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EMDEON INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the accompanying notes in Part I, Item 1 of this Quarterly Report on Form 10-Q ("Quarterly Report"), together with the risk factors contained in the section titled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013 ("Form 10-K") on file with the Securities and Exchange Commission ("SEC"). Unless stated otherwise or the context otherwise requires, references in this Quarterly Report to "we", "us", "our", "Emdeon" and "the Company" refer to Emdeon Inc. and its subsidiaries. Forward-Looking Statements This Quarterly Report includes certain forward-looking statements within the meaning of the federal securities laws regarding, among other things, our or our management's intentions, plans, beliefs, expectations or predictions of future events, which are considered forward-looking statements. You should not place undue reliance on those statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements often include words such as "may," "will," "should," "believe," "expect," "anticipate," "intend," "plan," "estimate" or similar expressions. These statements are based upon assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. As you read this Quarterly Report, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions, including those described under the heading "Risk Factors" in our Form 10-K. Although we believe that these forward-looking statements are based upon reasonable assumptions, you should be aware that many factors, including those described under the heading "Risk Factors" in our Form 10-K, could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. Our forward-looking statements made herein speak only as of the date on which made. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements made herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Quarterly Report. Overview We are a leading provider of revenue and payment cycle management and clinical information exchange solutions connecting payers, providers, pharmacies and patients in the United States healthcare system. Our solutions integrate and automate key business and administrative functions of our payer, provider and pharmacy customers throughout the patient encounter, including pre-care patient eligibility and benefits verification and enrollment, clinical information exchange capabilities, claims management and adjudication, payment integrity, payment distribution, payment posting and denial management and patient billing and payment services. Our customers are able to improve efficiency, reduce costs, increase cash flow and more efficiently manage the complex revenue and payment cycle and clinical information exchange processes by using our comprehensive suite of solutions. We deliver our solutions and operate our business in three reportable segments: (i) payer services, which provides solutions primarily to commercial insurance companies, third party administrators and governmental payers; (ii) provider services, which provides solutions primarily to hospitals, physician practices, laboratories and other healthcare providers; and (iii) pharmacy services, which provides solutions to pharmacies, pharmacy benefit management companies, government agencies and other payers. Through our payer services segment, we provide payment cycle solutions that simplify the administration of healthcare related to insurance eligibility and benefit verification, claims management, payment integrity and payment distribution. Additionally, we provide patient billing and payment and consulting services through our payer services segment. Through our provider services segment, we provide 41-------------------------------------------------------------------------------- Table of Contents revenue cycle management solutions, government program eligibility and enrollment services and revenue optimization solutions that simplify providers' revenue cycle and workflow, reduce related costs and improve cash flow. Through our pharmacy services segment, we provide electronic prescribing, other electronic solutions and benefit administration services related to prescription benefit claim filing, adjudication and management. There are a number of company-specific initiatives and industry trends that may affect our transaction volumes, revenues, cost of operations and margins. As part of our strategy, we encourage our customers to migrate from paper-based claim, patient billing and payment, payment distribution and other transaction processing to electronic, automated processing in order to improve efficiency. Our business is aligned with our customers to support this transition, and as they migrate from paper-based transaction processing to electronic processing, even though our revenues for an applicable customer generally will decline, our margins and profitability will typically increase. For example, because the cost of postage is included in our revenues for patient billing and payment services (which is then also deducted as a cost of operations), when our customers transition to electronic processing, our revenues and costs of operations are expected to decrease as we will no longer incur or be required to charge for postage. As another example, as our payer customers migrate to comprehensive management services agreements with us, our electronic transaction volume usually increases while the rebates we pay and the per transaction rates we charge under these agreements are typically reduced. Part of our strategy also includes the development and introduction of new solutions. Our new and updated solutions are likely to require us to incur development and engineering expenditures, both operating and capital, and related sales and marketing costs at levels greater than recent years' expenditures in order to successfully develop and achieve market acceptance of such solutions. We also may acquire, or enter into agreements with third parties to assist us in providing, new solutions. For example, we offer our electronic payment solutions through banks or vendors who contract with banks and other financial service firms. The costs of these initiatives or the failure to achieve broad penetration in target markets with respect to new or updated solutions may negatively affect our results of operations, margins and cash flow. Because newly introduced solutions generally will have lower margins initially as compared to our existing and more mature solutions, our margins and margin growth may be adversely affected on a percentage basis until these new solutions achieve scale and maturity. In addition to our internal development efforts, we actively evaluate opportunities to improve and expand our solutions through strategic acquisitions. Our acquisition strategy focuses on identifying acquisitions that improve and streamline the business and administrative functions of healthcare. We believe our broad customer footprint allows us to deploy acquired solutions into our installed base, which, in turn, can help accelerate growth of our acquired businesses. We also believe our management team's ability to identify acquisition opportunities that are complementary and synergistic to our business, and to integrate them into our existing operations with minimal disruption, will continue to play an important role in the expansion of our business and growth. Our success in acquiring and integrating acquired businesses into our existing operations, the associated costs of such acquisitions, including integration costs, and the operating characteristics of the acquired businesses also may impact our results of operations and margins. Because the businesses we acquire sometimes have lower margins than our existing businesses, primarily as a result of their lack of scale and maturity, our margins on a percentage basis may be adversely affected in the periods subsequent to an acquisition from revenue mix changes and integration activities associated with these acquisitions. We also expect to continue to be affected by general economic, regulatory and