TMCnet News
CROSS COUNTRY HEALTHCARE INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The purpose of the following Management's Discussion and Analysis (MD&A) is to help facilitate the understanding of significant factors influencing the quarterly operating results, financial condition and cash flows of Cross Country Healthcare, Inc. Additionally, the MD&A also conveys our expectations of the potential impact of known trends, events or uncertainties that may impact future results. This discussion supplements the detailed information presented in the condensed consolidated financial statements and notes thereto which should be read in conjunction with the consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K, filed for the year ended December 31, 2013. Business Overview Cross Country Healthcare, Inc., is a national leader in providing healthcare recruiting, staffing and workforce management solutions. With more than 30 years of experience, we are dedicated to placing highly qualified nurses and physicians as well as allied health, advanced practice, clinical research, and case management professionals. We provide both retained and contingent placement services for physicians, as well as retained search services for healthcare executives. We have more than 4,300 active contracts with a broad range of clients, including acute care hospitals, physician practice groups, nursing facilities, rehabilitation and sports medicine clinics, government facilities, as well as nonclinical settings such as homecare and schools. Through our national staffing teams and network of more than 70 branch office locations, we are able to place clinicians for travel and per diem assignments, local short-term contracts and permanent positions. We are a market leader in providing flexible workforce management solutions, which include managed services provider, workforce assessments, internal resource pool consulting and development, electronic medical record transition staffing and recruitment process outsourcing. In addition, we provide education and training programs for healthcare professionals through seminars and e-learning tools. Our results are reported in three business segments: Nurse and Allied Staffing, Physician Staffing, and Other Human Capital Management Services. For the quarter ended September 30, 2014, Nurse and Allied Staffing which is comprised of travel and per diem nurse and allied staffing represented approximately 78% of our total revenue. Other Nurse and Allied Staffing services include the placement of allied healthcare professionals, such as rehabilitation therapists, radiology technicians, and respiratory therapists. Physician Staffing represented approximately 17% of our third quarter 2014 revenue and consists of temporary physician staffing services (locum tenens) in many specialties, certified registered nurse anesthetists (CRNAs), nurse practitioners (NPs) and physician assistants (PAs). Other Human Capital Management Services represented approximately 5% of our revenue and consists of healthcare professional education and training, as well as retained search services. Acquisitions Medical Staffing Network On June 30, 2014, we completed the acquisition of substantially all of the assets and certain liabilities of Medical Staffing Network (MSN) for an aggregate purchase price of $48.1 million, subject to certain post-closing net working capital adjustments. We paid $44.9 million, net of cash acquired and an additional $2.5 million was deferred and is due to the seller in 21 months less any COBRA expenses incurred by us on behalf of former MSN employees over that period. At the time of the acquisition, MSN had 55 locations throughout the U.S. that provide per diem, local, contract, travel, and permanent hire staffing services. This acquisition increases our branch network and market share, diversifies our customer base and brings new service lines. We believe it positions us to serve our customers better and to increase earnings growth through improved fill rates, expansion of our managed service programs and per diem activities, and the recognition of cost synergies. The acquisition has been accounted for in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations, using the acquisition method. The results of the MSN Acquisition are substantially reported through Nurse and Allied Staffing. Allied Healthcare Business In December 2013, we acquired the operating assets of On Assignment, Inc.'s Allied Healthcare Staffing division (the acquired allied staffing business) for an aggregate purchase price of $28.7 million, subject to certain post-closing adjustments. Excluded from the transaction were the accounts receivable, accounts payable and accrued compensation of the business being acquired. We used $24.7 million in cash on hand and $4.5 million from borrowings under our current revolver facility with Bank of America, N.A. to pay the purchase price and approximately $0.5 million in transaction costs. 26 -------------------------------------------------------------------------------- We believe this acquisition complements our current operations by: (1) adding new skillsets to our traditional staffing offerings, (2) expanding our local branch network, which will allow us to expand our local market presence and our MSP business, (3) diversifying our customer base into the local ambulatory care and retail market, which provides more balance between our large volume based customers and our small local customers, and (4) better positioning us to take additional market share at our MSP accounts. At the time of the acquisition, the acquired allied staffing business had 84 branch-based employees and made placements in more than 125 specialties from 23 branch offices. The allied staffing business acquisition has been accounted for in accordance with ASC805, Business Combination, using the acquisition method. The results of the acquisition's operations have been included in the consolidated statements of operations since December 2, 2013, the date of the acquisition. The acquired allied staffing business has been included in Nurse and Allied Staffing. Dispositions On February 15, 2013, we completed the sale of our clinical trial services business to ICON Clinical Research, Inc. and ICON Clinical Research UK Limited (the "Buyer") for an aggregate $52.0 million in cash, subject to certain adjustments. In the third quarter of 2014, the remaining Indemnity escrow related to the sale was released to us. The business segment has been classified as discontinued operations for all periods presented (see Note 4 - Discontinued Operations and Note 10 - Fair Value Measurements, to our condensed consolidated financial statements for more information). Segment Information In accordance with ASC 280, Segment Reporting, the Company reports three business segments - Nurse and Allied Staffing, Physician Staffing, and Other Human Capital Management Services, described below: ? Nurse and Allied Staffing - Nurse and Allied Staffing provides traditional staffing, including temporary and permanent placement of travel nurses and allied professionals, and branch-based local nurses and allied staffing. Its clients include: public and private acute-care and non-acute care hospitals, government facilities, schools, outpatient clinics, ambulatory care facilities, retailers, and many other healthcare providers throughout the U.S. The Company aggregates various brands that it markets to its customers in this business segment. ? Physician Staffing - Physician Staffing provides physicians in many specialties, certified registered nurse anesthetists (CRNAs), nurse practitioners (NPs) and physician assistants (PAs) under the Company's Medical Doctor Associates (MDA) brand as independent contractors on temporary assignments throughout the U.S. at various healthcare