation for certain of the losses incurred in 2012.

F-24

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 10—COMMON STOCK, PREFERRED STOCK, TREASURY STOCK, STOCK-BASED COMPENSATION AND OTHER BENEFITS

Common Stock

Holders of the Corporation’s common stock are entitled to one vote for each share held of record on all matters on which stockholders may vote. There are no preemptive, conversion, redemption or sinking fund provisions applicable to the Corporation’s common stock. In the event of liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in the assets available for distribution, subject to any prior rights of any holders of preferred stock then outstanding. In addition, the Corporation’s Credit Agreement imposes restrictions on its ability to pay cash dividends.

Preferred Stock

The certificate of incorporation authorizes the issuance of an aggregate of 1.0 million shares of preferred stock. On August 25, 2011, the Board of Directors designated 175,000 shares of preferred stock as Series A Junior Participating Preferred Stock (“Series A Junior Preferred Stock”). As of December 31, 2014, there were no shares of preferred stock outstanding.

The Series A Junior Preferred Stock is entitled to receive quarterly cumulative dividends in an amount per whole share equal to the greater of $10.00 or 1,000 times the dividends declared on the Common Stock since the preceding quarterly dividend payment date, or with respect to the first quarterly dividend payment date, since the date of issuance, and a liquidation preference of a minimum of $10.00 per whole share, plus an amount equal to any accrued dividends and distributions thereon, whether or not declared, to the date of payment, and will be entitled to an aggregate payment per whole share equal to 1,000 times the amount per share distributed to the holders of Common Stock. Holders of Series A Junior Preferred Stock are entitled to vote on each matter on which holders of Common Stock are entitled to vote, and have 1,000 votes per whole share. The preferred stockholders also are entitled to certain corporate governance and special voting rights, as defined in the certificate of designation.

The Corporation’s Board of Directors may, from time to time, direct the issuance of shares of preferred stock in series and may, at the time of issuance, determine the designation, powers, rights, preferences and limitations of each series. Satisfaction of any dividend preferences of outstanding preferred stock would reduce the amount of funds available for the payment of dividends on the Corporation’s shares of common stock. Holders of preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Corporation before any payment is made to the holders of the Corporation’s common stock. Under certain circumstances, the issuance of preferred stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of the Corporation’s securities or the removal of incumbent management. The Board of Directors may issue shares of preferred stock with voting and conversion rights that could adversely affect the holders of common stock. Specifically, the Corporation’s certificate of incorporation authorizes the Corporation’s Board of Directors to adopt a rights plan without stockholder approval. This could delay or prevent a change in control of the Corporation or the removal of existing management.

Treasury Stock Purchases

In August 2010, the Board of Directors authorized a share repurchase of up to $25.0 million of the Corporation’s common stock, of which $10.5 million was used. On July 2, 2012 the Board of Directors authorized an increase to the remaining portion of the existing stock repurchase program that allows the Corporation to repurchase up to a maximum of $25.0 million of the Corporation’s common stock. Approximately $19.7 million remained available under the program as of December 31, 2014. Share repurchases under this authorization may be made in the open market through unsolicited or solicited privately negotiated transactions, or in such other appropriate manner, and may be funded from available cash or the revolving credit facility. The amount and timing of the repurchases, if any, would be determined by the Corporation’s management and would depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions. Common stock acquired through the share repurchase program would be held as treasury shares and may be used for general corporate purposes, including reissuances in connection with acquisitions, employee stock option exercises or other employee stock plans. The stock repurchase program does not have an expiration date and may be limited, terminated or extended at any time without prior notice. During the year ended December 31, 2014, the Corporation repurchased no shares of common stock.

F-25

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 10—COMMON STOCK, PREFERRED STOCK, TREASURY STOCK, STOCK-BASED COMPENSATION AND OTHER BENEFITS (Continued)

The Corporation may redeem shares from employees upon the vesting of the Corporation’s stock awards for minimum statutory tax withholding purposes and to cover option exercise costs. The Corporation redeemed 200,334 shares of certain vested awards and exercise of certain stock options for an aggregate price of approximately $5.1 million during year ended December 31, 2014. These shares have also been designated by the Corporation as treasury stock.

