Note 7—Long-Term Obligations

The Company’s long-term obligations at September 30, 2013 and December 31, 2012 consist of the following:


	September 30, 2013		December 31, 2012
	(In thousands)
Senior secured notes due 2019 (2019 Notes)	$	135,658	$	125,827
4.75% convertible notes due 2018 (2018 Convertible Notes)		100,073		97,087
Capital leases		188		233

		235,919		223,147
Less-current portion of capital leases		60		60

Total	$	235,859	$	223,087

2019 Notes

In February 2011, the Company issued 2018 Convertible Notes at par value of $230.0 million that become due on February 1, 2018. The Company received cash proceeds from the sale of the 2018 Convertible Notes of $222.7 million, net of expenses. On May 9, 2012, the Company issued its 2019 Notes and accompanying warrants (as discussed below) in exchange for a portion of the existing 2018 Convertible Notes and $42.6 million in net cash, after debt financing costs. Certain holders exchanged their 2018 Convertible Notes, having an outstanding principal amount of $107.6 million, for units, or Units, comprised of the 2019 Notes, having a principal amount at maturity of $107.9 million, and warrants to purchase 4.0 million shares of the Company’s common stock at an exercise price of $1.863 per share. A Unit consists of $1,000 principal amount of the 2019 Notes and warrants to purchase 23.4 shares of common stock. The 2019 Notes are senior to the 2018 Convertible Notes and are secured by substantially all of the assets of the Company and the assets and securities of certain of the Company’s subsidiaries pursuant to a pledge and security agreement dated as of May 9, 2012, or the Pledge and Security Agreement, subject to certain exclusions described in the indenture governing the 2019 Notes, or the 2019 Indenture, and the Pledge and Security Agreement.

The Units and the 2019 Notes and warrants comprising the Units were issued by the Company without registration in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, or the Securities Act, and were offered only to qualified institutional buyers and accredited investors. The Units, 2019 Notes and accompanying warrants have not been registered under the Securities Act or any state or other securities laws and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws. The 2019 Notes and the warrants comprising the Units became separable 180 days after the date of issuance. The 2019 Notes have a cash coupon interest rate of 3% in the first three years and a cash coupon interest rate of 12% per year thereafter.

Commencement of the Chapter 11 Cases (as described in more detail in Note 15 below) constituted an event of default under the 2019 Indenture. Under the terms of the 2019 Notes, upon commencement of the Chapter 11 Cases, the accreted principal balance of, and the accrued and unpaid interest on, the 2019 Notes became immediately due and payable. As of October 14, 2013, the date the Company and SPHI commenced the Chapter 11 Cases, the 2019 Notes had a contractual accreted principal balance of approximately $145.4 million and outstanding accrued and unpaid interest. Under the Bankruptcy Code (as defined in Note 15 below), the acceleration provisions applicable to the debt obligations described above are generally unenforceable, and any remedies that may exist related to the events of default described above are stayed, under section 362 of the Bankruptcy Code.

The 2019 Notes were issued at a discount and by their terms would have reached their fully accreted principal amount on May 9, 2015, and would have matured on May 9, 2019. Under the terms of the 2019 indenture, at any time prior to May 9, 2015, all or part of the 2019 Notes would have been redeemable by the Company at a redemption price equal to 100% of the aggregate principal amount of the 2019 Notes to be redeemed, plus the Applicable Premium (as defined in the Indenture). At any time prior to May 9, 2015, up to 35% of the aggregate principal amount of the 2019 Notes would have been redeemable by the Company at a redemption price of 106% of the principal amount of the 2019 Notes to be redeemed, with the net cash proceeds of one or more equity offerings. At any time after May 9, 2015 and before May 9, 2016, all or part of the 2019 Notes would have been redeemable by the Company at a redemption price of 106% of the principal amount of the 2019 Notes to be redeemed. At any time after May 9, 2016 and before May 9, 2017, all or part of the 2019 Notes would have been redeemable by the Company at a redemption price of 103% of the principal amount of the 2019 Notes to be redeemed. At any time after May 9, 2017 and before their scheduled maturity, all or part of the 2019 Notes would have been redeemable by the Company at a redemption price of 100% of the principal amount of the 2019 Notes to be redeemed. All of the above redemptions would have included accrued but unpaid interest to the redemption date.

The 2019 Indenture contains certain agreements and restrictions, including, but not limited to: (i) restrictions on the Company’s ability to pay dividends, repurchase the Company’s stock, make early payments on indebtedness that is junior to the 2019 Notes, and make certain investments; (ii) an obligation for the Company to repurchase the 2019 Notes at 101% of the aggregate principal amount, at the option of the Holders, in the event of certain asset sales, change-in-control and other fundamental change events described in the 2019 Indenture; and (iii) restrictions on the Company’s ability to incur additional debt and liens.

Accounting for the 2019 Notes

The Company has accounted for the 2019 Notes in accordance with the guidance as set forth in FASB ASC 470, Debt and ASC 815 Derivatives and Hedging. Accordingly, the Company recorded a gain of $21.8 million upon the extinguishment of the exchanged 2018 Convertible Notes for Units. The gain resulted from the carrying value of the 2018 Convertible Notes exceeding its fair value. The debt issuance costs related to the 2018 Convertible Notes that were exchanged in the amount of approximately $2.2 million are netted against the gain. In addition, the recording of the gain on extinguishment of debt resulted in a $13.4 million decrease to additional-paid-in-capital. The 2019 Notes were recorded at fair value. The 2019 Notes by their terms contain certain redemption features, noted below, that are considered to be embedded derivatives under ASC 815 and require bifurcation from the host debt.