demographic factors affecting the healthcare industry. For several years, there has been pricing pressure in our industry, particularly as it relates to our claims management solutions, which has led and is expected to continue to lead to reduced prices for the same services. We have sought in the past and will continue to seek to mitigate pricing pressure by providing additional value-added solutions, increasing the volume of solutions we provide and managing our costs. In addition, significant changes in regulatory schemes, such as the updated Health Insurance Portability and Accountability Act of 1996, American Recovery and Reinvestment Act of 2009, the Patient Protection and Affordable Care Act ("ACA") and other federal healthcare policy initiatives, impact our customers' healthcare activities and can result in increased operating costs and capital expenditures for us. In particular, we believe the ACA will significantly affect the regulatory environment in which we and our customers operate by changing how healthcare services are covered, delivered and reimbursed through expanded coverage of previously uninsured individuals, increased efforts to link federal healthcare program payments to quality and efficiency and insurance market reforms. Also, changes in federal and state reimbursement patterns and rates can impact the revenues in certain of our business lines, particularly our government program eligibility and enrollment solutions. We are unable 42 -------------------------------------------------------------------------------- Table of Contents to predict how providers, payers, pharmacies and other healthcare market participants will respond to the various reform provisions of the ACA, and we cannot be sure that the markets for our solutions will continue to exist at current levels or that we will have adequate technical, financial and marketing resources to react to changes in those markets. Demographic trends affecting the healthcare industry, such as population growth and aging or unemployment rates, also could affect the frequency and nature of our customers' healthcare transactional activity. The impact of such changes could impact our revenues, cost of operations and infrastructure expenses and thereby affect our results of operations and the way we operate our business. For example, an increase in the United States population, if such increase is accompanied by an increase in the United States population that has health insurance benefits, or the aging of the United States population, which requires an overall increased need for healthcare services, may result in an increase in our transaction volumes which, in turn, may increase our revenues and cost of operations. Alternatively, a general economic downturn, which reduces the number of discretionary health procedures by patients, or a persistent high unemployment rate, which lessens healthcare utilization, may decrease or offset other growth in our volumes, which, in turn, may adversely impact our revenues and cost of operations. Recent Developments In January 2014, we reorganized our reportable segments as payer services, provider services and pharmacy services. In addition to these reportable segments, we report financial information for two additional operating segments that is presented on an aggregate basis. This discussion and analysis related to prior periods has been restated to reflect our current organizational structure. In January 2014, we effected a change in the tax status of EBS Master LLC ("EBS Master") from a partnership to a corporation. Prior to the tax status change, we recognized a deferred tax liability for the difference in the book and tax basis of its investment in EBS Master (i.e. outside basis). Following the tax status change, our deferred tax balances reflect the differences in the book and tax bases of the individual assets and liabilities included in the corporation. In addition, as a result of the change in tax status, we were required to revise the apportionment of our income taxes among various state taxing jurisdictions. The effect of this change in tax status resulted in the recognition of an income tax benefit. In February 2014, we acquired all of the equity interests of Vieosoft, Inc. ("Vieosoft"), a development stage enterprise, for initial cash consideration, contingent cash consideration that varies based on the performance of the acquired business in each of the four years following the acquisition and the assumption of certain liabilities. Such contingent consideration payments are limited to a maximum of $43.1 million on a cumulative basis over the respective periods. On July 21, 2014, we acquired all of the equity interests of Capario, Inc. ("Capario"), a technology-enabled provider of revenue cycle management solutions. We have preliminarily valued the consideration transferred at $89.8 million, which consisted of cash and an estimated working capital settlement. Additionally, concurrent with the closing of the acquisition, we paid $21.5 million of Capario's debt and $6.1 million of transaction related expenses incurred by Capario in connection with the acquisition. The acquisition was financed with cash on hand and borrowings of approximately $65.0 million under our senior secured revolving credit facility. Our Revenues and Expenses We generate virtually all of our revenue by using technology solutions to provide our customers services that automate and simplify business and administrative functions for payers, providers and pharmacies generally on either a per transaction, per document, per communication, per member per month, monthly flat-fee, contingent fee or hourly basis. Cost of operations consists primarily of costs related to services we provide to customers and costs associated with the operation and maintenance of our networks. These costs primarily include postage and materials costs related to our patient billing and payment and payment distribution services, rebates paid to our channel partners (net of rebates to certain customers that offset revenue) and data communications costs, all of which generally vary with our revenues and/or volumes. Cost of operations also includes personnel costs associated with production, network operations, customer support and other personnel, facilities expenses and equipment maintenance, all of which vary less directly with our revenue and/or volumes due to the fixed or semi-fixed nature of these expenses. 43 -------------------------------------------------------------------------------- Table of Contents The largest component of our cost of operations is postage, which is incurred in our patient billing and payment and payment distribution services businesses and which is also a component of our revenue in those businesses. Our postage costs increase as our patient billing and payment services volumes increase and also when the United States Postal Service ("USPS") increases postage rates. Postage rate increases, while generally billed as pass-through costs to our customers, affect our cost of operations as a percentage of revenue. In prior years, we have offset the impact of postage rate increases on cost of operations as a percentage of revenue through cost reductions from efficiency measures, including data communication expense reductions and production efficiencies. Though we plan to implement additional efficiency measures, we may not be able to offset the impact of postage rate increases in the future and, as a result, cost of operations as a percentage of revenue may increase if postage rate increases continue. Although the USPS historically has increased postage rates annually in most recent years, including in January 2013 and 2014, the frequency and nature of such annual increases may not occur as regularly in the future. Rebates are paid to channel partners for electronic and other volumes delivered through our network to certain payers and can be impacted by the number of comprehensive management services agreements we execute with payers, the associated rate structure with our payer customers, the success of our