DEBT

As of December 31, 2011 the Company’s long-term debt consisted of the following obligations (in thousands):



Revolving credit facility	$	63,822
Senior unsecured notes	225,000
Capital leases	4,637
	293,459
Less - obligations maturing within one year	66,161
Long term debt - net of current portion	$	227,298

Senior Secured Revolving Credit Facility

On December 28, 2010, the Company entered into a credit agreement (the “Senior Secured Revolving Credit Facility”), among the Company and all of its subsidiaries and Healthcare Finance Group, LLC (“HFG”). The $150.0 million Senior Secured Revolving Credit Facility matures on March 25, 2015. The amount of borrowings which may be made under the Senior Secured Revolving Credit Facility is based on a borrowing base comprised of specified percentages of eligible receivables and eligible inventory, up to a maximum of $150.0 million and subject to certain liquidity and reserve requirements. If the amount of borrowings outstanding under the revolving credit facility exceeds the borrowing base then in effect, the Company will be required to repay such borrowings in an amount sufficient to eliminate such excess. Interest on advances is based on a Eurodollar rate plus an applicable margin of 3.5%, with the Eurodollar rate having a floor of 1.25%. In the event of any default, the interest rate may be increased to 2.0% over the rate applicable to such loans. The facility also carries a non-utilization fee of 0.50% per annum, payable monthly, on the unused portion of the credit line. The facility includes $5.0 million of availability for letters of credit and $10.0 million of availability for swing line loans. At all times, we must maintain a balance of not less than $30.0 million.

The Company's obligations under the Senior Secured Revolving Credit Facility have been guaranteed by the Company's subsidiaries and secured by first priority security interests in substantially all of the Company's and subsidiary guarantors' assets (including the capital stock of our subsidiaries). The Senior Secured Revolving Credit Facility includes customary affirmative and negative covenants and events of default, as well as financial covenants relating to minimum liquidity, minimum fixed charge coverage ratio and accounts receivable turnover. Negative covenants include limitations on additional debt, liens, negative pledges, investments, dividends, stock repurchases, asset sales and affiliate transactions. Events of default include non-performance of covenants, breach of representations, cross-default to other material debt, bankruptcy and insolvency, material judgments and changes in control. We are in compliance with all covenants as of December 31, 2011 and as of the date of filing of this report.

The weighted average interest rate on our short term borrowings during the year ended December 31, 2011 was 4.66%. The weighted average interest rate on our short term borrowings during the year ended December 31, 2010 was 5.90%.

Senior Unsecured Notes

In connection with the acquisition of CHS, on March 25, 2010, the Company issued $225.0 million aggregate principal amount of 10¼% senior unsecured notes (“Senior Unsecured Notes”) due October 1, 2015 in an unregistered offering pursuant to Rule 144A and Regulation S under the Securities Act of 1933. The Company pays interest on the notes semi-annually, in arrears, on April 1 and October 1 of each year. These notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company's existing and future direct and indirect subsidiaries. As of December 31, 2011, the Company did not have any independent assets or operations and, as a result, its direct and indirect subsidiaries (other than minor subsidiaries), each being 100% owned by the Company, were fully and unconditionally, jointly and severally, providing guarantees on a senior unsecured basis to the Senior Unsecured Notes. As noted above, the Company and each of its guarantor subsidiaries are subject to restrictive covenants under the Senior Secured Revolving Credit Facility. The Senior Secured Revolving Credit Facility ranks senior in priority to each subsidiary's guarantee of the notes and could restrict the Company's ability to obtain funds from the guarantor subsidiaries. As of December 31, 2011, the carrying amount of the Company's Senior Unsecured Notes was $225.0 million, and the estimate of the fair value of the Senior Unsecured Notes, based on current market rates for debt of the same risk and maturities, was $223.0 million.

On June 22, 2010, the Company filed an Offer to Exchange (the “Exchange Offer”) the original unregistered notes with new registered notes, as contemplated in the original note offering. The Senior Unsecured Notes are substantially identical to the original notes except some of the transfer restrictions, registration rights and additional interest provision relating to the original notes do not apply. On July 13, 2010, the Company's planned registration of the notes became effective. The Exchange Offer expired on August 12, 2010, and the new registered notes commenced trading publicly on August 16, 2010.

On or after April 1, 2013, the Company may redeem some or all of the Senior Unsecured Notes at the redemption prices set plus accrued and unpaid interest to the date of redemption. The redemption premium percentages for notes redeemed are as follows: (a) on or after April 1, 2013, 105.125% of the principal amount, and (b) on or after October 1, 2014, 100.000% of the principal amount. Prior to April 1, 2013, the Company may redeem up to 35% of the aggregate principal amount of the notes at the premium of 110.250% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date, with the net cash proceeds of certain equity offerings. In addition, the Company may, at its option, redeem some or all of the Senior Unsecured Notes at any time prior to April 1, 2013, by paying a premium.

Debt Issuance Costs and Other Fees

Total debt issuance costs related to the Senior Secured Revolving Credit Facility and Senior Unsecured Notes were $5.2 million and $6.2 million as of December 31, 2011 and 2010, respectively. These costs are being amortized over the term of the Senior Secured Revolving Credit Facility and Senior Unsecured Notes.

Loss on Extinguishment of Debt

In connection with the Senior Secured Revolving Credit Facility agreement that was signed on December 28, 2010, the Company terminated its then existing $100 million term loan that was outstanding at that time. The Company incurred a loss on extinguishment of debt of $9.6 million in connection with these transactions, consisting of the writeoff of deferred financing costs associated with the term loan and fees paid to the lender.

Interest Expense

Net interest expense was $28.3 million, $27.6 million, and $1.9 million for the years ended December 31, 2011, 2010, and 2009, respectively. Interest expense for the year ended December 31, 2011 included $24.1 million of interest expense related to our $225.0 million of Senior Unsecured Notes and $4.4 million related to the $150.0 million Senior Secured Revolving Credit Facility. Interest expense for the year ended December 31, 2010 included $24.4 million of interest expense related to our original senior secured facility and Senior Unsecured Notes issued in March 2010 and $2.3 million related to a bridge loan finance fee. Interest expense for the year ended December 31, 2009 was related to a prior $85.0 million revolving credit facility with an affiliate of Healthcare Finance Group, Inc.

Effect of Asset Purchase Agreement

We expect to close on the sale of the Company's traditional and specialty pharmacy mail operations and community pharmacies to Walgreen Co. and subsidiaries in the second quarter of 2012, as discussed in Note 17. Under the terms of the Senior Secured Revolving Credit Facility, our credit availability will be reduced by an amount equal to the reduction in asset levels associated with the discontinued operations. Specifically, as we collect the accounts receivable from the community pharmacy and mail service businesses, our asset-based loan availability will be reduced. Under the terms of the Senior Unsecured Notes, upon a major asset sale such as the one anticipated to Walgreen Co. and subsidiaries, we are obligated to use proceeds from the sale to reduce debt under the Senior Secured Revolving Credit Facility or reinvest the proceeds in the business. If we do not use the sale proceeds within 360 days, we are required to make a tender offer to redeem a portion of the Senior Unsecured Notes, based on defined criteria. We may also use the sale proceeds under certain terms to redeem a portion of the Senior Unsecured Notes prior to the one year anniversary date of the sale.