As of December 31, 2014, the Corporation had a total of 2,617,305 shares held as treasury stock.

Amended and Restated 2007 Omnibus Incentive Plan

The Corporation has adopted the Amended and Restated PharMerica Corporation 2007 Omnibus Incentive Plan (as amended and restated, the “Omnibus Plan”) under which the Corporation is authorized to grant equity-based and other awards to its employees, officers, directors, and consultants.

The Corporation’s Compensation Committee administers the Omnibus Plan and has the authority to determine the recipient of the awards, the types of awards, the number of shares covered, and the terms and conditions of the awards. The Omnibus Plan allows for grants of incentive stock options, non-qualified stock options, stock appreciation rights, restricted share and restricted stock units, deferred shares, performance awards, including cash bonus awards, and other stock-based awards.

Stock options granted to officers and employees under the Omnibus Plan generally vest in four equal annual installments and have a term of seven years. The restricted stock units granted to officers generally vest in three equal annual installments. The restricted stock units granted to members of the Board of Directors vest in one annual installment. The performance share units granted under the Omnibus Plan vest based upon the achievement of a target amount of the Corporation’s earnings before interest, income taxes, depreciation and amortization, merger, acquisition, integration costs and other charges, Hurricane Sandy disaster costs, restructuring charges, settlements, litigation and other charges, California Medicaid estimated recoupment, and any changes in accounting principles, which reinforces the importance of achieving the Corporation’s profitability objectives. The performance is generally measured over a three-year period.

As of December 31, 2014, total shares available for grants of stock-based awards pursuant to the Omnibus Plan were 2,865,608 shares. The 2,865,608 shares do not take into consideration the dilution of 1.65 shares of stock for any full-value award, including restricted stock awards, restricted stock units and performance share awards at target. The number of shares remaining available for future issuance calculated under the fungible share pool would be 1,737,623.

F-26

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 10—COMMON STOCK, PREFERRED STOCK, TREASURY STOCK, STOCK-BASED COMPENSATION AND OTHER BENEFITS (Continued)

Stock-Based Compensation Expense

The following is a summary of stock-based compensation incurred by the Corporation (dollars in millions, except per share amounts):

	2012			2013			2014
Stock option compensation expense	$	1.6		$	1.0		$	0.6
Nonvested stock compensation expense		5.1			6.2			6.8
Total Stock Compensation Expense	$	6.7		$	7.2		$	7.4

Negative effect on diluted earnings per share	$	(0.13	)	$	(0.15	)	$	(0.15	)

As of December 31, 2014, there was $7.7 million of total unrecognized compensation cost related to the Corporation’s stock compensation arrangements. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

Stock Option Activity

The Corporation did not issue stock options during the years ended December 31, 2013 or December 31, 2014.

The following table summarizes option activity for the periods presented:

	Number of Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Term	Aggregate Instrinsic Value (in millions)
Outstanding options at December 31, 2013		1,289,573		$	14.63	2.9 years	$	8.9
Exercised		(283,809	)		14.75
Canceled		(88,697	)		12.60
Expired		(3,858	)		17.57
Outstanding options at December 31, 2014		913,209		$	14.62	2.1 years	$	5.6
Exercisable options at December 31, 2014		818,558		$	15.06	1.9 years	$	4.6

The total intrinsic value of stock options exercised for the years ended December 31, 2012, 2013, and 2014 was $0.2 million, $3.5 million, and $1.6 million, respectively. Cash received from stock option exercises during the year ended December 31, 2014 was $3.4 million. The total fair value of options vested for the years ended December 31, 2012, 2013, and 2014 was $2.1 million, $1.6 million, and $0.9 million, respectively. The Corporation expects to recognize stock-based compensation expense for stock options over a remaining weighted average period of less than one year.