direct sales efforts to providers and the extent to which direct connections to payers are developed by our channel partners. While these rebates are generally a component of our cost of operations, in cases where the channel partners are also our customers, these rebates generally are recognized as an offset to revenue. Our data communication expense consists of telecommunication and transaction processing charges. Our material costs relate primarily to our patient statements and payment services volumes, and consist primarily of paper and printing costs. Development and engineering expense consists primarily of personnel costs related to the development, management and maintenance of our current and future solutions. We may invest more in this area in the future as we develop new and enhance existing solutions. Sales, marketing, general and administrative expense consists primarily of personnel costs associated with our sales, account management and marketing functions, as well as management, administrative and other shared corporate services related to the operations of our operating segments and overall business operations. Our development and engineering expense, sales, marketing, general and administrative expense and corporate expense, while related to our current operations, also are affected and influenced by our future plans including the development of new solutions, business strategies and enhancement and maintenance of our infrastructure. Our depreciation and amortization expense is related to depreciation of our property and equipment, including technology assets, and amortization of intangible assets acquired and recorded in conjunction with acquisition method accounting. As a result, the amount of depreciation and amortization expense is affected by the level of our recent investment in property and equipment and the level of our recent acquisition activity. Our interest expense consists principally of cash interest associated with our long-term debt obligations and non-cash interest associated with the amortization of borrowing costs and discounts related to debt issuance. If market interest rates on the variable portion of our long-term debt increase in the future, our interest expense may increase. Our income taxes consist of federal and state income taxes. These amounts include current income taxes payable, as well as income taxes for which the payment is deferred to future periods and dependent on the occurrence of future events. Our income taxes are affected by the recognition of valuation allowances, our tax status and other items also can affect our income tax expense. For additional information, see the discussion of income taxes in the section "Significant Items Affecting Comparability-Income Taxes". 44-------------------------------------------------------------------------------- Table of Contents Significant Items Affecting Comparability Certain significant items or events should be considered to better understand differences in our results of operations from period to period. We believe that the following items or events have had a significant impact on our results of operations for the periods discussed below or may have a significant impact on our results of operations in future periods: Acquisitions and Divestitures We actively evaluate opportunities to improve and expand our business through targeted acquisitions that are consistent with our strategy. On occasion, we also may dispose of certain components of our business that no longer fit within our overall strategy. Because of our acquisition activity, our results of operations may not be directly comparable among periods. The following summarizes our acquisition transactions since January 1, 2013 and affected segments: Date Business Description Affected Segment June 2013 Goold Health Systems Technology-enabled Pharmacy Services ("Goold") provider of pharmacy benefit and related services primarily to State Medicaid agencies February 2014 Vieosoft Development stage Pharmacy Services enterprise July 2014 Capario Technology-enabled Provider Services provider of revenue cycle management solutions Efficiency Measures We evaluate and implement efficiency measures and other cost savings initiatives on an ongoing basis to improve our financial and operating performance through reorganization, cost savings, productivity improvements, product development and other process improvements. For instance, we continue to evaluate measures to consolidate our data centers, operations and networks, to outsource certain information technology and operations functions and to streamline product development. The implementation of these measures often involves upfront cash costs related to severance, professional fees, contractor costs and/or capital expenditures, with the cost savings or other improvements not realized until the measures are successfully completed. Additionally, we may recognize impairment charges as a result of such initiatives. Income Taxes Our blended statutory federal and state income tax rate ranges from 37% to 40%. Our effective income tax rate, however, can be affected by several factors, including the change in tax status of EBS Master from a partnership to a corporation in January 2014. The following table and subsequent commentary reconcile our federal statutory rate to our effective income tax rate, and the subsequent commentary describes the more significant of the reconciling factors: Six Months Ended Six Months Ended June 30, 2014 June 30, 2013 Statutory United States federal tax rate 35.0 % 35.0 % State income taxes (net of federal benefit) 5.4 4.3 Change in tax status 2.7 - Other 0.4 (0.4 ) Effective income tax rate 43.5 % 38.9 % State Income Taxes-Our effective tax rate for state income taxes is generally impacted by changes in our apportionment. In addition, our effective tax rate for state income taxes for the six months ended June 30, 2014 was affected by the change in tax status of EBS Master from a partnership to a corporation. 45-------------------------------------------------------------------------------- Table of Contents Change in Tax Status-Prior to the change in tax status of EBS Master from a partnership to a corporation, we recognized a deferred tax liability for the difference in the book and tax basis of our investment in EBS Master (i.e. outside basis). The outside tax basis of the investment in EBS Master excluded consideration of goodwill within EBS Master that otherwise would have no tax basis. Following the tax status change, our deferred tax balances reflect only the difference in the book and tax bases of the individual assets and liabilities included in the corporation. Amendments of the Senior Credit Agreement Our interest expense primarily is affected by the amount of debt funding and the applicable variable interest rates, including a fixed spread, under our credit agreement (the "Senior Credit Agreement") governing our senior secured term loan facility (the "Term Loan Facility") and senior secured revolving credit facility (the "Revolving Facility") (collectively, the "Senior Credit Facilities"). In April 2013, we amended the Senior Credit Agreement to reduce the LIBOR-based interest rate by 125 basis points, and also to modify certain financial covenants. Impairment of Long-lived Assets During the three months ended June 30, 2014, our pharmacy services segment received notice that its existing contract with a customer would not be renewed in full upon its expiration. As a result, we abandoned a customer related project that was under development and assessed the recoverability of the net assets included in the relevant asset group. We recognized a $73.2 million impairment charge to write off the abandoned project and to adjust the carrying value of the asset group to its fair value. Additionally, we abandoned certain pharmacy services and provider services segment development projects in connection with execution of certain strategic initiatives. We recognized impairment charges of $3.3 million and $6.4 million during the three and six months ended June 30, 