facilities, such as acute and non-acute care facilities, medical group practices, government facilities, and managed care organizations. ? Other Human Capital Management Services - Other Human Capital Management Services provides education and training programs to the healthcare industry and retained search services for physicians and healthcare executives within the U.S. Executive Summary of Operations We continue to execute on the elements of our strategy to grow revenue in our core businesses, expand margins and enhance the operating leverage of our infrastructure. The fundamentals of our strategy are to ensure we offer a full range of services and specialties necessary to meet the needs of our clients, to deliver creative and flexible workforce solutions, build a customer-centric strong sales capability with geographic access to all of our key markets, provide world class client service with a focus on fulfillment and retention, and continuously improve our operational effectiveness. For the quarter ended September 30, 2014, our revenue was $188.9 million, and we had a loss from continuing operations of $7.5 million, or $0.24 per diluted share, primarily due to a change in the fair value of an embedded derivative in our convertible notes. Cash flow used in operations for the nine months ended September 30, 2014 was $3.1 million. We ended the third quarter of 2014 with $7.7 million of cash and cash equivalents and total debt of $65.4 million (including $7.3 million related to the change in valuation of the embedded derivative in our Convertible Notes), and a ratio of debt, net of cash, to total capitalization of 26.8%. Nurse and Allied Staffing 27-------------------------------------------------------------------------------- In the third quarter of 2014, Nurse and Allied Staffing grew both year-over year and sequentially from a combination of robust organic growth and the impact of acquisitions. Throughout the quarter, we experienced increasing demand for our services, as well as growth in the number of health care professionals on assignment. At the end of the quarter Nurse and Allied Staffing orders were at the highest levels since October 2001 and the trends have continued into the fourth quarter. Orders are not perfectly correlated with our revenue, however, they are a strong indicator of our revenue opportunity. Physician Staffing In the third quarter of 2014, revenue from Physician Staffing decreased 3% year-over-year and increased 5% sequentially. The year-over-year decline was primarily volume driven, partly offset by the impact of the MSN acquisition. The sequential increase was entirely due to the impact of the MSN acquisition. Other Human Capital Management Services In the third quarter of 2014, revenue in Other Human Capital Management Services was essentially flat year-over-year and down slightly sequentially. Business Metrics In general, we evaluate our financial condition and operating results by revenue, contribution income (see Segment Information), and net income (loss). We also use measurement of our cash flow generation and operating and leverage ratios to help us assess our financial condition. In addition to the metrics identified below, we monitor other volume and profitability indicators such as number of open orders, contract bookings, and price. Business Segment Business Measurement Nurse and Allied Staffing FTEs represent the average number of Nurse and Allied Staffing contract personnel on a full-time equivalent basis. Average revenue per FTE per day is calculated by dividing the Nurse and Allied Staffing revenue by the number of days worked in the respective periods. Nurse and Allied Staffing revenue also includes revenue from the permanent placement of nurses. Physician Staffing Days filled is calculated by dividing the total hours filled during the period by 8 hours. Revenue per day filled is calculated by dividing the actual revenue invoiced (excluding permanent placement fees) by Physician Staffing days filled for the period presented. Other Financial Data (unaudited) Three Months Ended September 30, September 30, Percent 2014 2013 Change Change Nurse and Allied Staffing statistical data: FTEs 6,396 2,241 4,155 185.4 % Average Nurse and Allied Staffing revenue per FTE per day $ 251 $ 318 (67 ) (21.1 )% Physician Staffing statistical data: Days filled 22,742 24,011 (1,269 ) (5.3 )% Revenue per day filled $ 1,428 $ 1,461 (33 ) (2.3 )% 28-------------------------------------------------------------------------------- Nine Months Ended September 30, September 30, Percent 2014 2013 Change Change Nurse and Allied Staffing statistical data: FTEs 4,227 2,341 1,886 80.6 % Average Nurse and Allied Staffing revenue per FTE per day 269 317 (48 ) (15.1 )% Physician Staffing statistical data: Days filled 64,690 69,861 (5,171 ) (7.4 )% Revenue per day filled 1,432 1,418 14 1.0 % Results of Operations The following table summarizes, for the periods indicated, selected condensed consolidated statements of operations data expressed as a percentage of revenue: Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 Revenue from services 100.0 % 100.0 % 100.0 % 100.0 % Direct operating expenses 75.0 73.9 74.4 74.2 Selling, general and administrative expenses 21.6 23.6 23.1 24.1 Bad debt expense 0.1 0.2 0.2 0.2 Depreciation and amortization 1.1 1.3 1.2 1.4 Acquisition and integration costs 1.3 - 1.3 - Restructuring costs - 0.1 0.2 0.1 Legal settlement charge - - - 0.2 Income (loss) from operations 0.9 0.9 (0.4 ) (0.2 ) Foreign exchange (gain) loss - - - - Interest expense 1.0 0.2 0.6 0.2 Change in fair value of convertible note derivative liability 3.8 - 1.7 - Loss on early extinguishment and modification of debt - - - 0.4 (Loss) income from continuing operations before income taxes (3.9 ) 0.7 (2.7 ) (0.8 ) Income tax expense (benefit) 0.1 (0.6 ) - (0.4 ) (Loss) income from continuing operations (4.0 ) 1.3 (2.7 ) (0.4 ) (Loss) income from discontinued operations, net of income taxes - (0.5 ) - 0.6 Net (loss) income (4.0 ) 0.8 (2.7 ) 0.2 Less: Net income attributable to non-controlling interest in subsidiary - - - - Net (loss) income attributable to Cross Country Healthcare, Inc. (4.0 )% 0.8 % (2.7 )% 0.2 % Segment Information Management evaluates performance of each segment primarily based on revenue and contribution income. Management does not evaluate, manage or measure performance of segments using asset information; accordingly, asset information by segment is not prepared or disclosed. The information in the following table is derived from the segments' internal financial information as used for corporate management purposes. Certain corporate expenses are not allocated to and/or among the operating segments. 