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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

Commission file number 1-34435

EMDEON INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   20-5799664

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3055 Lebanon Pike, Suite 1000

Nashville, TN

  37214
(Address of Principal Executive Offices)   (Zip Code)

(615) 932-3000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x*

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

 

Outstanding as of November 7, 2014

Common Stock, $0.01 par value   100

 

* The registrant is a voluntary filer of certain reports required to be filed by companies under Section 13 or 15(d) of the Securities and Exchange Act of 1934 and has filed all reports that would have been required to have been filed by the registrant during the preceding 12 months had it been subject to such filing requirements during the entirety of such period.

 

 


Emdeon Inc.

Table of Contents

 

Part I. Financial Information

  

Item 1. Financial Statements

     3   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     39   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     54   

Item 4. Controls and Procedures

     55   

Part II. Other Information

  

Item 1. Legal Proceedings

     55   

Item 1A. Risk Factors

     55   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     55   

Item 3. Defaults Upon Senior Securities

     55   

Item 4. Mine Safety Disclosures

     55   

Item 5. Other Information

     56   

Item 6. Exhibits

     56   

Signatures

     57   

Exhibit Index

     58   


PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

Emdeon Inc.

Condensed Consolidated Balance Sheets

(unaudited and amounts in thousands, except share and per share amounts)

 

     September 30,
2014
    December 31,
2013
 
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 23,927      $ 76,538   

Accounts receivable, net of allowance for doubtful accounts of $4,310 and $3,856 at September 30, 2014 and December 31, 2013, respectively

     231,950        214,247   

Deferred income tax assets

     16,974        6,317   

Prepaid expenses and other current assets

     33,085        27,019   
  

 

 

   

 

 

 

Total current assets

     305,936        324,121   

Property and equipment, net

     239,635        269,470   

Goodwill

     1,584,655        1,502,434   

Intangible assets, net

     1,530,775        1,632,688   

Other assets, net

     19,656        19,169   
  

 

 

   

 

 

 

Total assets

   $ 3,680,657      $ 3,747,882   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY   

Current liabilities:

    

Accounts payable

   $ 12,263      $ 8,367   

Accrued expenses

     143,807        131,149   

Deferred revenues

     10,233        10,881   

Current portion of long-term debt

     24,493        31,330   
  

 

 

   

 

 

 

Total current liabilities

     190,796        181,727   

Long-term debt, excluding current portion

     1,998,569        1,999,026   

Deferred income tax liabilities

     416,986        436,263   

Tax receivable agreement obligations to related parties

     159,716        150,496   

Other long-term liabilities

     13,576        11,824   

Commitments and contingencies

    

Equity:

    

Common stock (par value, $.01), 100 shares authorized and outstanding at September 30, 2014 and December 31, 2013, respectively

     —          —     

Additional paid-in capital

     1,147,586        1,139,375   

Accumulated other comprehensive income (loss)

     (1,570     (1,343

Accumulated deficit

     (245,002     (169,486
  

 

 

   

 

 

 

Total equity

     901,014        968,546   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 3,680,657      $ 3,747,882   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


Emdeon Inc.

Condensed Consolidated Statements of Operations

(unaudited and amounts in thousands)

 

    Three Months
Ended September 30,
2014
    Three Months
Ended September 30,
2013
    Nine Months
Ended September 30,
2014
    Nine Months
Ended September 30,
2013
 

Revenue

  $ 341,608      $ 317,810      $ 996,973      $ 922,452   

Costs and expenses:

       

Cost of operations (exclusive of depreciation and amortization below)

    202,305        191,695        597,843        563,146   

Development and engineering

    8,156        7,878        24,771        23,201   

Sales, marketing, general and administrative

    45,031        44,104        150,739        123,469   

Depreciation and amortization

    48,448        47,181        141,541        137,943   

Accretion

    4,452        7,112        9,220        18,712   

Impairment of long-lived assets

    3,114        25        82,689        1,887   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    30,102        19,815        (9,830     54,094   

Interest expense, net

    36,635        37,000        109,741        116,390   

Loss on extinguishment of debt

    —          —          —          23,160   

Contingent consideration

    1,976        1,879        3,646        1,879   

Other

    —          (2,925     (3,968     (2,925
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision (benefit)

    (8,509     (16,139     (119,249     (84,410

Income tax provision (benefit)

    4,493        126        (43,733     (26,422
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (13,002   $ (16,265   $ (75,516   $ (57,988
 

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


Emdeon Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited and amounts in thousands)

 

     Three Months
Ended September 30,
2014
    Three Months
Ended September 30,
2013
    Nine Months
Ended September 30,
2014
    Nine Months
Ended September 30,
2013
 

Net income (loss)

   $ (13,002   $ (16,265   $ (75,516   $ (57,988

Other comprehensive income (loss):

        

Changes in fair value of interest rate swap, net of taxes

     732        (1,064     (127     2,511   

Foreign currency translation adjustment

     (127     35        (100     (65
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     605        (1,029     (227     2,446   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (12,397   $ (17,294   $ (75,743   $ (55,542
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


Emdeon Inc.

Condensed Consolidated Statements of Equity

(unaudited and amounts in thousands, except share amounts)

 

     Common Stock      Additional
Paid-in
    Retained
Earnings
    Accumulated
Other
Comprehensive
    Total  
     Shares      Amount      Capital     (Deficit)     Income (Loss)     Equity  

Balance at January 1, 2013

     100      $ —         $ 1,130,968     $ (95,028   $ (3,789   $ 1,032,151  

Equity compensation expense

     —           —           5,637       —          —          5,637  

Repurchase of Parent common stock

     —           —           (250     —          —          (250

Net income (loss)

     —           —           —          (57,988     —          (57,988

Foreign currency translation adjustment

     —           —           —          —          (65     (65

Change in fair value of interest rate swap, net of taxes

     —           —           —          —          2,511       2,511  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

     100      $ —         $ 1,136,355     $ (153,016   $ (1,343   $ 981,996  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2014

     100      $ —         $ 1,139,375     $ (169,486   $ (1,343   $ 968,546  

Equity compensation expense

     —           —           5,914       —          —          5,914  

Issuance of shares in connection with equity compensation plans, net of taxes

     —           —           1,257       —          —          1,257  

Repurchase of Parent common stock

     —           —           (960     —          —          (960

Capital contribution from Parent

     —           —           2,000       —          —          2,000  

Net income (loss)

     —           —           —          (75,516     —          (75,516

Foreign currency translation adjustment

     —           —           —          —          (100     (100

Change in fair value of interest rate swap, net of taxes

     —           —           —          —          (127     (127
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

     100      $ —         $ 1,147,586     $ (245,002   $ (1,570   $ 901,014  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6