2014, respectively, related to these abandoned projects. Critical Accounting Estimates The preparation of financial statements in accordance with United States generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts and related disclosures. We consider 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 that could have been made could have a material impact on our consolidated results of operations and financial condition. We believe the current assumptions and other considerations used to estimate amounts reflected in our unaudited condensed consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our unaudited condensed consolidated financial statements, the resulting changes could have a material adverse effect on our unaudited condensed consolidated results of operations and financial condition. We believe there have been no significant changes during the three months ended June 30, 2014 to the items we disclosed as our critical accounting estimates in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K. 46 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table summarizes our consolidated results of operations for the three and six months ended June 30, 2014 and 2013, respectively (amounts in thousands). Three Months Ended Three Months Ended Six Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 % of % of % of % of Amount Revenue Amount Revenue Amount Revenue Amount Revenue Revenues $ 336,158 100.0 % $ 305,283 100.0 % $ 655,365 100.0 % $ 604,642 100.0 % Cost and expenses: Cost of operations (exclusive of depreciation and amortization below) 201,398 59.9 188,026 61.6 395,538 60.4 371,449 61.4 Development and engineering 7,380 2.2 7,626 2.5 16,616 2.5 15,324 2.5 Sales, marketing, general and administrative 53,602 15.9 40,658 13.3 105,711 16.1 79,364 13.1 Depreciation and amortization 46,630 13.9 43,946 14.4 93,093 14.2 90,762 15.0 Accretion 4,844 1.4 7,459 2.4 4,768 0.7 11,599 1.9 Impairment of long-lived assets 76,508 22.8 1,893 0.6 79,576 12.1 1,862 0.3 Operating income (54,204 ) (16.1 ) 15,675 5.1 (39,937 ) (6.1 ) 34,282 5.7 Interest expense, net 36,543 10.9 37,974 12.4 73,106 11.2 79,389 13.1 Loss on extinguishment of debt - - 23,160 7.6 - - 23,160 3.8 Contingent consideration (290 ) (0.1 ) - - 1,670 0.3 - - Other (3,971 ) (1.2 ) - - (3,971 ) (0.6 ) - - Income (loss) before income tax provision (benefit) (86,486 ) (25.7 ) (45,459 ) (14.9 ) (110,742 ) (16.9 ) (68,267 ) (11.3 ) Income tax provision (benefit) (26,959 ) (8.0 ) (17,191 ) (5.6 ) (48,226 ) (7.4 ) (26,547 ) (4.4 ) Net income (loss) $ (59,527 ) (17.7 )% $ (28,268 ) (9.3 )% $ (62,516 ) (9.5 )% $ (41,720 ) (6.9 )% 47 -------------------------------------------------------------------------------- Table of Contents Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013 Revenues Our total revenues were $336.2 million for the three months ended June 30, 2014 as compared to $305.3 million for the three months ended June 30, 2013, an increase of $30.9 million, or 10.1%. Factors affecting our revenues are described in the various segment discussions below. Cost of Operations Our total cost of operations was $201.4 million for the three months ended June 30, 2014 as compared to $188.0 million for the three months ended June 30, 2013, an increase of $13.4 million, or 7.1%. As a percentage of revenue, our cost of operations was 59.9% for the three months ended June 30, 2014 as compared to 61.6% the three months ended June 30, 2013. The increase in our cost of operations is primarily due to volume growth, including approximately $2.5 million related to the impact of the USPS postage rate increase effective in January 2014, approximately $2.8 million related to the inclusion of the acquired Goold business and increased strategic growth initiative costs. The decrease in our cost of operations as a percentage of revenue is primarily due to changes in revenue mix and increased productivity. Development and Engineering Expense Our total development and engineering expense was $7.4 million for the three months ended June 30, 2014 as compared to $7.6 million for the three months ended June 30, 2013, a decrease of $0.2 million, or 3.2%, reflecting generally consistent levels of activity. Sales, Marketing, General and Administrative Expense Our total sales, marketing, general and administrative expense was $53.6 million for the three months ended June 30, 2014 as compared to $40.7 million for the three months ended June 30, 2013, an increase of $12.9 million, or 31.8%. The increase in our sales, marketing, general and administrative expense was primarily due to approximately $5.1 million related to increased strategic growth initiatives, labor-related and acquisition-related costs, approximately $2.5 million related to an increase in our estimated liability related to a vendor dispute and approximately $1.0 million related to the inclusion of the acquired Goold and Vieosoft businesses. Depreciation and Amortization Expense Our depreciation and amortization expense was $46.6 million for the three months ended June 30, 2014 as compared to $43.9 million for the three months ended June 30, 2013, an increase of $2.7 million, or 6.1%. This increase was primarily due to increased capital expenditures and acquisition activity, partially offset by the effects of the impairment charge related to the pending partial loss of a customer contract. Accretion Our accretion was $4.8 million for the three months ended June 30, 2014 as compared to $7.5 million for the three months ended June 30, 2013. The amount recognized as accretion can vary significantly from period to period due to changes in estimates related to the amount or timing of our tax receivable agreement obligation payments. Such changes can result from a variety of factors, including changes in tax rates and the expected timing of prior net operating loss utilization, which can be affected by business combinations, changes in corporate structure, leverage, operations or other factors. 48-------------------------------------------------------------------------------- Table of Contents Interest Expense Our interest expense was $36.5 million for the three months ended June 30, 2014 as compared to $38.0 million for the three months ended June 30, 2013, a decrease of $1.4 million, or 3.8%. Interest expense for the three months ended June 30, 2014 includes the effect of lower interest rates on the Senior Credit Facilities as a result of the April 2013 repricing transaction. Income Taxes Our income tax benefit was $27.0 million for the three months ended June 30, 2014 as compared to an income tax benefit of $17.2 million for the three months ended June 30, 2013. Our effective tax rate was 31.2% for the three months ended June 30, 2014 as compared to 37.8% for the three months ended June 30, 2013. As a result of the impairment charge recognized in connection with the pending partial loss of a customer contract, the Company was required to recognize a valuation allowance related to its state deferred tax assets for three of its subsidiaries. Segment Revenues and Adjusted EBITDA We operate our business in three reportable segments: payer services, provider services and pharmacy services. In addition to these reportable segments, we report financial information for two additional operating segments on an aggregate basis, one of which provides revenue cycle management solutions through channel partners and the other of which provides revenue cycle solutions, either directly or through channel partners, to dental practices. We also maintain a corporate function which includes management, administrative and other shared corporate services such as information technology, legal, finance, human resources, marketing and product management. The segment profit measure primarily utilized by management is adjusted EBITDA which is defined as EBITDA (defined as net income before net interest expense, income tax provision (benefit) and depreciation and amortization), plus certain other non-cash or non-operating items. The non-cash or other non-operating items affecting the segment profit measure generally include