29--------------------------------------------------------------------------------Information on operating segments and the reconciliation to income (loss) from operations for the periods indicated are as follows: Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 (a) 2014 2013 (a) (amounts in thousands) Revenues: Nurse and Allied Staffing $ 147,518 $ 65,580 $ 310,327 $ 202,309 Physician Staffing 32,286 33,353 92,271 97,933 Other Human Capital Management Services 9,140 9,115 27,093 28,890 $ 188,944 $ 108,048 $ 429,691 $ 329,132 Contribution income (b): Nurse and Allied Staffing (c) $ 12,575 $ 4,998 $ 25,196 $ 13,665 Physician Staffing 1,478 2,243 4,103 7,031 Other Human Capital Management Services (55 ) 55 (121 ) 879 13,998 7,296 29,178 21,575 Unallocated corporate overhead (c) 7,836 4,831 19,216 16,618 Depreciation 1,005 890 2,796 2,952 Amortization 1,011 552 2,580 1,684 Acquisition and integration costs 2,383 - 5,425 - Restructuring costs - 109 755 484 Legal settlement charge - - - 750 Income (loss) from operations $ 1,763 $ 914 $ (1,594 ) $ (913 ) ___________________ (a) Prior year data has been reclassified to conform to the current year's presentation. Effective January 1, 2014, we merged our Allied Health Group, LLC subsidiary with Medical Doctor Associates, LLC subsidiary. The decision to merge these companies was based on a number of factors including the consolidation of back office processes and other operational efficiencies. Along with this merger, we evaluated the Allied Health Group trade name and determined that it would be more valuable to use it for our Nurse and Allied Staffing business, and as a result, transferred the trade name effective January 1, 2014. The allied health staffing business of MDA has primarily consisted of higher-level allied professionals, such as physician assistants and nurse practitioners, whose job functions are becoming increasingly more similar to those of physicians than to other allied health professionals. The 2014 change in legal structure and processes, along with the current market dynamics has changed our approach/conclusion to aggregate this business with Nurse and Allied Staffing for 2014. We have revised our segments for 2014 reporting to include this business with Physician Staffing. (b) We define contribution income or loss from operations before depreciation, amortization, acquisition and integration costs, restructuring costs, legal settlement charges, impairment charges, and other corporate expenses not specifically identified to a reporting segment. Contribution income is a measure used by management to assess operations and is provided in accordance with ASC 280, Segment Reporting. (c) In 2014, we refined our methodology for allocating certain corporate overhead expenses to our Nurse and Allied Staffing segment to more accurately reflect this segment's profitability. Prior year information has been reclassified to conform to current year presentation. 30--------------------------------------------------------------------------------Comparison of Results for the Three Months Ended September 30, 2014 compared to the Three Months Ended September 30, 2013 Results of Recent Acquisitions We are in the process of integrating the acquired businesses into our current operations, including the consolidation of branch and corporate offices and as a result, it is impracticable to separate their results from the date of acquisition. We provide information about the unaudited pro forma combined financial information as if the MSN and allied staffing business acquisitions had occurred as of January 1, 2013 to provide context to the underlying growth of the businesses. Revenue from services Revenue from services increased 74.9%, to $188.9 million for the three months ended September 30, 2014, as compared to $108.0 million for the three months ended September 30, 2013. The increase was entirely from Nurse and Allied Staffing as revenue from Physician Staffing declined year-over year and was essentially flat in Other Human Capital Management Services. Nurse and Allied Staffing Revenue from Nurse and Allied Staffing increased 124.9%, to $147.5 million for the three months ended September 30, 2014, as compared to $65.6 million for the three months ended September 30, 2013. The year-over-year increase was a result of growth in the segment as well as the impact from the acquired businesses. On a pro forma basis, including results of the acquired businesses in both periods, revenue increased 11.6%, primarily related to higher demand for travel nurses. The average number of Nurse and Allied Staffing FTEs on contract during the three months ended September 30, 2014 increased 185.4% from the three months ended September 30, 2013, including 3,816 FTEs from the acquired businesses. The average Nurse and Allied Staffing revenue per FTE per day decreased 21.1%, primarily due to lower average bill rates in the acquired businesses relating to mix. Physician Staffing Revenue from Physician Staffing decreased 3.2%, to $32.3 million for the three months ended September 30, 2014, as compared to $33.4 million for the three months ended September 30, 2013. The decrease in revenue was due to lower volume partially offset by the impact of the MSN acquisition. Physician Staffing days filled decreased 5.3%, to 22,742 days in the three months ended September 30, 2014, as compared to 24,011 days in the three months ended September 30, 2013. Revenue per day filled for the three months ended September 30, 2014 was $1,428, down, 2.3% from the prior year. Other Human Capital Management Services Revenue from Other Human Capital Management Services was $9.1 million for the three months ended September 30, 2014 and 2013. A slight increase in revenue from our education and training business was substantially offset by slightly lower revenue from our retained search business. Direct operating expenses Direct operating expenses are comprised primarily of field employee compensation and independent contractor expenses, housing expenses, travel expenses and field insurance expenses. Direct operating expenses increased $61.8 million or 77.4%, to $141.7 million for the three months ended September 30, 2014, as compared to $79.9 million for three months ended September 30, 2013. As a percentage of total revenue, direct operating expenses increased to 75.0% compared to 73.9% in the same prior year period, primarily due to the reset of payroll taxes for healthcare professionals transitioning to our company from the MSN acquisition, as well as higher direct costs in Physician Staffing. Selling, general and administrative expenses Selling, general and administrative expenses increased 60.2%, to $40.9 million for the three months ended September 30, 2014, as compared to $25.5 million for the three months ended September 30, 2013. This increase is primarily due to the acquired 31--------------------------------------------------------------------------------businesses. As a percentage of total revenue, selling, general and administrative expenses were 21.6% and 23.6%, for the three months ended September 30, 2014 and 2013, respectively. Included in selling, general and administrative expenses is unallocated corporate overhead of $7.8 million and $4.8 million for the three months ended September 30, 2014 and 2013, respectively, representing an increase of $3.0 million primarily due to the impact of acquisitions. As a percentage of consolidated revenue, unallocated corporate overhead was 4.1% and 4.5% for the three months ended September 30, 2014 and 2013, respectively. Share-based compensation, included in unallocated corporate overhead, was $0.4 million and $0.5 million for the three months ended September 30, 2014 and 2013, respectively. Contribution income Nurse and Allied Staffing Contribution income from Nurse and Allied Staffing increased $7.6 million or 151.6%, to $12.6 million for the three months ended September 30, 2014, as compared to $5.0 million for the three months ended September 30, 2013. As a percentage of segment revenue, contribution income was 8.5% for the three months ended September 30, 2014, and 7.6% for the three months ended September 30, 2013. This increase was primarily due to improved operating leverage in the business. Physician Staffing Contribution income from Physician Staffing decreased $0.8 million or 34.1%, to $1.5 million for the three months ended September 30, 2014, as compared to $2.2 million for the three months ended September 30, 2013. As a percentage of segment revenue, contribution income was 4.6% for the three months ended September 30, 2014 and 6.7% for the three months ended September 30, 2013. This decrease was primarily due to a combination of higher professional liability expense in the three months ended September 30, 2014 and negative operating leverage. Other Human Capital Management Services Contribution income from Other Human Capital Management Services was a loss of $0.1 million for the three months ended