F-27

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 10—COMMON STOCK, PREFERRED STOCK, TREASURY STOCK, STOCK-BASED COMPENSATION AND OTHER BENEFITS (Continued)

Nonvested Shares

The following table summarizes nonvested share activity for the periods presented:

	Number of Shares			Weighted- Average Grant Date Fair Value
Outstanding shares at December 31, 2013		1,096,674		$	13.47
Granted - Restricted Stock Units		196,216			25.58
Granted - Performance Share Units		247,385			20.01
Forfeited		(110,992	)		15.85
Vested		(487,713	)		12.37
Outstanding shares at December 31, 2014		941,570		$	18.00

The total fair value of shares vested for the years ended December 31, 2012, 2013, and 2014 was $1.4 million, $5.1 million, and $6.0 million, respectively. The weighted average remaining term and intrinsic value of nonvested shares at December 31, 2014 was 2.4 years and $19.5 million, respectively. The Corporation expects to recognize stock based compensation expense of $7.6 million for nonvested shares over a weighted average period of approximately 2.4 years.

Based upon the achievement of the performance criteria at the end of the performance cycle for the performance share units issued to date, the Corporation may issue no shares or a maximum of 702,499 shares.

401(k) Plan

The Corporation sponsors a salary reduction plan qualified under Section 401(k) of the Internal Revenue Code with a safe harbor matching contribution for all eligible employees, as defined in the plan document. Contributions to the plan are based upon employee contributions and the Corporation’s matching contributions. For the years ended December 31, 2012, 2013, and 2014, the Corporation’s matching contributions to the plan were $6.0 million, $5.9 million, and $5.8 million, respectively.

Deferred Compensation Plans

The Corporation maintains an unfunded deferred compensation plan for certain management and highly compensated employees. Under the plan, a participant may elect to defer up to 50 % of such participant’s annual base salary and up to 100 % of such participant’s annual short-term incentive program cash bonus into the plan during each plan year. In addition, the Corporation may, in its sole discretion, make discretionary contributions to a participant’s account.

The Corporation also maintains a deferred compensation plan for the directors of the Corporation. The directors of the Corporation may elect to defer up to 100 % of their cash fees and their stock fees in any one year. If a director elects to defer his/her restricted share grant, the shares will be deferred as they vest until the participant elects for the deferred compensation to be a taxable event.

As of December 31, 2013 and 2014, the Corporation had $6.9 million and $8.0 million, respectively, recognized as a long-term liability related to the deferred compensation plans in the accompanying consolidated balance sheets. Deferred compensation expense was $0.4 million, $1.5 million and $0.7 million for the years ended December 31, 2012, 2013, and 2014, respectively.

F-28

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 11—INCOME TAXES

The provision for income taxes is based upon the Corporation’s annual income or loss before income taxes for each respective accounting period. The following table summarizes the Corporation’s provision for income taxes for the periods presented (dollars in millions):

	2012		2013		2014
Current provision:
Federal	$	11.6	$	13.0	$	10.4
State		1.5		1.3		1.3
Total		13.1		14.3		11.7
Deferred provision:
Federal		1.4		4.8		(2.1	)
State		1.4		7.2		(0.2	)
Total		2.8		12.0		(2.3	)
Total provision for income taxes	$	15.9	$	26.3	$	9.4

A reconciliation of the U.S. statutory rate to the Corporation’s effective tax rate is as follows for the years ended December 31:

	2012			2013			2014
U.S. statutory rate applied to pretax income		35.0	%		35.0	%		35.0	%
Differential arising from:
State taxes		4.2			4.3			4.0
Non-deductible legal expenses		-			14.8			31.3
Domestic Production Activities Deduction		-			(4.7	)		(10.4	)
Stock compensation		-			2.6			-
Valuation allowances		-			7.1			0.2
Research and development credits		-			-			(5.6	)
Other		1.7			(0.9	)		3.5
Effective tax rate		40.9	%		58.2	%		58.0	%

The effective tax rates in 2013 and 2014 are higher than the federal statutory rate largely as a result of the combined impact of state and local taxes and various non-deductible expenses.