equity compensation; acquisition accounting adjustments; acquisition-related costs; strategic initiatives, duplicative and transition costs; impairment of long lived assets; and contingent consideration adjustments. Adjusted EBITDA for the respective segments excludes all costs and adjustments associated with the above-referenced corporate functions. Financial information, including details of our adjustments to EBITDA, for each of our segments is set forth in Note 12 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report. Payer Services Our payer services segment revenue and adjusted EBITDA is summarized in the following table (in thousands): June 30, June 30, 2014 2013 $ Change Revenue: Claims management $ 72,649 $ 70,335 $ 2,314 Payment distribution services 73,264 64,603 8,661 Patient billing and payment services 69,627 63,553 6,074 Intersegment revenue 2,383 1,793 590 $ 217,923 $ 200,284 $ 17,639 Adjusted EBITDA $ 68,788 $ 65,793 $ 2,995 49 -------------------------------------------------------------------------------- Table of Contents Claims management revenue for the three months ended June 30, 2014 increased by $2.3 million, or 3.3%, as compared to the prior year period primarily due to new sales and implementations, partially offset by the impact of market pricing pressures on our transaction rates. Payment distribution services revenues for the three months ended June 30, 2014 increased by $8.7 million, or 13.4%, as compared to the prior year period. This increase was primarily driven by new sales and implementations and the impact of the USPS postage rate increase effective in January 2014, partially offset by customer attrition. Patient billing and payment services revenue for the three months ended June 30, 2014 increased by $6.1 million, or 9.6%, as compared to the prior year period. This increase was primarily driven by the impact of the USPS postage rate increase effective in January 2014 and new sales and implementations, partially offset by customer attrition. Payer services adjusted EBITDA for the three months ended June 30, 2014 increased by $3.0 million, or 4.6%, as compared to the prior year period. As a percentage of revenue, payer services adjusted EBITDA was 31.6% for the three months ended June 30, 2014 as compared to 32.8% for the three months ended June 30, 2013. The increase in payer services adjusted EBITDA was primarily due to the impact of the revenue items described above, partially offset by increased strategic growth initiative costs. The decrease in our payer services adjusted EBITDA as a percentage of revenue is primarily due to the impact of the USPS postage rate increase effective in January 2014. Provider Services Our provider services segment revenue and adjusted EBITDA is summarized in the following table (in thousands): June 30, June 30, 2014 2013 $ Change Revenue: Revenue cycle technology $ 32,221 $ 29,701 $ 2,520 Revenue cycle services 36,106 30,752 5,354 Physician services 9,439 9,031 408 $ 77,766 $ 69,484 $ 8,282 Adjusted EBITDA $ 37,311 $ 29,880 $ 7,431 Revenue cycle technology revenue for the three months ended June 30, 2014 increased by $2.5 million, or 8.5%, as compared to the prior year period primarily due to new sales and implementations, partially offset by customer attrition. Revenue cycle services revenue for the three months ended June 30, 2014 increased by $5.4 million, or 17.4%, as compared to the prior year period primarily due to new sales and implementations and improved reimbursement patterns of federal and state payers related to our government eligibility and enrollment services, partially offset by customer attrition. Physician services revenue for the three months ended June 30, 2014 increased by $0.4 million, or 4.5%, as compared to the prior year period primarily due to new sales and implementations, partially offset by customer attrition. Provider services adjusted EBITDA for the three months ended June 30, 2014 increased by $7.4 million, or 24.9%, as compared to the prior year period. As a percentage of revenue, provider services adjusted EBITDA was 48.0% for the three months ended June 30, 2014 as compared to 43.0% for the three months ended June 30, 2013. The increase in provider services adjusted EBITDA and as a percentage of revenue was primarily due to the impact of revenue items described above and efficiency measures, partially offset by increased strategic growth initiative costs. 50 -------------------------------------------------------------------------------- Table of Contents Pharmacy Services Our pharmacy services segment revenue and adjusted EBITDA is summarized in the following table (in thousands): June 30, June 30, 2014 2013 $ Change Revenue: Pharmacy services $ 29,966 $ 25,413 $ 4,553 Intersegment revenue 104 85 19 $ 30,070 $ 25,498 $ 4,572 Adjusted EBITDA $ 15,476 $ 14,202 $ 1,274 Pharmacy services revenue for the three months ended June 30, 2014 increased by $4.6 million, or 17.9%, as compared to the prior year period. Pharmacy services revenue for the three months ended June 30, 2014 and 2013 included $5.9 million and $1.3 million, respectively, related to the Goold acquisition. Excluding this revenue, pharmacy services revenue for the three months ended June 30, 2014 was generally consistent with the prior year period. Pharmacy services adjusted EBITDA for the three months ended June 30, 2014 increased by $1.3 million, or 9.0%, as compared to the prior year period. The increase in pharmacy services adjusted EBITDA is primarily due to the impact of the revenue items described above. As a percentage of revenue, pharmacy services adjusted EBITDA was 51.5% for the three months ended June 30, 2014 as compared to 55.7% for the prior year period. The decrease in pharmacy services adjusted EBITDA as a percentage of revenue is primarily due to increased strategic growth initiative and channel partner costs, changes in revenue mix and the impact of the Vieosoft acquisition. 51 -------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013 Revenues Our total revenues were $655.4 million for the six months ended June 30, 2014 as compared to $604.6 million for the six months ended June 30, 2013, an increase of $50.7 million, or 8.4%. Factors affecting our revenues are described in the various segment discussions below. Cost of Operations Our total cost of operations was $395.5 million for the six months ended June 30, 2014 as compared to $371.4 million for the six months ended June 30, 2013, an increase of $24.1 million, or 6.5%. As a percentage of revenue, our cost of operations was 60.4% for the six months ended June 30, 2014 as compared to 61.4% for the six months ended June 30, 2013. The increase in our cost of operations is primarily due to volume growth, including approximately $4.7 million related to the impact of the United States postage rate increase effective in January 2014, approximately $6.4 million related to the inclusion of the acquired Goold business and increased labor and strategic growth initiative costs. The decrease in our cost of operations as a percentage of revenue is primarily due to changes in revenue mix and increased productivity. Development and Engineering Expense Our total development and engineering expense was $16.6 million for the six months ended June 30, 2014 as compared to $15.3 million for the six months ended June 30, 2013, an increase of $1.3 million, or 8.4%. The increase in our development and engineering expense is primarily due to strategic growth initiative and labor costs. Sales, Marketing, General and Administrative Expense Our total sales, marketing, general and administrative expense was $105.7 million for the six months ended June 30, 2014 as compared to $79.4 million for the six months ended June 30, 2013, an increase of $26.3 million, or 33.2%. The increase in our sales, marketing, general and administrative expense was primarily due to approximately $10.8 million related to increased strategic growth initiatives, labor-related and acquisition-related costs, approximately $1.9 million related to canceling product development projects, approximately $2.5 million related to an increase in our estimated liability related to a vendor dispute and approximately $1.4 million related to the inclusion of the acquired Goold and Vieosoft businesses. Depreciation and Amortization Expense Our depreciation and amortization expense was $93.1 million for the six months ended June 30, 2014 as compared to $90.8 million for the six months ended June 30, 2013, an increase of $2.3 million, or 2.6%. This increase was primarily due to increased capital expenditures and acquisition activity, partially offset by the effects of the impairment charge related to the pending partial loss of a customer contract. Accretion Expense Our accretion expense was $4.8 million for the six months ended June 30, 2014 as compared to $11.6 million for the six months ended June 30, 2013. The amount recognized as accretion expense can vary significantly from period to period due to changes in estimates related to the amount or timing of our tax receivable agreement obligation payments. Such changes can result from a variety of factors, including changes in tax rates and the expected timing of prior net operating loss utilization, which can be affected by business combinations, changes in leverage, operations or other factors. 52-------------------------------------------------------------------------------- Table of Contents Interest Expense Our interest expense was $73.1 million for the six months ended June 30, 2014 as compared to $79.4 million for the six months ended June 30, 2013, a decrease of $6.3 million, or 7.9%. Interest expense for the six months ended June 30, 2014 includes the effect of lower interest rates on the Senior Credit Facilities as a result of the April 2013 repricing transaction. Income Taxes Our income tax benefit was $48.2 million for the six months ended June 30, 2014 as compared to an income tax benefit of $26.5 million for the six months ended June 30, 2013. Our effective tax rate was 43.5% for the six months ended June 30, 2014 as compared to 38.9% for the six months ended June 30, 2013. Differences between the federal statutory rate and the effective income tax rates for these periods principally relate to an increase in state tax rates, a change in methodology of estimating state income taxes from a separate return basis to, where permitted by the state taxing authorities, a consolidated state return basis and the establishment of a valuation allowance related to state deferred tax assets of three of our subsidiaries as a result of the impairment charge recognized in connection with the pending partial loss of a customer contract. Segment Revenues and Adjusted EBITDA Payer Services Our payer services segment revenue and adjusted EBITDA is summarized in the following table (in thousands): June 30, June 30, 2014 2013 $ Change Revenue: Claims management $ 142,300 $ 137,640 $ 4,660 Payment distribution services 140,063 130,232 9,831 Patient billing and payment services 137,560 126,485 11,075 Intersegment revenue 4,572 2,774 1,798 $ 424,495 $ 397,131 $ 27,364 Adjusted EBITDA $ 133,276 $ 127,220 $ 6,056 Claims management revenue for the six months ended June 30, 2014 increased by $4.7 million, or 3.4%, as compared to the prior year period primarily due to new sales and implementations, partially offset by the impact of market pricing pressures on our transaction rates. Payment distribution services revenues for the six months ended June 30, 2014 increased by $9.8 million, or 7.5%, as compared to the prior year period. This increase was primarily driven by new sales and implementations and the impact of the USPS postage rate increase effective in January 2014, partially offset by customer attrition. Patient billing and payment services revenue for the six months ended June 30, 2014 increased by $11.1 million, or 8.8%, as compared to the prior year period. This increase was primarily driven by the impact of the USPS postage rate increase effective in January 2014 and new sales and implementations, partially offset by customer attrition. Payer services adjusted EBITDA for the six months ended June 30, 2014 increased by $6.1 million, or 4.8%, as compared to the prior year period. As a percentage of revenue, payer services adjusted EBITDA was 31.4% for the six months ended June 30, 2014 as compared to 32.0% for the six months ended June 30, 2013. The increase in payer services adjusted EBITDA was primarily due to the impact of the revenue items described above, partially offset by strategic growth initiative costs. The decrease in payer services adjusted EBITDA as a percentage of revenue is due to the impact of the USPS postage rate increase effective in January 2014. 53 -------------------------------------------------------------------------------- Table of Contents Provider Revenue Cycle Solutions Our provider revenue cycle solutions segment revenue and adjusted EBITDA is summarized in the following table (in thousands): June 30, June 30, 2014 2013 $ Change Revenue: Revenue cycle technology $ 62,912 $ 58,099 $ 4,813 Revenue cycle services 66,512 61,101 5,411 Physician services 18,578 17,793 785 $ 148,002 $ 136,993 $ 11,009 Adjusted EBITDA $ 66,993 $ 60,597 $ 6,396 Revenue cycle technology revenue for the six months ended June 30, 2014 increased by $4.8 million, or 8.3%, as compared to the prior year period primarily due to new sales and implementations, partially offset by customer attrition. Revenue cycle services revenue for the six months ended June 30, 2014 increased by $5.4 million, or 8.9%, as compared to the prior year period primarily due to new sales and implementations and improved reimbursement patterns of federal and state payers related to our government eligibility and enrollment services, partially offset by customer attrition. Physician services revenue for the six months ended June 30, 2014 increased by $0.8 million, or 4.4%, as compared to the prior year period primarily due to new sales and implementations, partially offset by customer attrition. Provider services adjusted EBITDA for the six months ended June 30, 2014 increased by $6.4 million, or 10.6%, as compared to the prior year period. As a percentage of revenue, provider services adjusted EBITDA was 45.3% for the six months ended June 30, 2014 as compared to 44.2% for the six months ended June 30, 2013. The increase in provider services adjusted EBITDA and as a percentage of revenue was primarily due to the impact of the revenue items described above and efficiency measures, partially offset by increased strategic growth initiative costs. Pharmacy Services Our pharmacy services segment revenue and adjusted EBITDA is summarized in the following table (in thousands): June 30, June 30, 2014 2013 $ Change Revenue: Pharmacy services $ 61,159 $ 49,967 $ 11,192 Intersegment revenue 181 180 1 $ 61,340 $ 50,147 $ 11,193 Adjusted EBITDA $ 32,423 $ 29,115 $ 3,308 Pharmacy services revenue for the six months ended June 30, 2014 increased by $11.2 million, or 22.4%, as compared to the prior year period. Pharmacy services revenue for the six months ended June 30, 2014 and 2013 included $11.6 million and $1.3 million, respectively, related to the Goold acquisition. Excluding this revenue, pharmacy services revenue for the six months ended June 30, 2014 increased by $0.9 million, or 1.8%, as compared to the prior year period. This increase was primarily due to new sales and implementations, offset by customer attrition. 