September 30, 2014, as compared to income of $0.1 million for the three months ended September 30, 2013. Contribution income as a percentage of segment revenue was (0.6)% for the three months ended September 30, 2014 and 0.6% for the three months ended September 30, 2013. Depreciation and amortization expense Depreciation and amortization expense totaled $2.0 million for the three months ended September 30, 2014 and $1.4 million for the three months ended September 30, 2013. As a percentage of consolidated revenue, depreciation and amortization expense was 1.1% and 1.3% for the three months ended September 30, 2014 and 2013, respectively. Restructuring Costs There were no restructuring costs for the three months ended September 30, 2014. Restructuring costs were $0.1 million for the three months ended September 30, 2013 and primarily related to severance costs associated with the plan to reduce operating costs implemented in the second quarter of 2013. Acquisition and Integration Costs During the three months ended September 30, 2014, we incurred acquisition and integration costs of $2.4 million. The acquisition and integration costs were primarily related to integration costs of the MSN acquisition. No similar charges were recorded in the three months ended September 30, 2013. Interest expense Interest expense totaled $1.8 million and $0.2 million for the three months ended September 30, 2014 and 2013, respectively. The increase was primarily due to higher average borrowings in the three months ended September 30, 2014 compared to de minimis debt outstanding in the prior year quarter. The effective interest rate on our borrowings was 7.1% for the three month period ended September 30, 2014. 32--------------------------------------------------------------------------------Change in Fair Value of Convertible Note Derivative Liability Change in fair value of convertible note derivative liability of $7.3 million in the three months ended September 30, 2014 relates to the fair value of embedded features of our Convertible Notes. The Convertible Notes include terms that are considered to be embedded derivatives, including conversion and redemption features that primarily protect the investors' investment with us (see Note 9 - Convertible Notes Derivative Liability). On a quarterly basis, we are required to record this embedded derivative at fair value with the changes being recorded as a component of other expense (income) on our condensed consolidated statements of operations. Income tax expense (benefit) Income tax expense from continuing operations totaled $0.2 million for the three months ended September 30, 2014, as compared to a benefit of $0.6 million for the three months ended September 30, 2013. The effective tax rate was (2.3)% and (79.6)% for the three months ended September 30, 2014 and September 30, 2013, respectively. The income tax expense for the three months ended September 30, 2014 was more than the statutory rate primarily due to changes in the valuation allowance resulting from the amortization of indefinite-lived intangible assets for tax purposes and the partial non-deductibility of certain per diem expenses, partly offset by a reduction in unrecognized tax benefits due to the expiration of certain statutes of limitation. The effective tax rate for the three months ended September 30, 2013 was lower than the statutory rate due to the impact of the non-deductibility of certain per diem expenses, state taxes and foreign taxes. (Loss) Income from discontinued operations, net of income taxes (Loss) income from discontinued operations, net of income taxes included the results from the sale of the clinical trial services business which was classified as discontinued in the three months ended September 30, 2013. See Note 4 -Discontinued Operations, to our condensed consolidated financial statements for more information. Comparison of Results for the Nine Months Ended September 30, 2014 compared to the Nine Months Ended September 30, 2013 Revenue from services Revenue from services increased 30.6%, to $429.7 million for the nine months ended September 30, 2014, as compared to $329.1 million for the nine months ended September 30, 2013. The revenue increase was entirely from Nurse and Allied Staffing and was partially offset by revenue declines in both Physician Staffing and Other Human Capital Management Services. Nurse and Allied Staffing Revenue from Nurse and Allied Staffing increased 53.4%, to $310.3 million for the nine months ended September 30, 2014, as compared to $202.3 million for the nine months ended September 30, 2013. The revenue increase was related to the acquired businesses as well as robust organic growth. On a pro forma basis, including results of the acquired businesses in both periods, revenue increased 7.7% due to higher volume and higher average bill rates in the nine months ended September 30, 2014. The average number of Nurse and Allied Staffing FTEs on contract during the nine months ended September 30, 2014, increased 80.6% from the nine months ended September 30, 2013 primarily due to the acquired businesses. The average Nurse and Allied Staffing revenue per FTE per day decreased 15.1%, primarily due to lower average bill rates in the acquired business. Physician Staffing Revenue from Physician Staffing decreased 5.8%, to $92.3 million for the nine months ended September 30, 2014, as compared to $97.9 million for the nine months ended September 30, 2013. The decrease in revenue is primarily due to lower volume, which was partially offset by higher revenue per day filled. Physician Staffing days filled decreased 7.4%, to 64,690 days in the nine months ended September 30, 2014, as compared to 69,861 days in the nine months ended September 30, 2013. Revenue per day filled for the nine months ended September 30, 2014 was $1,432, a 1.0% increase from the nine months ended September 30, 2013. 33--------------------------------------------------------------------------------Other Human Capital Management Services Revenue from Other Human Capital Management Services decreased 6.2%, to $27.1 million for the nine months ended September 30, 2014, as compared to $28.9 million for the nine months ended September 30, 2013. The decrease is due to a combination of lower seminar attendance and lower revenue from our retained search business. Direct operating expenses Direct operating expenses are comprised primarily of field employee compensation and independent contractor expenses, housing expenses, travel expenses and field insurance expenses. Direct operating expenses increased $75.3 million or 30.8%, to $319.5 million for the nine months ended September 30, 2014, as compared to $244.2 million for nine months ended September 30, 2013. As a percentage of total revenue, direct operating expenses were 74.4% and 74.2% for the nine months ended September 30, 2014 and 2013, respectively. Selling, general and administrative expenses Selling, general and administrative expenses increased $20.3 million or 25.7%, to $99.5 million for the nine months ended September 30, 2014, as compared to $79.2 million for the nine months ended September 30, 2013. The increase was primarily related to the impact of the acquisitions. As a percentage of total revenue, selling, general and administrative expenses were 23.1% and 24.1%, for the nine months ended September 30, 2014 and 2013, respectively. Included in selling, general and administrative expenses is unallocated corporate overhead of $19.2 million for nine months ended September 30, 2014, compared to $16.6 million for the nine months ended September 30, 2013. As a percentage of consolidated revenue, unallocated corporate overhead was 4.5% and 5.0% for the nine months ended September 30, 2014 and 2013, respectively. Share-based compensation, included in unallocated corporate overhead, was $1.0 million and $1.6 million for the nine months ended September 30, 2014 and 2013, respectively. The year-over-year decline in share-based compensation was related to increased forfeitures. Contribution income Nurse and Allied Staffing Contribution income from Nurse and Allied Staffing increased 84.4%, to $25.2 million for the nine months ended September 30, 2014, as compared to $13.7 million for the nine months ended September 30, 2013. As a percentage of segment revenue, contribution income was 8.1% for the nine months ended September 30, 2014, and 6.8% for the nine months ended September 30, 2013. The margin improvement was primarily due to improvement in our bill/pay spread in our organic business. Physician Staffing Contribution income from Physician Staffing decreased 41.6%, to $4.1 million for the nine months ended September 30, 2014, as compared to $7.0 million for the nine months ended September 30, 2013. As a percentage of segment revenue, contribution income was 4.4% for the nine months ended September 30, 2014 and 7.2% for the nine months ended September 30, 2013. This decrease was primarily due to higher professional liability expense and lower revenue. Other Human Capital Management Services Contribution income from Other Human Capital Management Services was a loss of $0.1 million for the nine months ended September 30, 2014, as compared to income of $0.9 million for the nine months ended September 30, 2013. The decrease in contribution income was primarily due to lower revenue and higher direct mail expenses in our education and training business. Depreciation and amortization expense Depreciation and amortization expense totaled $5.4 million for the nine months ended September 30, 2014, as compared to $4.6 million for the nine months ended September 30, 2013. As a percentage of consolidated revenue, depreciation and amortization expense was 1.2% and 1.4% for the nine months ended September 30, 2014 and 2013, respectively. 34 --------------------------------------------------------------------------------Restructuring Costs During the nine months ended September 30, 2013, we initiated a restructuring plan to reduce operating costs. We recorded restructuring costs of $0.8 million and $0.5 million, in the nine months ended September 30, 2014 and 2013, respectively, primarily related to senior management severance pay. Legal Settlement Charge During the nine months ended September 30, 2013, we accrued $0.8 million to settle a wage and hour class action lawsuit in California, for which the Court granted final approval of the settlement in September 2014. See Note 13 - Commitments and Contingencies to our condensed consolidated financial statements. Acquisition and Integration Costs During the nine months ended September 30, 2014, we incurred acquisition and integration costs of $5.4 million, pretax. The acquisition and integration costs were primarily related to the MSN acquisition and the integration of the acquired allied staffing business and included transitional services as well as travel and training costs. No similar charges were recorded in the nine months ended September 30, 2013. Loss on early extinguishment and modification of debt In the nine months ended September 30, 2013, loss on early extinguishment or modification of debt was $1.4 million and related to a change in lenders' participations and modification of the then existing July 2012 Credit Agreement. See Note 8- Debt, to our condensed consolidated financial statements for more information. Interest expense Interest expense totaled $2.4 million for the nine months ended September 30, 2014 compared to $0.6 million for the nine months ended September 30, 2013. The increase in interest expense was due to a combination of higher average borrowings and higher interest rates on our borrowings. The effective interest rate on our borrowings was 5.6% for the nine month period ended September 30, 2014 compared to 2.1% in the nine month period ended September 30, 2013. Change in Fair Value of Derivative Change in fair value of derivative of $7.3 million in the nine months ended September 30, 2014 relates to the fair value of embedded features of our Convertible Notes. The Convertible Notes include terms that are considered to be embedded derivatives, including conversion and redemption features that primarily protect the investors' investment with us (see Note 9 - Convertible Notes Derivative Liability). On a quarterly basis, we are required to record this embedded derivative at fair value with the changes being recorded as a component of other expense (income) on our condensed consolidated statements of operations. Income tax expense (benefit) Income tax expense from continuing operations totaled $0.1 million for the nine months ended September 30, 2014, as compared to a $1.4 million tax benefit for the nine months ended September 30, 2013. The effective tax rate was (0.9)% and 51.3% in the nine months ended September 30, 2014 and 2013, respectively. The income tax expense in the nine months ended September 30, 2014 included a benefit of $2.7 million from discrete items, the most significant of which related to corrections to the valuation allowance recorded at December 31, 2013 and a lapse of the applicable statute of limitations for ASC 740 Unrecognized Tax Benefits. Excluding those discrete items, income tax expense was $2.8 million reflecting the impact of changes in the valuation allowance resulting from amortization of indefinite lived intangibles for tax purposes, as well as partial non-deductibility for certain per diem expenses and to a lesser extent state and foreign taxes, offsetting the tax benefit arising from the continuing loss. The effective tax rate for the nine months ended September 30, 2013 was lower than the statutory rate due to the impact of the non-deductibility of certain per diem expenses offset by additional state and foreign taxes. Income (loss) from discontinued operations, net of income taxes Income (loss) from discontinued operations, net of income taxes includes the results from the sale of the clinical trial services business which was classified as discontinued in the nine months ended September 30, 2013. Income from discontinued operations, net of tax of $1.9 million included a $4.0 million gain ($1.7 million net of taxes) on the sale of our clinical trial 35 --------------------------------------------------------------------------------services business in the nine months ended September 30, 2013. See Note 4 -Discontinued Operations, to our condensed consolidated financial statements for more information. Transactions with Related Parties We provided services to hospitals which are affiliated with certain members of our Board of Directors. We believe the pricing for these services is consistent with our other hospital customers. Revenue related to these transactions amounted to approximately $6.0 million and $11.4 million for the three and nine months ended September 30, 2014, respectively. Revenue related to these transactions amounted approximately $1.2 million and $3.5 million for the three and nine months ended September 30, 2013, respectively. Accounts receivable due from these hospitals at September 30, 2014 and December 31, 2013 were approximately $1.6 million and $0.4 million, respectively. MSN provided staffing services to an entity that has a non-controlling interest in InteliStaf of Oklahoma, LLC, a joint venture between MSN (68% ownership) and an unrelated third party (with 32% ownership). At September 30, 2014, we had a receivable balance of approximately $1.4 million and a payable balance of $0.3 million relating to these staffing services. Liquidity and Capital Resources As of September 30, 2014, we had a current ratio, defined as the amount of current assets divided by current liabilities, of 2 to 1. Working capital