Emdeon Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited and amounts in thousands)

 

     Nine Months Ended
September 30, 2014
    Nine Months Ended
September 30, 2013
 

Operating activities

    

Net income (loss)

   $ (75,516   $ (57,988

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     141,541        137,943   

Accretion

     9,220        18,712   

Equity compensation

     5,914        5,637   

Deferred income tax expense (benefit)

     (44,886     (27,884

Amortization of debt discount and issuance costs

     5,804        6,585   

Contingent consideration

     3,646        1,879   

Gain on sale of cost method investment

     —          (2,925

Loss on extinguishment of debt

     —          22,828   

Impairment of long-lived assets

     82,689        1,887   

Other

     (3,125     (819

Changes in operating assets and liabilities:

    

Accounts receivable

     (12,656     (15,582

Prepaid expenses and other

     (4,490     (1,804

Accounts payable

     644        685   

Accrued expenses, deferred revenue and other liabilities

     (375     20,985   

Tax receivable agreement obligations to related parties

     —          (103
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     108,410        110,036   
  

 

 

   

 

 

 

Investing activities

    

Purchases of property and equipment

     (37,673     (52,806

Payments for acquisitions, net of cash acquired

     (87,909     (18,291

Proceeds from sale of cost method investment

     36        5,820   

Other

     (133     —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (125,679     (65,277
  

 

 

   

 

 

 

Financing activities

    

Debt principal payments

     (9,659     (9,692

Payment of debt assumed from acquisition

     (23,262     (218

Proceeds from Revolving Facility

     65,000        —     

Payments on Revolving Facility

     (65,000     —     

Payment of loan costs

     —          (2,178

Repayment of deferred financing arrangements

     (4,717     (2,103

Repurchase of Parent common stock

     (960     (250

Capital contribution from Parent

     3,256        —     

Other

     —          (518
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (35,342     (14,959
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (52,611     29,800   

Cash and cash equivalents at beginning of period

     76,538        31,763   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 23,927      $ 61,563   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

1. Nature of Business and Organization

Nature of Business

Emdeon Inc. (the “Company”), through its subsidiaries, is a provider of revenue and payment cycle management and clinical information exchange solutions, connecting payers, providers, pharmacies and patients of the United States healthcare system. The Company’s product and service offerings integrate and automate key business and administrative functions for healthcare payers, providers and pharmacies throughout the patient encounter, including pre-care patient eligibility and benefits verification and enrollment, clinical information exchange, claims management and adjudication, payment integrity, payment distribution, payment posting and denial management and patient billing and payment processing.

Organization

The Company was formed as a Delaware limited liability company in September 2006 and converted into a Delaware corporation in September 2008 in anticipation of the Company’s August 2009 initial public offering (the “IPO”). On November 2, 2011, pursuant to an Agreement and Plan of Merger among the Company, Beagle Parent Corp. (“Parent”) and Beagle Acquisition Corp. (“Merger Sub”), Merger Sub merged with and into the Company with the Company surviving the merger (the “Merger”). Subsequent to the Merger, the Company became an indirect wholly-owned subsidiary of Parent, which is controlled by affiliates of The Blackstone Group L.P. (“Blackstone”).

2. Basis of Presentation

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”) Guidelines, Rules and Regulations (“Regulation S-X”) and, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of results for the unaudited interim periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The results of operations for the interim period are not necessarily indicative of the results to be obtained for the full fiscal year. All material intercompany accounts and transactions have been eliminated in the unaudited condensed consolidated financial statements.

Reclassifications

Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. The Company changed the classification of rebate payments to its channel partners from cost of operations to a reduction of revenue to the extent that such rebate payments for any given channel partner were less than or equal to revenue otherwise earned from the respective channel partner. To conform to the current period presentation, rebate payments to channel partners resulted in a reduction of revenue of $6,096 and $18,641 for the three and nine months ended September 30, 2013, respectively.

Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors and various other assumptions that the Company believes are necessary to consider in order to form a basis for making judgments about the carrying values of assets and liabilities, the recorded amounts of revenue and expenses and disclosure of contingent assets and liabilities. The Company is subject to uncertainties such as the impact of future events, economic, environmental and political factors and changes in the Company’s business environment; therefore, actual results could differ materially from these estimates. Accordingly, the accounting estimates used in the preparation of the Company’s financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in the reported results of operations; and if material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements. Estimates and assumptions by management affect: the allowance for doubtful

 

8


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

accounts; the fair value assigned to assets acquired and liabilities assumed in business combinations; tax receivable agreement obligations; the fair value of interest rate swap obligations; contingent consideration; loss accruals; the carrying value of long-lived assets (including goodwill and intangible assets); the amortization period of long-lived assets (excluding goodwill); the carrying value, capitalization and amortization of software development costs; the provision and benefit for income taxes and related deferred tax accounts; certain accrued expenses; revenue recognition; contingencies; and the value attributed to equity awards.

During the three months ended September 30, 2014, the Company recognized a change in estimate related to its accounts receivable, the effect of which reduced revenue and increased pretax loss by $4,098.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, which changes the requirements for reporting discontinued operations. Following adoption of this update, discontinued operations generally will be reported for the disposal by sale or otherwise of a component or a group of components that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. This update is effective for fiscal years and interim periods beginning in those years after December 15, 2014, with early adoption permitted. The Company does not expect the adoption of this update to have a material effect on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, which replaces most prior general and industry specific revenue recognition guidance with a principles-based comprehensive revenue recognition framework. Under this revised framework, a company will recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. This update is effective for fiscal years and interim periods beginning in those years after December 15, 2016. Early adoption is not permitted. Upon adoption, a company may elect to either retrospectively restate each prior reporting period or reflect the cumulative effect of initially applying the update with an adjustment to retained earnings. The Company is currently assessing the potential effects this update may have on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, which clarifies, in the context of share-based payment awards, that a performance target that affects vesting and could be achieved after the requisite service period has been rendered should be treated as a performance condition. Prior to this update, because there was no explicit guidance, there was diversity in practice among companies. This update is effective for fiscal years and interim periods within those years beginning after December 15, 2015, with early adoption permitted. The Company does not expect the adoption of this update to have a material effect on its consolidated financial statements.

3. Concentration of Credit Risk

The Company’s revenue is primarily generated in the United States. Changes in economic conditions, government regulations or demographic trends, among other matters, in the United States could adversely affect the Company’s revenue and results of operations.

The Company maintains its cash and cash equivalent balances in either insured depository accounts or money market mutual funds. The money market mutual funds are limited to investments in low-risk securities such as United States or government agency obligations, or repurchase agreements secured by such securities.