Equity Offering Redemption Right. The 2019 Indenture provides that, at any time prior to May 9, 2015, the Company may, at its option, redeem up to 35% of the aggregate principal amount of 2019 Notes at redemption price equal to the equity offering redemption price of such 2019 Notes, as defined in the 2019 Indenture, plus accrued and unpaid interest to the applicable redemption date, with the net cash proceeds of one or more equity offerings (as defined in the 2019 Indenture); provided that at least 65% of the sum of the aggregate principal amount of the securities originally issued under the 2019 Notes remains outstanding immediately after the occurrence of each such redemption; provided further that each such redemption occurs within 90 days of the date of closing of each such equity offering. Notice of any redemption upon any equity offering may be given not less than 30 and not more than 60 days prior to the redemption thereof, and any such redemption or notice may, at the Company’s discretion, be subject to one or more conditions, including, but not limited to, completion of the related equity offering.

Change of Control Redemption Right. The 2019 Indenture provides that, in the event of a Fundamental Change, as defined in the 2019 Indenture, which includes certain asset sales and change-in-control, each holder of the 2019 Notes shall have the right, at the holder’s option, to require the Company to repurchase all of the holder’s 2019 Notes at a price equal to 101% of the outstanding principal amount at maturity of the 2019 Notes, or portions thereof plus accrued and unpaid interest.

In accordance with FASB ASC 815, Derivatives and Hedging, the Company has separately accounted for the above redemption features as an embedded derivative, which is measured at fair value and included as a component of other liabilities on the Company’s consolidated balance sheets. Changes in the fair value of the embedded derivative are recognized in earnings.

2018 Convertible Notes

By their terms, the 2018 Convertible Notes bear cash interest at a rate of 4.75% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2011. The 2018 Convertible Notes are unsecured and subordinate to the 2019 Notes.

Commencement of the Chapter 11 Cases (as described in more detail in Note 15 below) constituted an event of default under the indenture governing the 2018 Convertible Notes, or the 2018 Indenture. Under the terms of the 2018 Convertible Notes, upon commencement of the Chapter 11 Cases, the outstanding principal amount of, and accrued and unpaid interest on, the 2018 Convertible Notes became immediately due and payable. As of October 14, 2013, the date the Company and SPHI commenced the Chapter 11 Cases, the 2018 Convertible Notes had an outstanding principal amount of approximately $122.4 million and outstanding accrued and unpaid interest. Under the Bankruptcy Code, the acceleration provisions applicable to the debt obligations described above are generally unenforceable, and any remedies that may exist related to the events of default described above are stayed, under section 362 of the Bankruptcy Code.

At September 30 2013, by their terms, the 2018 Convertible Notes may be converted into shares of the Company’s common stock based on an initial conversion rate of 86.6739 shares per $1,000 principal amount of 2018 Convertible Notes. Under the 2018 Indenture, the 2018 Convertible Notes would not have been redeemable prior to February 1, 2015. On or after February 1, 2015 and prior to the maturity date, the Company all or a portion of the 2018 Convertible Notes would have been redeemable by the Company for cash at a redemption price equal to 100% of the principal amount of the 2018 Convertible Notes to be redeemed, plus accrued and unpaid interest. This conversion rate would have been adjusted if the Company had made specified types of distributions or entered into certain transactions with respect to the Company’s common stock.

The 2018 Indenture provides that the 2018 Convertible Notes are convertible only: (1) during any calendar quarter commencing after June 30, 2011 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of 2018 Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (3) if the Company calls any or all of the 2018 Convertible Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. At September 30, 2013, the 2018 Convertible Notes were not convertible.

The principal balance, unamortized discount and net carrying amount of the 2019 Notes and 2018 Convertible Notes at September 30, 2013 and December 31, 2012 are as follows:


	Liability Component (In thousands)
	Principal Balance		Unamortized Discount		Net Carrying Amount
September 30, 2013
Senior secured notes due 2019 (2019 Notes)	$	170,941	$	35,283	$	135,658
4.75% convertible notes due 2018 (2018 Notes)		122,441		22,368		100,073

	$	293,382	$	57,651	$	235,731

December 31, 2012
Senior secured notes due 2019 (2019 Notes)	$	170,941	$	45,114	$	125,827
4.75% convertible notes due 2018 (2018 Notes)		122,441		25,354		97,087

	$	293,382	$	70,468	$	222,914

Total interest expense under the Company’s long-term debt obligations for the three and nine-month periods ended September 30, 2013 and 2012 is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
Total Interest Expense	2013		2012		2013		2012
Accretion of debt discount	$	4,407	$	3,818	$	12,817	$	8,323
Amortization of debt issue costs		221		274		651		561

Non-cash interest expense		4,628		4,092		13,468		8,884
Accrued interest		2,736		2,713		8,212		8,078

Total Interest Expense	$	7,364	$	6,805	$	21,680	$	16,962