increased to $65.6 million as of September 30, 2014 from $39.0 million as of December 31, 2013 primarily due to the MSN acquisition. We financed the purchase price of MSN using $55.0 million in new subordinated debt consisting of a $30.0 million, 5-year term loan and $25.0 million of convertible notes having a 6-year maturity and a conversion price of $7.10. We also amended our loan agreement with Bank of America. N.A. to increase our borrowing capacity under our senior secured asset-based revolving credit facility from $65.0 million to $85.0 million. See Note 8 - Debt and Note 9 - Convertible Notes Derivative Liability for further information. Our operating cash flows constitute our primary source of liquidity, and historically, have been sufficient to fund our working capital, capital expenditures, internal business expansion and debt service. We believe that our capital resources are sufficient to meet our working capital needs for the next twelve months. We expect to meet our future needs for working capital, capital expenditures, internal business expansion and debt service from a combination of cash on hand, operating cash flows and funds available through the revolving loan portion of our First Lien Loan Agreement. We believe that operating cash flows and cash on hand, along with amounts available under our First Lien Loan Agreement, will be sufficient to meet these needs during the next twelve months. Net cash used in operating activities was $3.1 million in the nine months ended September 30, 2014, compared to $11.6 million provided by operating activities in the nine months ended September 30, 2013. Net cash flow provided by discontinued operations was approximately $0.1 million in the nine months ended September 30, 2013. The increased usage in cash in the nine months ended September 30, 2014 was primarily due to an increase in accounts receivable coupled with acquisition and integration costs related to MSN and the allied health staffing business acquired in December of 2013 The number of days' sales outstanding was 52 days at September 30, 2014 compared to 49 days and 51 days at September 30, 2013 and December 31, 2013, respectively. Investing activities used $44.9 million in the nine months ended September 30, 2014, compared to $45.0 million provided by investing activities in the nine months ended September 30, 2013. As previously noted, we acquired substantially all of the assets and certain liabilities of MSN in the second quarter of 2014 for a purchase price of $48.1 million, net of cash acquired. During the nine months ended September 30, 2013, we sold the clinical trial services business with net proceeds from the sale of $45.7 million which included costs to sell the business. We used $3.8 million for capital expenditures in the nine months ended September 30, 2014 compared to $0.7 million in the nine months ended September 30, 2013. The capital expenditures in the nine months ended September 30, 2014 included $0.9 million of tenant improvements funded by our landlord due to the relocation of our Physician Staffing headquarters. Net cash provided by financing activities during the nine months ended September 30, 2014, was $47.6 million compared to net cash used in financing activities of $34.4 million during the nine months ended September 30, 2013. During the nine months ended September 30, 2014, excluding non-cash changes, we increased our debt by $48.9 million primarily to fund the acquisition of MSN, including acquisition related expenses, and to fund integration efforts from our allied health acquisition as well. In addition, we used $1.1 million for debt issuance costs related to the financing of the MSN acquisition. In the nine months ended September 30, 2013, we repaid total debt, net of borrowings, of $33.6 million using the proceeds from the sale of 36 --------------------------------------------------------------------------------clinical trial services business. In addition, we used $0.5 million to pay debt issuance costs related to our First Lien Loan Agreement. Stockholders' Equity Stock Repurchase Program As of September 30, 2014, we may purchase up to an additional 942,443 shares of Common Stock under the February 2008 Board authorization, subject to certain conditions in the our First Lien Loan Agreement and Second Lien Term Loan Agreement. Subject to certain conditions as described in the First Lien Loan Agreement, we may repurchase up to an aggregate amount of $5.0 million of our Equity Interests (as defined in the Loan Agreement). During the nine months ended September 30, 2014 and September 30, 2013, we did not repurchase any shares under our February 2008 Board of Directors' authorization. Share-based Payments On March 11, 2014, the Board of Directors approved an amendment and restatement of the 2007 Stock Incentive Plan (amended and restated effective March 20, 2013) (the "Stock Incentive Plan"), which was renamed the 2014 Omnibus Incentive Plan. The Stock Incentive Plan as amended and restated is referred to below as the Omnibus Plan. The Omnibus Plan approval was subject to, and became effective upon, stockholder approval at the Annual Meeting held on May 13, 2014. The Omnibus Plan generally incorporates the provisions of the Stock Incentive Plan as currently in effect and includes the following key modifications: • Increase of the Aggregate Share Reserve. The aggregate share reserve was increased by an additional 600,000 shares for a total share reserve of 4,100,000 shares under the Omnibus Plan. • Removal of Non-Appreciation Award Limit. In connection with the increase in the aggregate share reserve, the limit on the number of awards that are not "appreciation awards" (i.e., restricted stock and restricted stock units) that may be granted under the Omnibus Plan was removed. • Performance-Based Cash Awards. The Omnibus Plan includes performance-based cash awards that may be granted with the intent to comply with the "performance-based compensation" exception under Section 162(m) of the Code. • Term Extension. The term of the Amended Plan was extended until March 10, 2024 (the 2007 Stock Incentive Plan was scheduled to expire on April 5, 2017). • Added pre-tax income as a metric to measure performance based equity awards. During the nine months ended September 30, 2014, 377,308 restricted stock awards and 239,585 performance stock awards were granted under the Omnibus Plan to our non-employee Directors and management team. Pursuant to the Omnibus Plan the number of target shares that are issued for performance stock awards are determined based on the level of attainment of the targets. If the minimum level of performance is attained, restricted stock will be issued and with a vesting date of December 31, 2016, subject to the employee's continuing employment. Debt Senior Credit Facility On January 9, 2013, we entered into a First Lien Loan, (the First Lien Loan Agreement or Senior Secured Asset-Based), by and among the Company and certain of its subsidiaries, as borrowers, and Bank of America, N.A., as agent. The First Lien Loan Agreement was subsequently amended to allow for the sale of our clinical trials services business in February 2013 and for administrative matters. 