The effective tax rate did not change significantly from 2013 to 2014. The increase in the non-deductible legal expenses relates to the legal settlement accruals recorded in 2014. See Note 6. This increase offsets almost entirely the favorable changes in the rate for the domestic production activities deduction, stock compensation, valuation allowance, and research and development credits.

The Corporation derives a current federal and state income tax benefit from the impact of deductions associated with the amortization of tax deductible goodwill acquired through business combinations. The tax basis of the Corporation’s tax deductible goodwill was approximately $128.5 million (as adjusted) and $145.3 million at December 31, 2013 and 2014, respectively.

F-29

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 11—INCOME TAXES (Continued)

The Corporation recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled. The Corporation also recognizes as deferred tax assets, the future tax benefits from net operating and capital loss carryforwards. As of December 31, 2014, the Corporation has federal net operating loss carryforwards of $40.1 million ($14 million deferred tax asset). These net operating loss carryforwards resulted from the stock acquisitions the Corporation completed in 2013 and 2014. These net operating losses are subject to limitations under Internal Revenue Code Section 382; however, the Corporation expects that it will be able to use the recorded amount which takes into account the limitations of the carryforwards. Accordingly, the Corporation has not recorded any valuation allowance for the associated deferred tax asset. The deferred tax asset for state net operating loss carryforwards is $3.1 million, net of federal impact and valuation allowances. The state net operating losses have carryforward periods ranging from 1 to 20 years depending on the taxing jurisdiction.

As a result of a corporate restructuring that was implemented on January 1, 2014, separate company state taxable income was significantly reduced. This reduction in separate company state taxable income impacted the Corporation’s analysis of the realizability of separate company net operating loss carryforwards. A valuation allowance is provided for the Corporation’s deferred tax assets if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Based on the Corporation’s analysis of the impact of the corporate restructuring, a valuation allowance on the separate company state net operating loss carryforwards was recorded. The deferred tax asset for state net operating loss carryforwards totaled $3.2 million and $3.1 million at December 31, 2013 and 2014, respectively, net of valuation allowances of $4.1 million.

The Corporation recognized net deferred tax assets totaling $18.2 million and $30.6 million at December 31, 2013 and 2014, respectively, net of valuation allowances of $4.1 million.

Current deferred income taxes consisted of (dollars in millions):

	December 31, 2013					December 31, 2014
	Assets			Liabilities		Assets			Liabilities
Accrued expenses	$	9.6		$	-	$	7.7		$	-
Allowance for doubtful accounts		20.8			-		22.8			-
Net operating losses		1.0			-		-			-
Other		7.2			-		13.7			-
Valuation allowance		(1.7	)		-		(2.0	)		-
Total current deferred taxes	$	36.9		$	-	$	42.2		$	-

Noncurrent deferred income taxes consisted of (dollars in millions):

	December 31, 2013					December 31, 2014
	Assets			Liabilities		Assets			Liabilities
Accelerated depreciation	$	-		$	11.2	$	-		$	11.4
Stock-based compensation		4.8			-		4.6			-
Goodwill and intangibles		-			25.4		-			33.0
Net operating losses		8.0			-		21.2			-
Other		7.5			-		9.1			-
Valuation allowances		(2.4	)		-		(2.1	)		-
Total noncurrent deferred taxes	$	17.9		$	36.6	$	32.8		$	44.4
Noncurrent deferred taxes, net				$	18.7				$	11.6

As of December 31, 2013 and December 31, 2014, the Corporation had no reserves recorded as a liability for unrecognized tax benefits for U.S. federal and state tax jurisdictions. There were no unrecognized tax benefits at December 31, 2014 that, if recognized, would affect the tax rate.

F-30

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 11—INCOME TAXES (Continued)

It is the Corporation’s policy to accrue interest and penalties related to liabilities for income tax contingencies in the provision for income taxes. As of December 31, 2014, the Corporation had no accrued interest or penalties related to uncertain tax positions.

The federal statute of limitations remains open for tax years 2012 through 2013. The IRS completed its audit of the Corporation’s consolidated U.S. income tax returns for 2010 and 2011 in February 2014.