4. Business Combinations

In July 2014, the Company acquired all of the equity interests of Capario, Inc. (“Capario”), a technology-enabled provider of revenue cycle management solutions.

In February 2014, the Company acquired all of the equity interests of Vieosoft, Inc. (“Vieosoft”), a development stage enterprise.

 

9


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

In June 2013, the Company acquired all of the equity interests of Goold Health Systems (“Goold”), a technology-enabled provider of pharmacy benefit and related services primarily to state Medicaid agencies across the nation.

The following table summarizes certain information related to these acquisitions. The preliminary values of the consideration transferred, assets acquired and liabilities assumed in the Capario acquisition, including related tax effects, are subject to receipt of a final valuation and a final working capital settlement.

 

                 Capario                              Vieosoft                              Goold               

Total Consideration Fair Value at Acquisition Date:

      

Cash paid at closing

   $ 89,422      $ 800      $ 19,391   

Contingent consideration

     —          6,015        5,553   

Other

     (227     —          (5
  

 

 

   

 

 

   

 

 

 
   $ 89,195      $ 6,815      $ 24,939   
  

 

 

   

 

 

   

 

 

 

Allocation of the Consideration Transferred:

      

Cash

   $ 2,292      $ 21      $ 1,101   

Accounts receivable

     5,046        —          3,435   

Deferred income tax assets

     275        —          —     

Prepaid expenses and other current assets

     1,112        —          647   

Property and equipment

     9,580        —          7,695   

Identifiable intangible assets:

      

Tradename

     900        —          —     

Noncompetition agreements

     2,740        1,320        280   

Customer relationships

     38,510        —          5,160   

Backlog and other

     —          2,060        460   

Goodwill

     76,062        6,159        14,300   

Accounts payable

     (2,020     —          (541

Accrued expenses

     (9,068     (194     (2,076

Deferred revenues

     —          —          (101

Current maturities of long-term debt

     (2,600     (1,877     (218

Deferred income tax liabilities

     (14,642     (674     (5,203

Long-term debt

     (18,785     —          —     

Other long-term liabilities

     (207     —          —     
  

 

 

   

 

 

   

 

 

 

Total consideration transferred

   $ 89,195      $ 6,815      $ 24,939   
  

 

 

   

 

 

   

 

 

 

Acquisition costs in sales, marketing, general and administrative expense:

      

For the three months ended September 30, 2014

   $ 234      $ —        $ —     

For the three months ended September 30, 2013

   $ —        $ —        $ 18   

For the nine months ended September 30, 2014

   $ 862      $ 111      $ —     

For the nine months ended September 30, 2013

   $ —        $ —        $ 280   

 

10


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

                 Capario                               Vieosoft                              Goold               

Other Information:

       

Gross contractual accounts receivable

   $ 5,112       $ —        $ 3,435   

Amount not expected to be collected

   $ 66       $ —        $ —     

Goodwill expected to be deductible for tax purposes

   $       $ —        $ —     

Contingent Consideration Information:

       

Contingent consideration range

     N/A       $ 0 - $43,104      $ 0 - 15,000   

Measurement period

       
 
 
 
February 12,
2014 to
December 31,
2017
  
  
  
  
   
 
 
July 1, 2013
to September 30,
2014
  
  
  

Basis of measurement

     N/A        
 
 
 
Milestone
achievement,
revenue
performance
  
  
  
  
   
 
 
 
 
Award of
contracts with
annual revenue
exceeding
targeted amount
  
  
  
  
  

Type of measurement

     N/A         Level 3        Level 3   

Key assumptions at the acquisition date:

       

Probability of achieving milestone objectives

     N/A         90%        N/A   

Probability of achieving minimum gross profit margin

     N/A        
 
5% for 2015 -
90% for 2017
 
  
    N/A   

Probability of winning new contracts

     N/A         N/A        10%-50%   

Probability of retaining contracts that expire during the measurement period

     N/A         N/A        90%   

Range of baseline revenue retention for existing customers

     N/A         N/A        75%-125%   

Expected payment date(s)

     N/A         2015-2017        12/15/2014   

Discount rate(s)

     N/A         5.2% to 53.2%        15.4%   

Increase (decrease) to net loss:

       

For the three months ended September 30, 2014

     N/A       $ 647      $ 1,329   

For the nine months ended September 30, 2014

     N/A       $ 1,305      $ 2,341   

For the three months ended September 30, 2013

     N/A         N/A      $ 1,879   

For the nine months ended September 30, 2013

     N/A         N/A      $ 1,879   

The Company generally recognizes goodwill attributable to the assembled workforce and expected synergies among the operations of acquired entities and the Company’s existing operations. In the case of the Company’s acquisitions of operating companies, synergies generally have resulted from the elimination of duplicative facilities and personnel costs and cross selling opportunities among the Company’s existing customer base.

Goodwill is generally deductible for federal income tax purposes when a business combination is treated as an asset purchase. Goodwill is generally not deductible for federal income tax purposes when the business combination is treated as a stock purchase.

5. Goodwill and Intangible Assets

Goodwill activity during the nine months ended September 30, 2014 was as follows:

 

     Payer      Provider      Pharmacy      All Other      Total  

Balance at December 31, 2013

   $ 827,455       $ 401,845       $ 160,561       $ 112,573       $ 1,502,434   

Acquisitions

     18,792         34,211         6,159         23,059         82,221   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 30, 2014

   $ 846,247       $ 436,056       $ 166,720       $ 135,632       $ 1,584,655   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

Intangible assets subject to amortization as of September 30, 2014 consisted of the following:

 

     Weighted
Average
Remaining
Life
   Gross
Carrying
Amount
     Accumulated
Amortization
    Net  
          
          

Customer relationships

   16.2    $ 1,602,232       $ (232,575   $ 1,369,657   

Trade names

   16.2      157,430         (23,235     134,195   

Non-compete agreements

   2.2      17,140         (8,260     8,880   

Data sublicense agreement

   3.0      31,000         (15,275     15,725   

Other

   6.0      2,653         (335     2,318   
     

 

 

    

 

 

   

 

 

 

Total

      $ 1,810,455       $ (279,680   $ 1,530,775   
     

 

 

    

 

 

   

 

 

 

Amortization expense was $75,286 and $78,140 for the nine months ended September 30, 2014 and 2013, respectively. Aggregate future amortization expense for intangible assets is estimated to be:

 

2014 (remainder)

   $ 25,574   

2015

     101,888   

2016

     101,301   

2017

     97,399   

2018

     92,788   

Thereafter

     1,111,825   
  

 

 

 
   $ 1,530,775   
  

 

 

 

During the nine months ended September 30, 2014, the Company recognized an impairment charge related to the pending partial loss of a customer contract. See Note 8 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report.