37-------------------------------------------------------------------------------- On June 30, 2014, we entered into a third amendment (the Amendment) to the First Lien Loan Agreement dated as of January 9, 2013 with Bank of America, N.A., as agent, in order to, among other things, increase our borrowing capacity under the First Lien Loan Agreement and to consent to the consummation of the MSN acquisition and the incurrence of the indebtedness contemplated pursuant to the Second Lien Term Loan Agreement and the Note Purchase Agreement. The Amendment provides for, among other things, increasing the revolving credit facility under the First Lien Loan Agreement from $65.0 million to $85.0 million and increasing the letter of credit subline under the First Lien Loan Agreement from $20.0 million to $35.0 million. In addition, the termination date of the revolving credit facility under the First Lien Loan Agreement has been extended to June 30, 2017. We used the increased availability under the letter of credit subline to collateralize certain insurance obligations related to the MSN acquisition. The revolving credit facility and letter of credit subline will be used to provide ongoing working capital and for other general corporate purposes. As of September 30, 2014, the interest rate spreads and fees under the First Lien Loan Agreement are based on LIBOR plus 1.50% or Base Rate plus 0.50%. The LIBOR and Base Rate margins are subject to performance pricing adjustments, pursuant to a pricing matrix based on excess availability under the revolving credit facility, and could increase by 200 basis points if an event of default exists. We are required to pay a monthly commitment fee on the average daily unused portion of the revolving loan facility, which, as of September 30, 2014, was 0.375%. The revolving credit facility can be used to provide ongoing working capital and for other general corporate purposes of the Company and its subsidiaries. As of September 30, 2014, the Gross Availability, as defined in the First Lien Loan Agreement, was approximately $70.7 million based on the our August accounts receivable balance. We had $26.5 million letters of credit outstanding and $4.5 million drawn under the revolving credit facility, leaving $39.7 million available as of September 30, 2014. The letters of credit relate to our workers' compensation and professional liability insurance policies. For additional information refer to Note 8- Debt to our condensed consolidated financial statements. Second Lien Term Loan On June 30, 2014, we entered into a second lien loan and security agreement (the Second Lien Term Loan Agreement), by and among the Company, as borrower, certain of its domestic subsidiaries, as guarantors, and BSP Agency, LLC, as agent. The Second Lien Term Loan Agreement provides for a five-year senior secured term loan facility in an aggregate principal amount of $30.0 million (the loans thereunder, the Second Lien Term Loans). The proceeds from the Second Lien Term Loan Facility were used to pay a portion of the consideration for the MSN acquisition and related fees and expenses. Amounts borrowed under the Second Lien Term Loan Facility that are repaid or prepaid may not be re-borrowed. The Second Lien Term Loans bear interest at a rate equal to adjusted LIBOR (defined as the 3-month London interbank offered rate for U.S. dollars, adjusted for customary Eurodollar reserve requirements, if any, and subject to a floor of 1.00%) plus 6.50%. The interest rate would increase by 200 basis points if an event of default exists under the Second Lien Term Loan Agreement. At our option we may elect to prepay the Second Lien Term Loans on or before June 30, 2015, subject to a prepayment premium in an amount equal to (i) the amount of the principal amount of the Second Lien Term Loans being repaid, plus (ii) the accrued but unpaid interest on the principal amount so prepaid, if any, to the date of the prepayment, plus (iii) any associated administrative amounts or charges owed to the lenders as a result of the redeployment of funds or fees payable to terminate matching deposits, plus (iv) a "make whole" amount equal to the excess, if any, of (a) the present value at the prepayment date of (1) 103% of the aggregate principal amount of the Second Lien Term Loans then being prepaid, plus (2) all remaining scheduled interest payments due on the principal amount of such Second Lien Term Loans being prepaid through June 30, 2015 (excluding accrued but unpaid interest to the date of such prepayment), computed using a discount rate equal to the Treasury rate as of such prepayment date plus 50 basis points over (b) the outstanding principal amount of such Second Lien Term Loans being prepaid. The Company may, at its option at any time after June 30, 2015, prepay the Second Lien Term Loans in whole or in part at the redemption prices set forth therein, which range from 103% of the principal amount thereof for prepayments during the period July 1, 2015 through June 30, 2016, 102% of the principal amount thereof for prepayments during the period July 1, 2016 through June 30, 2017, and 100% of the principal amount thereof for prepayments after such date. If we complete a public offering on or prior to November 27, 2014, however, we may apply the proceeds of such public offering to prepay the Second Lien Term Loans (plus accrued and unpaid interest thereon), in whole but not in part, without premium or penalty. Subject to certain exceptions, the Second Lien Term Loans are required to be prepaid with: (a) 50% of excess cash flow (as defined in the Second Lien Term Loan Agreement) above $5.0 million for each fiscal year of the Company (commencing with 38 -------------------------------------------------------------------------------- the fiscal year ending December 31, 2015), provided that voluntary prepayments of the Second Lien Term Loans made during such fiscal year will reduce the amount of excess cash flow prepayments required for such fiscal year on a dollar-for-dollar basis; (b) 100% of the net cash proceeds of all asset sales or other dispositions of property by us, as set forth in the agreement, in excess of a defined threshold and subject to our right to reinvest such proceeds within 12 months; (c) 100% of the net cash proceeds of issuances of debt offerings by us (except the net cash proceeds of any permitted debt); and (d) 50% of the net cash proceeds of equity offerings of the Company. Private Placement of Convertible Notes On June 30, 2014, we entered into a Convertible Note Purchase Agreement (the Note Purchase Agreement), with certain note holders (collectively, the Noteholders). Pursuant to the Note Purchase Agreement, we sold to the Noteholders an aggregate of $25.0 million of convertible senior notes (the Convertible Notes). The proceeds from the Note Purchase Agreement were used to pay a portion of the consideration paid in the MSN Acquisition and related fees and expenses. The Convertible Notes are convertible at the option of the holders thereof at any time into shares of the our common stock, par value $0.0001 per share (Common Stock), at an initial conversion price of $7.10 per share, or 3,521,126 shares of Common Stock. After three years, we have the right to force a conversion of the Convertible Notes if the volume-weighted average price (VWAP) per share of its Common Stock exceeds 125% of the then conversion price for 20 days of a 30 day trading period. The conversion price is subject to adjustment pursuant to customary weighted average anti-dilution provisions including adjustments for the following: Common Stock dividends or distributions; issuance of any rights, warrants of options to acquire Common Stock; distributions of property; tender offer or exchange offer payments; cash dividends; or certain issuances of Common Stock at less than the conversion price. Upon conversion of the Convertible Notes, we will exchange, for the applicable conversion amount thereof a number of shares of Common Stock equal to the amount determined by dividing (i) such conversion amount by (ii) the conversion price in effect at the time of conversion. No fractional shares of Common Stock will be issued upon conversion of the Conversion Notes. In lieu of fractional shares, the Company shall pay cash in respect of each fractional share equal to such fractional amount multiplied by the Thirty Day VWAP as of the closing of business on the Business Day immediately preceding the conversion