State tax jurisdictions generally have statutes of limitations ranging from three to five years. The Corporation is no longer subject to state and local income tax examinations by tax authorities for years before 2009. The state income tax impact of federal income tax changes remains subject to examination by various states for a period of up to one year after formal notification of IRS settlement to the states.

F-31

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 12—EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share (dollars in millions, except per share amounts):

	2012		2013		2014
Numerator:
Numerator for basic and earnings per diluted share - net income	$	22.9	$	18.9	$	6.8
Denominator:
Denominator for basic earnings per share - weighted average shares		29,471,734		29,601,199		29,983,428
Effective of dilutive securities (stock options, restricted stock units and performance share units)		430,162		474,500		665,703
Denominator for earnings per diluted share - adjusted weighted average shares		29,901,896		30,075,699		30,649,131
Basic earnings per share	$	0.78	$	0.64	$	0.23
Earnings per diluted share	$	0.77	$	0.63	$	0.22
Unexercised employee stock options, unvested restricted shares and performance shares excluded from the effect of dilutive securities above (a)		2,574,284		1,417,272		340,291

(a)

These unexercised employee stock options, unvested restricted shares and performance shares that have not yet met performance conditions are not included in the computation of diluted earnings per share because to do so would be anti-dilutive for the periods presented.

Stock options and restricted shares and units granted by the Corporation are treated as potential common shares outstanding in computing earnings per diluted share. Performance share units are treated as potential common shares outstanding in computing earnings per diluted share only when the performance conditions are met.

Common shares repurchased by the Corporation reduce the number of basic shares used in the denominator for basic and diluted earnings per share.

F-32

Index

PHARMERICA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 13—UNAUDITED QUARTERLY FINANCIAL INFORMATION

The quarterly interim information shown below has been prepared by the Corporation’s management and is unaudited. It should be read in conjunction with the audited consolidated financial statements appearing herein (dollars in millions, except per share amounts).

	2013 Quarters									2014 Quarters
	First		Second		Third			Fourth		First		Second			Third			Fourth

Revenue	$	439.8	$	430.8	$	436.8		$	450.5	$	452.2	$	448.6		$	470.2		$	523.5
Cost of goods sold		355.5		348.2		357.6			369.4		372.2		366.7			387.2			429.1
Gross profit	$	84.3	$	82.6	$	79.2		$	81.1	$	80.0	$	81.9		$	83.0		$	94.4
Operating income (loss)	$	20.0	$	21.3	$	0.6		$	13.9	$	10.3	$	(9.7	)	$	17.1		$	12.7
Net income (loss)	$	10.5	$	10.2	$	(6.2	)(1)	$	4.4	$	4.8	$	(9.7	)(1)	$	8.5	(2)	$	3.2

Earnings (loss) per common share:
Basic	$	0.36	$	0.34	$	(0.21	)	$	0.15	$	0.16	$	(0.32	)	$	0.28		$	0.11
Diluted	$	0.35	$	0.34	$	(0.21	)	$	0.15	$	0.16	$	(0.32	)	$	0.28		$	0.10

Shares used in computing earnings (loss) per common share:
Basic		29.6		29.7		29.7			29.5		29.8		30.0			30.1			30.1
Diluted		30.1		30.1		29.7			30.2		30.4		30.0			30.6			30.7

(1)	During the third quarter 2013 and the second quarter 2014, the Corporation recognized losses related to settlement, litigation and other charges. See Note 6.

(2)	During the third quarter 2014, the Corporation recognized a $4.3 loss on extinguishment of debt.

NOTE 14---SUBSEQUENT EVENTS

The Corporation, through its wholly owned subsidiary Amerita, completed the acquisition of a home infusion and pharmacy services business on January 23, 2015. The business provides home infusion and pharmacy services including home infusion therapies, pain management, nutritional therapies, and specialty pharmacy services. The company serves patients in their homes, doctors’ offices, and other non-hospital settings.

On March 2, 2015, the Corporation provided ABDC with a notice of termination of the Amended PVA effective April 1, 2015. The Corporation entered into a new Prime Vendor Agreement with Cardinal Health effective April 1, 2015.

