NOTE 5-- DISCONTINUED OPERATIONS

On February 1, 2012, the Company and certain of its subsidiaries (collectively, the "Sellers") entered into a purchase agreement (the “2012 Asset Purchase Agreement”) with Walgreen Co. and certain of its subsidiaries (collectively, the "Pharmacy Services Buyers") with respect to the sale of certain assets, rights and properties (the “Pharmacy Services Asset Sale”) relating to the Sellers' traditional and specialty pharmacy mail operations and community retail pharmacy stores.

Pursuant to the terms of the 2012 Asset Purchase Agreement, the Company received a total purchase price of approximately $173.8 million during 2012, including approximately $158.8 million at closing on May 4, 2012 (which included monies received for the inventories on hand attributable to the operations subject to the Pharmacy Services Asset Sale) and a subsequent additional purchase price payment of $15.0 million based on events related to the Pharmacy Services Buyer's retention of certain business after closing. Similarly, the Company may have been required to refund up to approximately $6.4 million of the cash received to the Buyers under certain circumstances during the 14 month period following the closing. During the three months ended September 30, 2013, the contingency was resolved with no refund due to the Buyers and the Company included the amount of this liability in the gain on sale. The $173.8 million purchase price excluded all accounts receivable and working capital liabilities relating to the operations subject to the sale, which were retained by the Company. The net accounts receivable retained by the Company were approximately $0.0 and $4.8 million at December 31, 2013 and 2012, respectively.

The Pharmacy Services Asset Sale included the sale of 27 community pharmacy locations and certain assets of three community pharmacy locations and three traditional and specialty mail service operations, which constituted all of the Company's operations in the community pharmacy and mail order lines of business. Two mail order locations which were not transferred as part of the Pharmacy Services Asset Sale have been redeployed to provide infusion pharmacy services.

On May 4, 2012, the carrying value of the assets included in the Pharmacy Services Asset Sale was as follows (in thousands):



	Carrying Value
Inventory	$	30,560
Prepaid expenses and other current assets	299
Total current assets	30,859
Property and equipment, net	1,592
Goodwill	11,754
Intangible assets, net	2,503
Total assets	$	46,708

In addition, the Company and its subsidiaries and certain subsidiaries of the Pharmacy Services Buyers entered into an agreement concurrently with the 2012 Asset Purchase Agreement which provided that the Company cease to be the sole fulfillment pharmacy for customers who utilized the drugstore.com website. The agreement provided for a cash payment of $3.0 million to the Company and the payment of $2.9 million to the Pharmacy Services Buyers related to contingent consideration from the Company's 2010 acquisition of the prescription pharmacy business of DS Pharmacy, Inc. both of which occurred during the year ended December 31, 2012.

As a result of the divestiture process, the Company's management commenced an assessment of the Company's continuing operations in order to align its corporate structure with its remaining operations. As part of these efforts, the Company has incurred and expects to continue to incur additional charges that may impact the Company's future consolidated financial statements (see Note 7 - Restructuring Expenses). These additional charges include employee severance, other restructuring type charges, temporary redundant expenses, potential cash bonus payments, bad debt expense relating to retained receivables, the write down of certain long-lived assets and potential accelerated payments or terminated costs for certain of its contractual obligations. Interest expense was allocated to discontinued operations based upon the portion of the borrowing base associated with discontinued operations. Income tax expense has also been allocated to discontinued operations. These adjustments have been made for all periods presented. Depreciation expense was no longer incurred on fixed assets included in the disposal group as of February 1, 2012, the date the Company entered into the 2012 Asset Purchase Agreement.

As a result of the Pharmacy Services Asset Sale, the Company recognized a total pretax gain of $108.2 million including a pretax gain of $101.6 million net of transaction costs of $5.6 million during the year ended December 31, 2012. The Company also recognized approximately $13.4 million of impairment costs, employee severance and other benefit-related costs, and facility-related costs as a result of the transaction in the year ended December 31, 2012 (see Note 8 - Property and Equipment). The impairment costs, employee severance and other benefit-related costs, facility-related costs, and other one-time charges are included in income (loss) from discontinued operations, net of income taxes in the Consolidated Statements of Operations. The Company allocated tax expense of $6.1 million to discontinued operations' pre-tax income of $79.2 million during the year ended December 31, 2012. The allocated tax expense is less than the statutory rate because the Company used $24.1 million of deferred tax assets that previously had a full valuation allowance. The use of the deferred tax assets significantly reduced the amount of gain that was subject to federal and state income tax.

The Company recognized approximately $7.6 million of other costs during the year ended December 31, 2013, primarily legal and other fees associated with the settlements discussed below and collection fees for the retained accounts receivable.

Effective January 8, 2014, the Company entered into a Stipulation and Order of Settlement and Dismissal (the “Federal Settlement Agreement”) with the U.S. Department of Justice (the “DOJ”) and a qui tam relator (the “Relator”). The Federal Settlement Agreement memorialized the federal and private component of an agreement in principle to settle all civil claims under the False Claims Act and related statutes and all common law claims that could have been brought by the DOJ and Relator that arose out of the distribution of the Novartis Pharmaceutical Corporation’s product Exjade® (the “Medication”) by the Company's traditional and specialty pharmacy mail operations and community retail pharmacy stores prior to its divestiture in May 2012. Further, effective February 11, 2014, the Company entered into State Settlement Agreements with the offices of the Attorneys General of thirty-five states (the "Settling States"). The State Settlement Agreements memorialized the state component of the Company's agreement in principle to settle the claims that could have been brought by the Settling States that arose out of the distribution of the Medication. During the year ended December 31, 2013, the Company accrued $15.0 million related to the Settlement Agreements and included the amount and related legal fees and expenses in income (loss) from discontinued operations, net of income taxes in the Consolidated Statements of Operations (see Note 10 - Commitments and Contingencies).

As of December 31, 2013, there were accruals of $16.3 million related to legal settlement, employee severance and other costs, of which $4.3 million is included in accrued expenses and other current liabilities and $12.0 million is included in other non-current liabilities on the Consolidated Balance Sheets. The accrual activity consisted of the following (in thousands):



	Legal Settlement		Impairment Costs			Employee Severance and Other Benefits			Facility-Related Costs			Other Costs			Total
Balance at December 31, 2011	$	—	$	—		$	—		$	—		$	—		$	—
Expenses	—		5,839			5,279			1,071			1,198			13,387
Cash payments	—		—			(5,234		)	(82		)	(3,133		)	(8,449		)
Non-cash charges	—		(5,839		)	—			(989		)	2,024			(4,804		)
Balance at December 31, 2012	—		—			45			—			89			134
Expenses	15,000		—			186			—			7,410			22,596
Cash payments	—		—			(103		)	—			(6,261		)	(6,364		)
Non-cash charges	—		—			(36		)	—			(43		)	(79		)
Balance at December 31, 2013	$	15,000	$	—		$	92		$	—		$	1,195		$	16,287

The operating results of the divested traditional and specialty pharmacy mail operations and community pharmacies for the years ended December 31, 2013, 2012 and 2011 are summarized below (in thousands):



	Years ended December 31,
	2013			2012		2011
Revenue	$	(75	)	$	466,747	$	1,263,520
Gross profit	(519		)	29,844		96,888
Operating expenses	7,118			38,612		77,727
Legal settlement expense	15,000			—		—
Bad debt expense	—			12,931		7,213
Interest (income) expense	(41		)	761		2,764
Gain on sale	6,548			101,624		—
Income tax expense	—			6,117		888
Income (loss) from discontinued operations, net of income taxes	$	(16,048	)	$	73,047	$	8,296