6. Long-Term Debt

In November 2011, the Company entered into a credit agreement which was comprised of a senior secured term loan facility (the “Term Loan Facility”), a revolving credit facility (the “Revolving Facility”; together with the Term Loan Facility, the “Senior Credit Facilities”), 11% senior notes due 2019 (the “2019 Notes”) and 11.25% senior notes due 2020 (the “2020 Notes”; together with the 2019 Notes, the “Senior Notes”).

 

12


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

Long-term debt as of September 30, 2014 and December 31, 2013, consisted of the following:

 

     September 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 $13,520 and $15,826 at September 30, 2014 and December 31, 2013, respectively (effective interest rate of 4.21%)

   $ 1,255,092      $ 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 $6,966 and $7,664 at September 30, 2014 and December 31, 2013, respectively (effective interest rate of 11.53%)

     368,034        367,336   

$375 million 11.25% Senior Notes due December 31, 2020, net of unamortized discount of $8,868 and $9,560 at September 30, 2014 and December 31, 2013, respectively (effective interest rate of 11.86%)

     366,132        365,440   

Obligation under data sublicense agreement

     22,543        22,543   

Other

     11,261        12,592   

Less current portion

     (24,493     (31,330
  

 

 

   

 

 

 

Long-term debt

   $ 1,998,569      $ 1,999,026   
  

 

 

   

 

 

 

Senior Credit Facilities

The credit agreement governing the Senior Credit Facilities (the “Senior Credit Agreement”) provides that, subject to certain conditions, the Company 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 credit 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) $300,000 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 credit 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 $30,000 in the form of borrowings on same-day notice, referred to as swingline loans, and up to $50,000 in the form of letters of credits, 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 the Company’s 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%.

In April 2012, the Company amended the Senior Credit Agreement to reprice the Senior Credit Facilities and borrow $80,000 of additional term loans. 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 the Company’s 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 the Company’s first lien net leverage ratio).

In April 2013, the Company 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

 

13


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

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 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 $23,160 and other expenses related to fees paid to third parties of $1,151 for the nine months ended September 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, the Company is 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 the Company 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 the Company’s first lien net leverage ratio) of the Company’s 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.

The Company 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.

The Company is 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 the Company’s 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 Parent), the Company and each of its 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 its United States wholly-owned restricted subsidiaries and 65% of the capital stock of its foreign restricted subsidiaries, subject in each case to the exclusion of certain assets and additional exceptions.

The Senior Credit Agreement requires the Company 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 the Company’s ability and the ability of its 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;

 

14


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

   

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 September 30, 2014, the Company believes it was 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 11.00% 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.

The Company 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, the Company may, at its 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, the Company may redeem the 2019 Notes, the 2020 Notes or both, in whole or in part, at its 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 the Company experiences specific kinds of changes in control, it 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 the Company’s existing and future indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness. The Company’s obligations under the Senior Notes are guaranteed on a senior basis by all of its existing and subsequently acquired or organized wholly-owned United States restricted subsidiaries that guarantee the Senior Credit Facilities or its other indebtedness or indebtedness of any affiliate guarantor. The Senior Notes and the related guarantees are effectively subordinated to the Company’s existing and future secured obligations and that of its 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 the Company’s subsidiaries that do not guarantee the Senior Notes.

The indentures governing the Senior Notes (the “Indentures”) contain customary covenants that restrict the ability of the Company and its restricted subsidiaries to:

 

   

pay dividends on their capital stock or redeem, repurchase or retire their 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 their assets and the assets of their subsidiaries;

 

   

prepay subordinated debt;

 

   

engage in certain transactions with affiliates; and

 

   

enter into agreements restricting the subsidiaries’ ability to pay dividends.

The Indentures also contain certain customary affirmative covenants and events of default.

 

15


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

As of September 30, 2014, the Company believes it was in compliance with all of the applicable debt covenants under the Senior Notes.

Obligation Under Data Sublicense Agreement

In October 2009 and April 2010, the Company acquired certain additional rights to specified uses of its data from the former owner of the Company’s business in order to broaden the Company’s ability to pursue business intelligence and data analytics solutions for payers and providers. The Company previously licensed exclusive rights to this data to the former owner of the Company’s business. In connection with these data rights acquisitions, the Company recorded amortizable intangible assets and corresponding obligations at inception based on the present value of the scheduled annual payments through 2018, which totaled $65,000 in the aggregate (approximately $30,000 remained payable at September 30, 2014). In connection with the Merger, the Company was required to adjust this obligation to its fair value.

Other

From time to time, the Company enters into deferred financing arrangements with certain vendors. The obligations under such arrangements are recorded at the present value of the scheduled payments. Such future payments totaled $12,081 at September 30, 2014.

7. Interest Rate Swap

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. During the three and nine months ended September 30, 2014, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt pursuant to the Term Loan Facility. As of September 30, 2014, the Company had three outstanding interest rate derivatives with a combined notional amount of $640,000 that were designated as cash flow hedges of interest rate risk.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $2,570 will be reclassified as an increase to interest expense.

 

16


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

The following table summarizes the fair value of the Company’s derivative instruments at September 30, 2014 and December 31, 2013:

 

     Fair Values of Derivative Instruments  
    

Asset (Liability) Derivatives

 
    

Balance Sheet Location

   September 30,
2014
    December 31,
2013
 

Derivatives designated as hedging instruments:

       

Interest rate swaps

   Other assets    $ 679      $ 899   

Interest rate swaps

   Accrued expenses      (2,570     (2,575
     

 

 

   

 

 

 
      $ (1,891   $ (1,676
     

 

 

   

 

 

 

Tabular Disclosure of the Effect of Derivative Instruments on the Statement of Operations

The effect of the derivative instruments on the accompanying unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013, respectively, is summarized in the following table:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Derivatives in Cash Flow Hedging Relationships

        

Gain/ (loss) related to effective portion of derivative recognized in other comprehensive loss

   $ 595      $ (2,305   $ (2,150   $ 2,096   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gain/ (loss) related to effective portion of derivative reclassified from accumulated other comprehensive loss to interest expense

   $ (652   $ (652   $ (1,935   $ (1,935
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit Risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company also could be declared in default on its derivative obligations.

As of September 30, 2014, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $2,595. If the Company had breached any of these provisions at September 30, 2014, the Company could have been required to settle its obligations under the agreements at this termination value. The Company does not offset any derivative instruments and the derivative instruments are not subject to collateral posting requirements.

8. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company’s assets and liabilities that are measured at fair value on a recurring basis consist of the Company’s derivative financial instruments and contingent consideration associated with business combinations. The table below summarizes these items as of September 30, 2014, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

Description

   Balance at
September 30,
2014
    Quoted in
Markets
Identical (Level 1)
     Significant Other
Observable
Inputs (Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

Interest rate swaps

   $ (1,891   $ —         $ (1,891   $ —     

Contingent consideration obligations

     (15,145     —           —          (15,145
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (17,036   $ —         $ (1,891   $ (15,145
  

 

 

   

 

 

    

 

 

   

 

 

 

 

17


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

The valuation of the Company’s derivative financial instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair value of the interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments) using the overnight index swap rate as the discount rate.

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements and measures the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs to evaluate the likelihood of default by itself and by its counterparties. As of September 30, 2014, the Company determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The valuation of the Company’s contingent consideration obligations is estimated as the present value of total expected contingent consideration payments which are determined using a Monte Carlo simulation. This analysis reflects the contractual terms of the purchase agreements and utilizes assumptions with regard to future sales, probabilities of achieving such future sales, the likelihood and timing of expected payments and a discount rate. Significant increases with respect to assumptions as to future sales and probabilities of achieving such future sales would result in a higher fair value measurement, while an increase in the discount rate would result in a lower fair value measurement.

The table below presents a reconciliation of the fair value of the liabilities that use significant unobservable inputs (Level 3).

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     2014     2013     2014     2013  

Balance at beginning of period

   $ (13,169   $ (5,887   $ (5,484   $ (296

Adjustment of provisional amounts

     —          223        —          —     

Issuance of contingent consideration

     —          —          (6,015     (5,495

Settlement of contingent consideration

     —          105        —          232   

Total changes included in contingent consideration

     (1,976     (1,879     (3,646     (1,879
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ (15,145   $ (7,438   $ (15,145   $ (7,438
  

 

 

   

 

 

   

 

 

   

 

 

 

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

During the nine months ended September 30, 2014, the Company’s pharmacy services segment received notice that its existing contract with a customer would not be renewed in full upon its expiration. As a result, the Company abandoned a customer related project that was under development and assessed the recoverability of the net assets included in the relevant asset group. The Company recognized an impairment charge to write off the abandoned project and to adjust the carrying value of the asset group to its fair value. This latter impairment charge was generally allocated to the affected long-lived assets on a pro rata basis. Additionally, the Company abandoned certain pharmacy services and provider services segment development projects in connection with execution of certain strategic initiatives during the nine months ended September 30, 2014.

 

18


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

The following table summarizes the affected financial statement captions, the allocation of the impairment charges among those captions and provides certain quantitative information associated with the required fair value measurements.

 

     Range of Inputs      Fair Value      Impairment  

Long-lived assets to be held and used

        

Relevant asset group

     N/A       $ 13,066       $ 73,220   

Balance sheet account:

        

Customer relationships

     N/A         N/A       $ 72,290   

Property and equipment

     N/A         N/A       $ 930   

Unobservable inputs (discounted cash flow method):

        

Probability of contract extension

     80%         N/A         N/A   

Probability of new contract execution

     20%-90%         N/A         N/A   

Expected annual revenue range

   $ 3,080-$3,590         N/A         N/A   

Risk free interest rate

     1.6%         N/A         N/A   

Long-lived assets to be disposed of

        

Property and Equipment

     N/A       $       $ 8,848   

Assets and Liabilities Measured at Fair Value upon Initial Recognition

The carrying amount and the estimated fair value of financial instruments held by the Company as of September 30, 2014 were:

 

     Carrying
Amount
     Fair Value  

Cash and cash equivalents

   $ 23,927       $ 23,927   

Accounts receivable

   $ 231,950       $ 231,950   

Senior Credit Facilities (Level 1)

   $ 1,255,092       $ 1,255,926   

Senior Notes (Level 2)

   $ 734,166       $ 830,861   

The carrying amounts of cash equivalents and accounts receivable approximate fair value because of their short-term maturities. The fair value of long-term debt is based upon market quotes and trades by investors in partial interests of these instruments.

9. Legal Proceedings

The Company finalized and paid $8,000 related to the settlement of a vendor fee dispute during the three months ended September 30, 2014, with $500 and $3,000 of this amount recognized within sales, general, marketing and administrative expense during the three and nine months ended September 30, 2014, respectively.

Additionally, in the normal course of business, the Company is involved in various claims and legal proceedings. While the ultimate resolution of these matters has yet to be determined, the Company does not believe that their outcomes will have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

10. Income Taxes

In January 2014, the Company 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, the Company 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, the Company’s 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, the Company was required to revise the apportionment of its income taxes among various state taxing jurisdictions.

Income taxes were also affected by the establishment of a valuation allowance related to state deferred tax assets for three of the Company’s subsidiaries.

 

19


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

After giving effect to this change in tax status and these other items, income taxes for the nine months ended September 30, 2014 amounted to an income tax benefit of $43,733 and an effective tax rate of 36.7%. The income tax benefit for the nine months ended September 30, 2013, which does not reflect the change in tax status, was $26,422 and resulted in an effective tax rate of 31.3%.

11. Tax Receivable Agreement Obligation to Related Parties

In connection with the IPO, the Company entered into tax receivable agreements which obligated the Company to make payments to certain current and former owners of the Company, including affiliates of Hellman and Friedman (“H&F”) and certain members of management, equal to 85% of the applicable cash savings that the Company realizes as a result of tax attributes arising from certain previous transactions. The Company will retain the benefit of the remaining 15% of these tax savings.

In November 2011, H&F and certain current and former members of management exchanged all of their remaining EBS Master Units (“EBS Units”) for cash and a combination of cash and shares of Parent, respectively, and the former majority owner of the Company assigned its rights under the tax receivable agreements to affiliates of Blackstone (Blackstone, together with H&F and certain current and former members of management are sometimes referred to collectively as the “TRA Members”). Additionally, effective December 31, 2011, the Company simplified its corporate structure. The tax attributes of the exchange of EBS Units and corporate restructuring are expected to provide the Company with additional cash savings, 85% of which are payable to the TRA Members. Collectively, the Company expects the tax attributes of the above referenced events to result in cumulative payments under the tax receivable agreements of approximately $352,521. $160,690 of this amount, which reflected the initial fair value of the tax receivable agreement obligations plus recognized accretion, was reflected as an obligation on the accompanying unaudited condensed consolidated balance sheet at September 30, 2014.

During the nine months ended September 30, 2014, the Company changed its estimate of the timing and amount of future cash flows attributable to the tax receivable agreements as a result of the effective tax rate change resulting from the change in tax status of EBS Master from a partnership to a corporation and the acquisitions of Vieosoft and Capario. These revised estimates resulted in a decrease to pretax net loss of $5,756 for the nine months ended September 30, 2014.