54 -------------------------------------------------------------------------------- Table of Contents Pharmacy services adjusted EBITDA for the six months ended June 30, 2014 increased by $3.3 million, or 11.4%, as compared to the prior year period. The increase in pharmacy services adjusted EBITDA is primarily due to the impact of the revenue items described above. As a percentage of revenue, pharmacy services adjusted EBITDA was 52.9% for the six months ended June 30, 2014 as compared to 58.1% for the six months ended June 30, 2013. The decrease in pharmacy services adjusted EBITDA as a percentage of revenue was primarily due to increased strategic growth initiative and channel partner costs, changes in revenue mix and the impact of the Goold and Vieosoft acquisitions. Liquidity and Capital Resources General We are a holding company with no material business operations. Our principal assets are the equity interests we own in our subsidiaries. We conduct all of our business operations through our direct and indirect subsidiaries. Accordingly, our only material sources of cash are borrowings under our Senior Credit Facilities and dividends or other distributions or payments that are derived from earnings and cash flow generated by our subsidiaries. We anticipate cash generated by operations, the funds available under our Senior Credit Facilities, including the Revolving Facility, and existing cash and equivalents will be sufficient to meet working capital requirements, service our debt and finance capital expenditures. There can be no assurance, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our Senior Credit Facilities in amounts sufficient to enable us to repay our indebtedness, or to fund other liquidity needs. We and our subsidiaries, affiliates or significant stockholders may from time to time seek to retire or purchase our outstanding debt (including our senior notes) through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Cash Flows Operating Activities Cash provided by operating activities for the six months ended June 30, 2014 was $33.8 million as compared to $84.2 million for six months ended June 30, 2013, a decrease of $50.4 million. This decrease is primarily due to a difference in the timing of interest payments under our senior notes of approximately $31.2 million and increased strategic growth initiative costs. Cash provided by operating activities can be significantly impacted by our non-cash working capital assets and liabilities, which may vary based on the timing of cash receipts that fluctuate by day of week and/or month and also may be impacted by cash management decisions. Investing Activities Cash used in investing activities for the six months ended June 30, 2014 was $26.7 million as compared to $51.5 million for the six months ended June 30, 2013. Cash used in investing activities for each of the six months ended June 30, 2014 and 2013 consisted of capital expenditures for property and equipment and cash consideration paid for acquisitions. Financing Activities Cash used in financing activities for the six months ended June 30, 2014 was $12.5 million as compared to $11.5 million for the six months ended June 30, 2013. Cash used in financing activities for each of the six months ended June 30, 2014 and 2013 primarily consisted of principal payments under our Senior Credit Facilities and deferred financing arrangements. 55-------------------------------------------------------------------------------- Table of Contents Long-term Debt In November 2011, we entered into the Senior Credit Agreement which was comprised of the Term Loan Facility and the Revolving Facility, $375.0 million of 11% senior notes due 2019 (the "2019 Notes") and $375.0 million 11.25% senior notes due 2020 (the "2020 Notes"; together with the 2019 Notes, the "Senior Notes"). Long-term debt as of June 30, 2014 and December 31, 2013, consisted of the following: June 30, December 31, 2014 2013 Senior Credit Facilities $1,301 million Senior Secured Term Loan facility, due November 2, 2018, net of unamortized discount of $14,295 and $15,826 at June 30, 2014 and December 31, 2013, respectively (effective interest rate of 4.21%) $ 1,256,307 $ 1,262,445 $125 million Senior Secured Revolving Credit facility, expiring on November 2, 2016 and bearing interest at a variable base rate plus a spread rate - - Senior Notes $375 million 11% Senior Notes due December 31, 2019, net of unamortized discount of $7,205 and $7,664 at June 30, 2014 and December 31, 2013, respectively (effective interest rate of 11.53%) 367,795 367,336 $375 million 11.25% Senior Notes due December 31, 2020, net of unamortized discount of $9,106 and $9,560 at June 30, 2014 and December 31, 2013, respectively (effective interest rate of 11.86%) 365,894 365,440 Obligation under data sublicense agreement 22,543 22,543 Other 11,574 12,592 Less current portion (23,565 ) (31,330 ) Long-term debt $ 2,000,548 $ 1,999,026 Senior Credit Facilities The Senior Credit Agreement provides that, subject to certain conditions, we may request additional tranches of term loans, increase commitments under the Revolving Facility or the Term Loan Facility or add one or more incremental revolving facility tranches (provided that the revolving credit commitments outstanding at any time have no more than three different maturity dates) in an aggregate amount not to exceed (a) $300.0 million plus (b) an unlimited amount at any time, subject to compliance on a pro forma basis with a first lien net leverage ratio of no greater than 4.00:1.00. Availability of such additional tranches of term loans or revolving facilities and/or increased commitments is subject to, among other conditions, the absence of any default under the Senior Credit Agreement and the receipt of commitments by existing or additional financial institutions. Proceeds of the Revolving Facility, including up to $30.0 million in the form of borrowings on same-day notice, referred to as swingline loans, and up to $50.0 million in the form of letters of credit, are available to provide financing for working capital and general corporate purposes. Borrowings under the Senior Credit Facilities bear interest at an annual rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the highest of (i) the applicable prime rate, (ii) the federal funds rate plus 0.50% and (iii) a LIBOR rate determined by reference to the costs of funds for United States dollar deposits for an interest period of one month, adjusted for certain additional costs, plus 1.00%, which base rate, in the case of the Term Loan Facility only, shall be no less than 2.25% or (b) a LIBOR rate determined by reference to the costs of funds for United States dollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, which, in the case of the Term Loan Facility only, shall be no less than 1.25%. 56-------------------------------------------------------------------------------- Table of Contents In April 2012, we amended the Senior Credit Agreement to reprice the Senior Credit Facilities and borrow $80.0 million of additional term loans for general corporate purposes, including acquisitions. Following this amendment, the LIBOR-based interest rate on the Term Loan Facility was LIBOR plus 3.75%, compared to the previous interest rate of LIBOR plus 5.50%. The new LIBOR-based interest rate on the Revolving Facility was LIBOR plus 3.50% (with a potential step-down to LIBOR plus 3.25% based on our first lien net leverage ratio), compared to the previous interest rate of LIBOR plus 5.25% (with a potential step-down to LIBOR plus 5.00% based on our first lien net leverage ratio). In April 2013, we again amended the Senior Credit Agreement to further reprice, and also to modify certain financial covenants under, the Senior Credit Facilities. Following this amendment, the interest rate on the Term Loan Facility is LIBOR plus 2.50%, compared to the previous interest rate of LIBOR plus 3.75%. The new interest rate on the Revolving Facility is LIBOR plus 2.50%, compared to the previous interest rate of LIBOR plus 3.50% (or 3.25% based on a specified first lien net leverage ratio). The Term Loan Facility remains subject to a LIBOR floor of 1.25%, and there continues to be no LIBOR floor on the Revolving Facility. In connection with the April 2013 repricing, the Senior Credit Agreement also was amended to, among other things, eliminate the financial covenant in the Senior Credit Facilities related to the consolidated cash interest coverage ratio and modify the financial covenant related to the net leverage test by maintaining the required first lien net leverage ratio at 5.35 to 1.00 for the remaining term of the Senior Credit Facilities. These amendments to the Senior Credit Agreement resulted in a loss on extinguishment of debt