F-33

Index

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Corporation has carried out an evaluation under the supervision and with the participation of management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s “disclosure controls and procedures” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. The Corporation’s disclosure controls and procedures are designed so that information required to be disclosed in the Corporation’s reports filed under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. The Corporation’s disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives, and management necessarily is required to use its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2014, the Corporation’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that the Corporation files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required and such information is accumulated and communicated as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Corporation’s internal control over financial reporting during the quarter ended December 31, 2014, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

(i)

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation;

(ii)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and

(iii)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements.

Index

Our management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992).

Based upon our assessment and those criteria, management has concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2014.

The Corporation has excluded the 2014 Acquisitions from its assessment of internal control over financial reporting as of December 31, 2014 because they were acquired by the Corporation in 2014. The total assets and total revenues of the 2014 Acquisitions represent approximately 3.8% and 3.6%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2014. The Corporation continues to integrate new acquisitions into corporate processes. No potential internal control changes due to new acquisitions would be considered material to, or are reasonably likely to materially affect, our internal control over financial reporting.

The effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2014 has been audited by KPMG LLP, our independent registered public accounting firm, who also audited our consolidated financial statements as of December 31, 2013 and 2014 and for each of the years in the three-year period ended December 31, 2014 included in this Annual Report on Form 10-K, as stated in their report which appears with our accompanying consolidated financial statements.

Item 9B.

Other Information

On January 25, 2013, the Corporation renegotiated its Amended PVA with ABDC effective January1, 2013. The Amended PVA modified the previous agreement, which was set to expire September 30, 2013 and extended its term until September 30, 2016. The Amended PVA requires the Corporation to purchase certain levels of brand and non-injectable generic drugs from ABDC. The Amended PVA does provide the flexibility for the Corporation to contract with other suppliers. If the Corporation fails to adhere to the contractual purchase provisions, ABDC has the ability to increase the Corporation’s drug pricing under the terms of the Amended PVA.

On September 10, 2014, the Corporation filed a Complaint in Jefferson Circuit Court in Louisville, Kentucky against ABDC for breach of the Amended PVA. The Corporation subsequently filed a First Amended Complaint asserting additional breaches of the Amended PVA and filed a motion seeking a preliminary injunction enjoining ABDC from instituting certain drug substitution programs. On September 10, 2014, ABDC filed suit in the Court of Chancery of the State of Delaware seeking a declaration that it is not in breach of the Amended PVA. The Delaware proceeding was voluntarily dismissed on November 20, 2014. On November 24, 2014, the Jefferson Circuit Court issued a temporary injunction against ABDC. That order was subsequently over-ruled by the Court of Appeals on February 13, 2015 and the Corporation is appealing the decision of the Court of Appeals to the Kentucky Supreme Court. On February 24, 2015, the Kentucky Supreme Court stayed the decision of the Court of Appeals until the Kentucky Supreme Court has an opportunity to rule on the matter. On March 2, 2015, the Corporation provided ABDC with a notice of termination of the Amended PVA effective April 1, 2015. The termination was for cause. On February 27, 2015, the Corporation entered into a new Prime Vendor Agreement with Cardinal Health effective April 1, 2015 through June 30, 2018. The new Prime Vendor Agreement with Cardinal Health requires the Corporation to purchase certain levels of brand and non-injectable generic drugs from Cardinal Health. The new Prime Vendor Agreement does provide flexibility for the Corporation to contract with other suppliers.

Index

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

The information required by this Item is incorporated herein by reference from the Corporation’s definitive proxy statement to be filed no later than 120 days after December 31, 2014. We refer to this proxy statement as the 2015 Proxy Statement.

Item 11.

Executive Compensation

Incorporated herein by reference from the Corporation’s 2015 Proxy Statement.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Incorporated herein by reference from the Corporation’s 2015 Proxy Statement.

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

Incorporated herein by reference from the Corporation’s 2015 Proxy Statement.

Item 14.

Principal Accounting Fees and Services.

Incorporated herein by reference from the Corporation’s 2015 Proxy Statement.