12. Segment Reporting

Effective January 1, 2014, the Company completed an internal reorganization of its reporting structure which resulted in a change in the composition of its operating segments. Additionally, the Company periodically makes other changes to the composition of its operating segments. Prior period segment information is restated to reflect the organizational structure and any other changes made.

Management views the Company’s operating results in three reportable segments: (a) payer services, (b) provider services and (c) pharmacy services. Listed below are the results of operations for each of the reportable segments. In addition to these reportable segments, the Company reports financial information for two additional operating segments that is presented on an aggregate basis. This information is reflected in the manner utilized by management to make operating decisions, assess performance and allocate resources. Segment assets are not presented to management for purposes of operational decision making, and therefore are not included in the accompanying tables. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the notes to the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the SEC.

Payer Services Segment

The payer services segment provides payment cycle solutions that simplify the administration of healthcare related to insurance eligibility and benefit verification, claims management, payment integrity and payment distribution. Additionally, the payer services segment provides patient billing and payment and consulting services.

 

20


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

Provider Services Segment

The provider services segment provides revenue cycle management solutions, government program eligibility and enrollment services and revenue optimization solutions primarily to hospitals, physician practices, laboratories and other healthcare providers that simplify providers’ revenue cycle and workflow, reduce related costs and improve cash flow.

Pharmacy Services Segment

The pharmacy services segment provides electronic prescribing services, other electronic solutions and benefit administration services to pharmacies, pharmacy benefit management companies, government agencies and other payers related to prescription benefit claim filing, adjudication and management.

All Other

All Other consists of two operating segments, one of which provides revenue cycle management solutions through channel partners and one of which provides revenue cycle solutions, either directly or through channel partners, to dental practices.

Corporate and Eliminations

Inter-segment revenue and expenses primarily represent claims management and patient billing and payment services provided between segments.

Corporate and eliminations includes management, administrative and other shared corporate services functions such as information technology, legal, finance, human resources, marketing and product management, as well as eliminations to remove inter-segment revenue and expenses. These administrative and other shared services costs are excluded from the adjusted EBITDA measure for each respective operating segment.

 

21


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

The revenue and adjusted EBITDA for the operating segments are as follows:

 

     Three Months Ended September 30, 2014  
     Payer      Provider     Pharmacy     All
Other
     Corporate
and
Eliminations
    Consolidated  

Revenue from external customers:

              

Claims management

   $ 73,314      $ —        $ —        $ —         $ —        $ 73,314  

Payment distribution services

     73,703        —          —          —           —          73,703  

Patient billing and payment services

     68,360        —          —          —           —          68,360  

Revenue cycle technology

     —           32,343       —          —           —          32,343  

Revenue cycle services

     —           34,979       —          —           —          34,979  

Physician services

     —           12,041       —          —           —          12,041  

Pharmacy

     —           —          31,649       —           —          31,649  

Channel Partner

     —           —          —          13,152        (6,200     6,952  

Dental

     —           —          —          8,267        —          8,267  

Inter-segment revenue

     2,490        —          90       —           (2,580     —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net revenue

   $ 217,867      $ 79,363     $ 31,739     $ 21,419      $ (8,780   $ 341,608  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     51,103        26,565       9,846       11,742        (107,765   $ (8,509

Interest expense

     —           (159     (5     —           36,799       36,635  

Depreciation and amortization

     16,843        12,178       3,254       41        16,132       48,448  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

EBITDA

     67,946        38,584       13,095       11,783        (54,834     76,574  

Equity compensation

     254        265       77       21        1,615       2,232  

Acquisition accounting adjustments

     18        7       152       —           12       189  

Acquisition-related costs

     461        12       —          8        906       1,387  

Transaction-related costs and advisory fees

     —           —          —          —           1,683       1,683  

Strategic initiatives, duplicative and transition costs

     —           7       96       —           303       406  

Severance costs

     321        801       13       —           767       1,902  

Accretion

     —           —          —          —           4,452       4,452  

Impairment of long-lived assets

     —           —          (90     —           3,204       3,114  

Contingent consideration

     —           —          1,976       —           —          1,976  

Other non-routine, net

     523        106       37       —           (529     137  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

EBITDA Adjustments

     1,577        1,198       2,261       29        12,413       17,478  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Adjusted EBITDA

   $ 69,523      $ 39,782     $ 15,356     $ 11,812      $ (42,421   $ 94,052  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

22


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

     Three Months Ended September 30, 2013  
     Payer     Provider      Pharmacy     All
Other
     Corporate
and
Eliminations
    Consolidated  

Revenue from external customers:

              

Claims management

   $ 78,292     $ —         $ —        $ —         $ —        $ 78,292  

Payment distribution services

     63,942       —           —          —           —          63,942  

Patient billing and payment services

     62,911       —           —          —           —          62,911  

Revenue cycle technology

     —          29,678        —          —           —          29,678  

Revenue cycle services

     —          31,172        —          —           —          31,172  

Physician services

     —          9,237        —          —           —          9,237  

Pharmacy

     —          —           30,363       —           —          30,363  

Channel Partner

     —          —           —          10,230        (6,095     4,135  

Dental

     —          —           —          8,080        —          8,080  

Inter-segment revenue

     1,625       —           77       —           (1,702     —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net revenue

   $ 206,770     $ 70,087      $ 30,440     $ 18,310      $ (7,797   $ 317,810  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     51,815       20,052        9,725       8,509        (106,240   $ (16,139

Interest expense

     (2     —           (3     —           37,005       37,000  

Depreciation and amortization

     16,333       11,579        4,309       43        14,917       47,181  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

EBITDA

     68,146       31,631        14,031       8,552        (54,318     68,042  

Equity compensation

     285       315        62       292        1,135       2,089  

Acquisition accounting adjustments

     65       76        94       4        12       251  

Acquisition-related costs

     884       29        41       2        563       1,519  

Transaction-related costs and advisory fees

     —          —           —          —           1,500       1,500  

Strategic initiatives, duplicative and transition costs

     —          —           223       16        2,188       2,427  

Severance costs

     84       105        18       —           3,302       3,509  

Accretion

     —          —           —          —           7,112       7,112  

Impairment of long-lived assets

     —          25        —          —           —          25  

Contingent consideration

     —          —           1,879       —           —          1,879  

Other non-routine, net

     101       136        2       —           (3,344     (3,105
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

EBITDA Adjustments

     1,419       686        2,319       314        12,468       17,206  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Adjusted EBITDA

   $ 69,565     $ 32,317      $ 16,350     $ 8,866      $ (41,850   $ 85,248  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

23


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

     Nine Months Ended September 30, 2014  
     Payer     Provider     Pharmacy     All Other      Corporate
and
Eliminations
    Consolidated  

Revenue from external customers:

             