date as well as any unpaid accrued interest. The Convertible Notes bear interest at a rate of 8.00% per annum, payable in quarterly cash installments; provided, however, that, at our option, up to 4.00% of the interest payable may be "paid-in-kind" through a quarterly addition of such "paid-in-kind" interest amount to the principal amount of the Convertible Notes. The Convertible Notes will mature on June 30, 2020, unless earlier repurchased, redeemed or converted. Subject to certain exceptions, we are not permitted to redeem the Convertible Notes until June 30, 2017. If we redeem the Convertible Notes on or after June 30, 2017, we are required to pay a premium equal to the greater of (i) the sum of (a) the amount of principal of the Convertible Notes redeemed, plus (b) the accrued but unpaid interests on the principal amount so redeemed to the date of the redemption, plus (c) 15% of the amount of principal of the Convertible Notes redeemed and (ii) the sum of (x) the average thirty day VWAP per share of Common Stock multiplied by the number of shares of Common Stock that the redeemed Convertible Notes are then convertible into and (y) the accrued but unpaid interest on the Convertible Notes. If the Convertible Notes are redeemed prior to June 30, 2017, we are required to pay a premium equal to the greater of (i) the sum of (a) the amount of principal of the Convertible Notes redeemed, plus (b) the accrued but unpaid interests on the principal amount so redeemed to the date of the redemption, plus (c) a "make whole" amount (described below) and (ii) the sum of (x) the average thirty day volume-weighted average price per share of Common Stock multiplied by the number of shares of Common Stock that the redeemed Convertible Notes are then convertible into and (y) the accrued but unpaid interest on the Convertible Notes. The "make whole" amount is equal to the excess, if any, of (1) the present value at the date of redemption of (A) 115% of the principal amount of the Convertible Notes redeemed, plus (B) all remaining scheduled interest due on the principal amount of the notes being redeemed through June 30, 2017 computed using a discount rate equal to the Treasury rate as of the date of redemption plus 50 basis points over (2) the outstanding principal amount of the Convertible Notes then redeemed. In conjunction with ASC 815, Accounting for Derivative Financial Instruments and Hedging Activities, we have bifurcated and accounted for an embedded derivative related to specific features of these Convertible Notes. As required by ASC 815, the embedded derivative is required to be accounted for as a derivative liability at fair value in our condensed consolidated financial statements. Refer to Note 9 - Convertible Notes Derivative Liability for further information. We have granted the Noteholders preemptive rights with respect to future equity issuances by us, subject to customary exceptions. 39 -------------------------------------------------------------------------------- In connection with the placement of the Convertible Notes, on June 30, 2014, we entered into a registration rights agreement (the Registration Rights Agreement) with the Noteholders, which sets forth the rights of the Noteholders to have the shares of Common Stock issuable upon conversion of the Convertible Notes registered with the Securities and Exchange Commission (the SEC) for public resale under the Securities Act of 1933, as amended. Pursuant to the Registration Rights Agreement, we are required to file a registration statement with the SEC (the Initial Registration Statement) on or prior to January 2, 2015, registering the shares of Common Stock issuable upon conversion of the Convertible Notes. We are required to use our reasonable best efforts to have the Initial Registration Statement declared effective as promptly as possible following the filing thereof and, in any event, by no later than by March 31, 2015. In addition, the agreement gives the Noteholders the ability to exercise certain piggyback registration rights in connection with registered offerings by the Company. Commitments and Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of September 30, 2014. The following table reflects our contractual obligations and other commitments as of September 30, 2014. Commitments Total 2014 2015 2016 2017 2018 Thereafter (amounts in thousands) Senior Secured Asset-Based (a) $ 4,501 $ 4,501 $ - $ - $ - $ - $ - Second Lien Term Loan (a) 30,000 - - - - - 30,000 Convertible Notes 25,000 - - - - - 25,000 Capital lease obligations 228 27 107 71 13 8 2 Operating leases obligations (b) 22,315 1,980 6,833 5,442 3,814 1,622 2,624 $ 82,044 $ 6,508 $ 6,940 $ 5,513 $ 3,827 $ 1,630 $ 57,626 _______________(a) Under our Senior Secured Asset-Based and Second Lien Term Loan, we are required to comply with certain financial covenants. Our inability to comply with the required covenants or other provisions could result in default under our credit facility. In the event of any such default and our inability to obtain a waiver of the default, all amounts outstanding could be declared immediately due and payable. (b) Represents future minimum lease payments associated with operating lease agreements with original terms of more than one year. Critical Accounting Principles and Estimates Derivative Liability In accordance with ASC 815, Accounting for Derivative Financial Instruments and Hedging Activities, we have bifurcated and accounted for an embedded derivative related to specific features of the Convertible Notes. The Convertible Notes derivative liability has been measured at fair value using a trinomial lattice model. Since the Conversion Price contains an anti-dilution adjustment, the probability that the Conversion Price of the Notes would decrease as the share price decreased was incorporated into the valuation calculation. The inputs into the valuation model are as follows: September 30, 2014 Closing share price $9.29 Conversion price $7.10 Risk free rate 2.07% Expected volatility 40% Dividend yield -% Expected life 5.75 years The fair value of the convertible note payable derivative liability was $14.1 million at September 30, 2014. 40 -------------------------------------------------------------------------------- Our other critical accounting principles and estimates remain consistent with those reported in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC. Recent Accounting Pronouncements In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity to reduce diversity in practice for reporting discontinued operations. Under the previous guidance, any component of an entity that was a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group was eligible for discontinued operations presentation. The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity) and that have a major effect on a reporting entity's operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The updated guidance is effective for periods beginning after December 15, 2014. We had operations that were reported as discontinued operations for the nine months ended September 30, 2013 and we do not expect the adoption of this guidance to have a material effect on our financial position, results of operations, or cash flows. In May 2014, the FASB and the International Accounting Standards Board (IASB) jointly issued Accounting Standards Update (ASU) No. 2014-9, Revenue from Contracts with Customers (Topic 606), which clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards (IFRS). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted under GAAP and retrospective application is permitted, but not required. We are currently evaluating the impact of adopting this guidance on our financial position and results of operations. 41-------------------------------------------------------------------------------- |