Index

PART IV

Item 15.

Exhibits [To be Updated]

(a)

(1) All Financial Statements

Consolidated financial statements filed as part of this report are listed under Part II, Item 8 of this Form 10-K.

(2) Financial Statement Schedules

No schedules are required because either the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the accompanying consolidated financial statements or the notes thereto.

(3) Exhibits

Exhibit No.	Description

3.1	Certificate of Incorporation of the Registrant, as amended (1)

3.2	Amended and Restated By-Laws of the Registrant, as amended (21)

3.3	Series A Junior Participating Preferred Stock Certificate of Designation (16)

3.4	Certificate of Elimination of the Series A Junior Participating Preferred Stock (13)

4.1	Specimen Common Stock Certificate of the Registrant (17)

10.1	Form CEO Stock Option Award Agreement (3) †

10.2	Form Non-Qualified Stock Option Award Agreement (3) †

10.3	Employment Agreement dated July 31, 2007 between Robert McKay and PharMerica Corporation (1) †

10.4	Employment Agreement dated August 17, 2007 between Thomas Caneris and PharMerica Corporation (1) †

10.5	Form Director Non-Qualified Stock Option Award Agreement (1) †

10.6	Form of Substitution NQSO Agreement for AmerisourceBergen 2001 Grants (1) †

10.7	Form of Substitution NQSO Agreement for AmerisourceBergen 2002 Grants (1) †

10.8	Trademark License Agreement (2)

10.9	Form of Non-Qualified Stock Option Award Agreement (4) †

10.10	Form of Performance Share Award Agreement (adjusted EBITDA and adjusted ROIC) (11) †

10.11	Form of Restricted Stock Unit Award Agreement (6) †

10.12	Amended and Restated PharMerica Corporation 2007 Omnibus Incentive Plan Adopted May 26, 2010 (7) †

10.13	Form of Director Restricted Stock Unit Award Agreement (7) †

10.14	Employment Letter Agreement dated February 27, 2014 between Gregory S. Weishar and PharMerica Corporation (20) †

Index

10.15	Amended and Restated Prime Vendor Agreement for Long-Term Care Pharmacies dated January 1, 2011 by and between ABDC, PharMerica Corporation, Pharmacy Corporation of America and Chem Rx Pharmacy Services, LLC (9)

10.16	First Amendment to Amended and Restated Prime Vendor Agreement for Long-Term Care Pharmacies, dated as of January 1, 2013, by and between ABDC, PharMerica Corporation, Pharmacy Corporation of America and Chem Rx Pharmacy Services, LLC (10)

10.17	Credit Agreement dated September 17, 2014 among PharMerica Corporation, the Lenders named therein, and Citibank, N.A., Compass Bank, MUFG Union Bank, N.A., Suntrust Bank and U.S. Bank, National Association, as Co-Documentation Agents (23)

10.18	Form of Indemnification Agreement (12)

10.19	Employment Agreement dated March 22, 2011 between Suresh Vishnubhatla and PharMerica Corporation (12) †

10.20	Summary of 2012 Long-Term Incentive Program (18) †

10.21	Employment Agreement, dated September 27, 2012, between PharMerica Corporation and Mark Lindemoen (14)

10.22	Summary of 2013 Long-Term Incentive Program (10) †

10.23	Summary of 2014 CEO Short-Term Incentive Program and 2014 Short-Term Incentive Program †

10.24	Summary of 2014 Long-Term Incentive Program †

10.25	Amended and Restated Employment Agreement, dated effective May 30, 2014, between PharMerica Corporation and David W. Froesel, Jr. (22)

10.26	Employment Agreement, dated November 10, 2012, between PharMerica Corporation and James D. Glynn (22)

21.1	Subsidiaries of the Registrant

23.1	Consent of KPMG LLP

31.1	Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification of Chief Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

Index

(1)	Filed with the Corporation’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 31, 2007, and incorporated herein by reference.

(2)	Filed with the Corporation’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2007, and incorporated herein by reference.

(3)	Filed with the Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 13, 2007, and incorporated herein by reference.