Claims management

   $ 215,614     $ —        $ —        $ —         $ —        $ 215,614  

Payment distribution services

     213,766       —          —          —           —          213,766  

Patient billing and payment services

     205,921       —          —          —           —          205,921  

Revenue cycle technology

     —          95,254       —          —           —          95,254  

Revenue cycle services

     —          101,491       —          —           —          101,491  

Physician services

     —          30,619       —          —           —          30,619  

Pharmacy

     —          —          92,808       —           —          92,808  

Channel Partner

     —          —          —          34,659        (17,618     17,041  

Dental

     —          —          —          24,459        —          24,459  

Inter-segment revenue

     7,062       —          271       —           (7,333     —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net revenue

   $ 642,363     $ 227,364     $ 93,079     $ 59,118      $ (24,951   $ 996,973  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     146,600       67,797       (40,942     31,170        (323,874   $ (119,249

Interest expense

     (9     (159     (6     —           109,915       109,741  

Depreciation and amortization

     49,921       36,127       11,479       159        43,855       141,541  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

EBITDA

     196,512       103,765       (29,469     31,329        (170,104     132,033  

Equity compensation

     769       759       198       66        4,122       5,914  

Acquisition accounting adjustments

     85       57       546       3        34       725  

Acquisition-related costs

     1,368       273       (72     9        3,895       5,473  

Transaction-related costs and advisory fees

     —          —          —          —           4,799       4,799  

Strategic initiatives, duplicative and transition costs

     59       230       192       —           9,205       9,686  

Severance costs

     851       1,227       18       30        3,626       5,752  

Accretion

     —          —          —          —           9,220       9,220  

Impairment of long-lived assets

     —          448       73,751       —           8,490       82,689  

Contingent consideration

     —          —          3,646       —           —          3,646  

Other non-routine, net

     3,156       465       206       6        (1,085     2,748  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

EBITDA Adjustments

     6,288       3,459       78,485       114        42,306       130,652  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Adjusted EBITDA

   $ 202,800     $ 107,224     $ 49,016     $ 31,443      $ (127,798   $ 262,685  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

24


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

     Nine Months Ended September 30, 2013  
     Payer      Provider      Pharmacy     All Other      Corporate
and
Eliminations
    Consolidated  

Revenue from external customers:

               

Claims management

   $ 215,933      $ —         $ —        $ —         $ —        $ 215,933  

Payment distribution services

     194,174        —           —          —           —          194,174  

Patient billing and payment services

     189,396        —           —          —           —          189,396  

Revenue cycle technology

     —           87,777        —          —           —          87,777  

Revenue cycle services

     —           92,273        —          —           —          92,273  

Physician services

     —           27,030        —          —           —          27,030  

Pharmacy

     —           —           80,331       —           —          80,331  

Channel Partner

     —           —           —          29,689        (18,642     11,047  

Dental

     —           —           —          24,491        —          24,491  

Inter-segment revenue

     4,399        —           256       —           (4,655     —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net revenue

   $ 603,902      $ 207,080      $ 80,587     $ 54,180      $ (23,297   $ 922,452  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     144,726        54,987        30,740       25,039        (339,902   $ (84,410

Interest expense

     1        33        (8     —           116,364       116,390  

Depreciation and amortization

     48,355        35,607        11,573       88        42,320       137,943  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

EBITDA

     193,082        90,627        42,305       25,127        (181,218     169,923  

Equity compensation

     865        906        140       844        2,882       5,637  

Acquisition accounting adjustments

     236        402        53       15        35       741  

Acquisition-related costs

     1,821        91        47       4        494       2,457  

Transaction-related costs and advisory fees

     —           —           —          —           4,825       4,825  

Strategic initiatives, duplicative and transition costs

     130        —           781       85        3,359       4,355  

Severance costs

     434        319        252       263        3,870       5,138  

Loss on extinguishment of debt and other related costs

     —           —           —          —           24,311       24,311  

Accretion

     —           —           —          —           18,712       18,712  

Impairment of long-lived assets

     —           —           —          —           1,887       1,887  

Contingent consideration

     —           —           1,879       —           —          1,879  

Other non-routine, net

     218        544        7       6        (2,200     (1,425
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

EBITDA Adjustments

     3,704        2,262        3,159       1,217        58,175       68,517  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Adjusted EBITDA

   $ 196,786      $ 92,889      $ 45,464     $ 26,344      $ (123,043   $ 238,440  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

13. Accumulated Other Comprehensive Income (Loss)

The following is a summary of the accumulated other comprehensive income (loss) balances, net of taxes, as of and for the nine months ended September 30, 2014.

 

     Foreign
Currency
Translation
Adjustment
    Cash Flow
Hedge
    Accumulated
Other
Comprehensive
Income (Loss)
 

Balance at January 1, 2014

   $ (264   $ (1,079   $ (1,343

Change associated with foreign currency translation

     (100     —          (100

Change associated with current period hedging

     —          (2,062     (2,062

Reclassification into earnings

     —          1,935        1,935   
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ (364   $ (1,206   $ (1,570
  

 

 

   

 

 

   

 

 

 

 

25


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

14. Supplemental Condensed Consolidating Financial Information

In lieu of providing separate annual and interim financial statements for each guarantor of the Senior Notes, Regulation S-X provides companies, if certain criteria are satisfied, with the option to instead provide condensed consolidating financial information for its issuers, guarantors and non-guarantors. In the case of the Company, the applicable criteria include the following: (i) the Senior Notes are fully and unconditionally guaranteed on a joint and several basis, (ii) each of the guarantors of the Senior Notes is a direct or indirect wholly-owned subsidiary of the Company and (iii) any non-guarantors are considered minor as that term is defined in Regulation S-X. Because each of these criteria has been satisfied by the Company, condensed consolidating balance sheets as of September 30, 2014 and December 31, 2013, condensed consolidating statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2014 and 2013, respectively, and condensed consolidating cash flows for the nine months ended September 30, 2014 and 2013, respectively, for the Company, segregating the issuer, the subsidiary guarantors and consolidating adjustments, are reflected below. Prior period amounts have been reclassified to conform to the current year presentation.