of $23.2 million and other expenses related to fees paid to third parties of $1.2 million for the three and six months ended June 30, 2013, which have been reflected within sales, marketing, general and administrative expense in the accompanying consolidated statements of operations. In addition to paying interest on outstanding principal under the Senior Credit Facilities, we are required to pay customary agency fees, letter of credit fees and a 0.50% commitment fee in respect of the unutilized commitments under the Revolving Facility. The Senior Credit Agreement requires that we prepay outstanding loans under the Term Loan Facility, subject to certain exceptions, with (a) 100% of the net cash proceeds of any incurrence of debt other than debt permitted under the Senior Credit Agreement, (b) commencing with the fiscal year ended December 31, 2012, 50% (which percentage will be reduced to 25% and 0% based on our first lien net leverage ratio) of our annual excess cash flow and (c) 100% of the net cash proceeds of certain asset sales and casualty and condemnation events, subject to reinvestment rights and certain other exceptions. We generally may voluntarily prepay outstanding loans under the Senior Credit Facilities at any time without premium or penalty other than breakage costs with respect to LIBOR loans. We are required to make quarterly payments equal to 0.25% of the aggregate principal amount of the loans under the Term Loan Facility, with the balance due and payable on November 2, 2018. Any principal amount outstanding under the Revolving Facility is due and payable on November 2, 2016. Certain of our United States wholly-owned restricted subsidiaries, together with the Company, are co-borrowers and jointly and severally liable for all obligations under the Senior Credit Facilities. Such obligations of the co-borrowers are unconditionally guaranteed by Beagle Intermediate Holdings, Inc., a direct wholly-owned subsidiary of Beagle Parent Corp., the Company and each of our existing and future United States wholly-owned restricted subsidiaries (with certain exceptions including immaterial subsidiaries). These obligations are secured by a perfected security interest in substantially all of the assets of the co-borrowers and guarantors now owned or later acquired, including a pledge of all of the capital stock of the Company and our United States wholly-owned restricted subsidiaries and 65% of the capital stock of our foreign restricted subsidiaries, subject in each case to the exclusion of certain assets and additional exceptions. 57-------------------------------------------------------------------------------- Table of Contents The Senior Credit Agreement requires us to comply with a maximum first lien net leverage ratio financial maintenance covenant, to be tested on the last day of each fiscal quarter. A breach of the first lien net leverage ratio covenant is subject to certain equity cure rights. In addition, the Senior Credit Facilities contain a number of negative covenants that, among other things and subject to certain exceptions, restrict our ability and the ability of our subsidiaries to: • incur additional indebtedness or guarantees; • incur liens; • make investments, loans and acquisitions; • consolidate or merge; • sell assets, including capital stock of subsidiaries; • pay dividends on capital stock or redeem, repurchase or retire capital stock of the Company or any restricted subsidiary, subject to customary covenants, including compliance with leverage ratios and subject to limitation based on net income generated during the term of the Senior Credit Agreement; • alter the business of the Company; • amend, prepay, redeem or purchase subordinated debt; • engage in transactions with affiliates; and • enter into agreements limiting dividends and distributions of certain subsidiaries. The Senior Credit Agreement also contains certain customary representations and warranties, affirmative covenants and provisions relating to events of default (including upon change of control). As of June 30, 2014, we believe we were in compliance with all of the applicable debt covenants under the Senior Credit Agreement. Senior Notes The 2019 Notes bear interest at an annual rate of 11% with interest payable semi-annually on June 30 and December 31 of each year. The 2019 Notes mature on December 31, 2019. The 2020 Notes bear interest at an annual rate of 11.25% with interest payable quarterly on March 31, June 30, September 30 and December 31 of each year. The 2020 Notes mature on December 31, 2020. We may redeem the 2019 Notes, the 2020 Notes or both, in whole or in part, at any time on or after December 31, 2015 at the applicable redemption price, plus accrued and unpaid interest. In addition, at any time prior to December 31, 2014, we may, at our option and on one or more occasions, redeem up to 35% of the aggregate principal amount of the 2019 Notes or the 2020 Notes, at a redemption price equal to 100% of the aggregate principal amount, plus a premium equal to the stated interest rate on the 2019 Notes or the 2020 Notes, respectively, plus accrued and unpaid interest with the net cash proceeds of certain equity offerings; provided that at least 50% of the sum of the aggregate principal amount of the 2019 Notes or 2020 Notes, respectively, originally issued (including any additional notes) remain outstanding immediately after such redemption and the redemption occurs within 180 days of the equity offering. At any time prior to December 31, 2015, we may redeem the 2019 Notes, the 2020 Notes or both, in whole or in part, at our option and on one or more occasions, at a redemption price equal to 100% of the principal amount, plus an applicable premium and accrued and unpaid interest. If we experience specific kinds of changes in control, we must offer to purchase the Senior Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest. The Senior Notes are senior unsecured obligations and rank equally in right of payment with all of our existing and future indebtedness and senior in right of payment to all of our existing and future subordinated indebtedness. Our obligations under the Senior Notes are guaranteed on a senior basis by all of our existing and subsequently acquired or organized wholly-owned United States restricted subsidiaries that guarantee our Senior Credit Facilities or our other indebtedness or indebtedness of any affiliate guarantor. The Senior Notes and the related guarantees are effectively subordinated to our existing and future secured obligations and that of our affiliate guarantors to the extent of the value of the collateral securing such obligations, and are structurally subordinated to all existing and future indebtedness and other liabilities of any of our subsidiaries that do not guarantee the Senior Notes. 58-------------------------------------------------------------------------------- Table of Contents The indentures governing the Senior Notes (the "Indentures") contain covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to: • pay dividends on our capital stock or redeem, repurchase or retire our capital stock, subject to customary covenants, including compliance with a fixed charge coverage ratio and subject to limitation based on net income generated during the term of the Indentures; • incur additional indebtedness or issue certain capital stock; • incur certain liens; • make investments, loans, advances and acquisitions; • consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries; • prepay subordinated debt; • engage in certain transactions with our affiliates; and • enter into agreements restricting our restricted subsidiaries' ability to pay dividends. The Indentures also contain certain affirmative covenants and events of default. As of June 30, 2014, we believe we were in compliance with all of the applicable debt covenants under the Senior Notes. Off-Balance Sheet Arrangements As of the filing of this Quarterly Report, we had no off-balance sheet arrangements or obligations, other than those related to surety bonds of an insignificant amount. |