(4)	Filed with the Corporation’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 8, 2008, and incorporated herein by reference.

(5)	Filed with the Corporation’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 5, 2009, and incorporated herein by reference.

(6)	Filed with the Corporation’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 4, 2010, and incorporated herein by reference.

(7)	Filed with the Corporation’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 5, 2010, and incorporated herein by reference.

(8)	Filed with the Corporation’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 4, 2010, and incorporated herein by reference.

(9)	Filed with the Corporation’s Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on May 25, 2011, and incorporated herein by reference.

(10)	Filed with the Corporation’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 1, 2013, and incorporated herein by reference.

(11)	Filed with the Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 9, 2009, and incorporated herein by reference.

(12)	Filed with the Corporation’s Schedule 14D-9 filed with the Securities and Exchange Commission on September 20, 2011, and incorporated herein by reference.

(13)	Filed with the Corporation’s Current Report on Form 8-K file with the Securities and Exchange Commission on April 2, 2012, and incorporated herein by reference.

(14)	Filed with the Corporation’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 7, 2013, and incorporated herein by reference.

(15)	Filed with the Corporation’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 5, 2013, and incorporated herein by reference.

(16)	Filed with the Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 25, 2011, and incorporated herein by reference.

(17)	Filed with Amendment No. 2 to the Corporation’s Registration Statement on Form S-4/S-1 (Reg. No 333-142940) filed with the Securities and Exchange Commission on June 27, 2007, and incorporated herein by reference.

(18)	Filed with the Corporation’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 2, 2012, and incorporated herein by reference.

(19)	Filed with the Corporation’s Annual Report on Form 10-K with the Securities and Exchange Commission on February 24, 2011, and incorporated herein by reference.

(20)	Filed with the Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 5, 2014, and incorporated herein by reference.

(21)	Filed with the Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 17, 2014, and incorporated herein by reference.

(22)	Filed with the Corporation’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 5, 2014, and incorporated herein by reference.

(23)	Filed with the Corporation’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 6, 2014, and incorporated herein by reference.

†	Management contract or compensatory plan or arrangement.

Index

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PHARMERICA CORPORATION

Date: March 2, 2015	By:	/S/ GREGORY S. WEISHAR

		Gregory S. Weishar
		Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/S/ GREGORY S. WEISHAR	Chief Executive Officer and Director	March 2, 2015
(Gregory S. Weishar)

/S/ DAVID W. FROESEL, JR.	Executive Vice President, Chief Financial	March 2, 2015
(David W. Froesel, Jr.)	Officer and Treasurer

/S/ BERARD E. TOMASSETTI	Senior Vice President and Chief Accounting	March 2, 2015
(Berard E. Tomassetti)	Officer

/S/ FRANK E. COLLINS	Director	March 2, 2015
(Frank E. Collins)

/S/ W. ROBERT DAHL JR.	Director	March 2, 2015
(W. Robert Dahl Jr.)

/S/ MARJORIE W. DORR	Director	March 2, 2015
(Marjorie W. Dorr)

/S/ DR. THOMAS P. GERRITY	Director	March 2, 2015
(Dr. Thomas P. Gerrity)

/S/ THOMAS P. MAC MAHON	Director	March 2, 2015
(Thomas P. Mac Mahon)

/S/ GEOFFREY G. MEYERS	Director	March 2, 2015
(Geoffrey G. Meyers)

/S/ DR. ROBERT A. OAKLEY	Director	March 2, 2015
(Dr. Robert A. Oakley)

/S/ PATRICK G. LEPORE	Director	March 2, 2015
(Patrick G. LePore)

Index

EXHIBIT INDEX

Exhibit No.	Description

10.23	Summary of 2014 CEO Short-Term Incentive Program and 2014 Short-Term Incentive Program †

10.24	Summary of 2014 Long-Term Incentive Program †

21.1	Subsidiaries of the Registrant

23.1	Consent of KPMG LLP

31.1	Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification of Chief Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Instance Document.

101.SCH	XBRL Taxonomy Extension Schema Document.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB	XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

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