 

26


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

Condensed Consolidating Balance Sheet

 

     As of September 30, 2014  
     Emdeon Inc.      Guarantor
Subsidiaries
     Consolidating
Adjustments
    Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 740       $ 23,187       $ —        $ 23,927   

Accounts receivable, net of allowance for doubtful accounts

     —           231,950         —          231,950   

Deferred income tax assets

     100         16,874         —          16,974   

Prepaid expenses and other current assets

     3,972         29,113         —          33,085   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     4,812         301,124         —          305,936   

Property and equipment, net

     7         239,628         —          239,635   

Due from affiliates

     —           138,176         (138,176     —     

Investment in consolidated subsidiaries

     1,718,809         —           (1,718,809     —     

Goodwill

     —           1,584,655         —          1,584,655   

Intangible assets, net

     135,750         1,395,025         —          1,530,775   

Other assets, net

     138,648         16,030         (135,022     19,656   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,998,026       $ 3,674,638       $ (1,992,007   $ 3,680,657   
  

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

          

Current liabilities:

          

Accounts payable

   $ —         $ 12,263       $ —        $ 12,263   

Accrued expenses

     16,589         127,218         —          143,807   

Deferred revenues

     —           10,233         —          10,233   

Current portion of long-term debt

     5,577         18,916         —          24,493   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     22,166         168,630         —          190,796   

Due to affiliates

     138,176         —           (138,176     —     

Long-term debt, excluding current portion

     776,954         1,221,615         —          1,998,569   

Deferred income tax liabilities

     —           552,008         (135,022     416,986   

Tax receivable agreement obligations to related parties

     159,716         —           —          159,716   

Other long-term liabilities

     —           13,576         —          13,576   

Commitments and contingencies

          

Equity

     901,014         1,718,809         (1,718,809     901,014   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 1,998,026       $ 3,674,638       $ (1,992,007   $ 3,680,657   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

27


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

Condensed Consolidating Balance Sheet

 

     As of December 31, 2013  
     Emdeon Inc.      Guarantor
Subsidiaries
     Consolidating
Adjustments
    Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 2,794       $ 73,744       $ —        $ 76,538   

Accounts receivable, net of allowance for doubtful accounts

     —           214,247         —          214,247   

Deferred income tax assets

     —           6,317         —          6,317   

Prepaid expenses and other current assets

     3,441         23,578         —          27,019   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     6,235         317,886         —          324,121   

Property and equipment, net

     10         269,460         —          269,470   

Due from affiliates

     —           69,142         (69,142     —     

Investment in subsidiaries

     1,764,213         —           (1,764,213     —     

Goodwill

     —           1,502,434         —          1,502,434   

Intangible assets, net

     142,500         1,490,188         —          1,632,688   

Other assets, net

     64,536         14,949         (60,316     19,169   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,977,494       $ 3,664,059       $ (1,893,671   $ 3,747,882   
  

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

          

Current liabilities:

          

Accounts payable

   $ —         $ 8,367       $ —        $ 8,367   

Accrued expenses

     8,205         122,944         —          131,149   

Deferred revenues

     —           10,881         —          10,881   

Current portion of long-term debt

     5,775         25,555         —          31,330   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     13,980         167,747         —          181,727   

Due to affiliates

     69,142         —           (69,142     —     

Long-term debt, excluding current portion

     775,330         1,223,696         —          1,999,026   

Deferred income tax liabilities

     —           496,579         (60,316     436,263   

Tax receivable agreement obligations to related parties

     150,496         —           —          150,496   

Other long-term liabilities

     —           11,824         —          11,824   

Commitments and contingencies

     —           —           —          —     

Total equity

     968,546         1,764,213         (1,764,213     968,546   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 1,977,494       $ 3,664,059       $ (1,893,671   $ 3,747,882   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

28


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

Condensed Consolidating Statement of Operations

 

     Three Months Ended September 30, 2014  
     Emdeon Inc.     Guarantor
Subsidiaries
     Consolidating
Adjustments
    Consolidated  

Revenue

   $ —        $ 341,608       $ —        $ 341,608   

Costs and expenses:

         

Cost of operations (exclusive of depreciation and amortization below)

     —          202,305         —          202,305   

Development and engineering

     —          8,156         —          8,156   

Sales, marketing, general and administrative

     1,290        43,741         —          45,031   

Depreciation and amortization

     2,251        46,197         —          48,448   

Accretion

     4,452        —           —          4,452   

Impairment of long-lived assets

     —          3,114         —          3,114   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss)

     (7,993     38,095         —          30,102   

Equity in earnings of consolidated subsidiaries

     (10,110     —           10,110        —     

Interest expense, net

     23,418        13,217         —          36,635   

Contingent consideration

     —          1,976         —          1,976   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income tax provision (benefit)

     (21,301     22,902         (10,110     (8,509

Income tax provision (benefit)

     (8,299     12,792         —          4,493   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ (13,002   $ 10,110       $ (10,110   $ (13,002
  

 

 

   

 

 

    

 

 

   

 

 

 

 

29


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

Condensed Consolidating Statement of Operations

 

     Three Months Ended September 30, 2013  
     Emdeon Inc.     Guarantor
Subsidiaries
     Consolidating
Adjustments
    Consolidated  

Revenue

   $ —        $ 317,810       $ —        $ 317,810   

Costs and expenses:

         

Cost of operations (exclusive of depreciation and amortization below)

     —          191,695         —          191,695   

Development and engineering

     —          7,878         —          7,878   

Sales, marketing, general and administrative

     1,997        42,107         —          44,104   

Depreciation and amortization

     2,251        44,930         —          47,181   

Accretion

     7,112        —           —          7,112   

Impairment of long-lived assets

     —          25         —          25   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss)

     (11,360     31,175         —          19,815   

Equity in earnings of consolidated subsidiaries

     (3,766     —           3,766        —     

Interest expense, net

     23,579        13,421         —          37,000   

Contingent consideration

     —          1,879         —          1,879   

Other

     (2,925     —           —          (2,925
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income tax provision (benefit)

     (28,248     15,875         (3,766     (16,139

Income tax provision (benefit)

     (11,983     12,109         —          126   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ (16,265   $ 3,766       $ (3,766   $ (16,265
  

 

 

   

 

 

    

 

 

   

 

 

 

 

30


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

Condensed Consolidating Statement of Operations

 

     Nine Months Ended September 30, 2014  
     Emdeon Inc.     Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Revenue

   $ —        $ 996,973      $ —        $ 996,973   

Costs and expenses:

        

Cost of operations (exclusive of depreciation and amortization below)

     —          597,843        —          597,843   

Development and engineering

     —          24,771        —          24,771   

Sales, marketing, general and administrative

     13,775        136,964        —          150,739   

Depreciation and amortization

     6,753        134,788        —          141,541   

Accretion

     9,220        —          —          9,220   

Impairment of long-lived assets

     —          82,689        —          82,689   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (29,748     19,918        —          (9,830

Equity in earnings of consolidated subsidiaries

     51,018        —          (51,018     —     

Interest expense, net

     70,224        39,517        —          109,741   

Contingent consideration

     —          3,646        —          3,646   

Other

     (111     (3,857     —          (3,968
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision (benefit)

     (150,879     (19,388     51,018        (119,249

Income tax provision (benefit)

     (75,363     31,630        —          (43,733
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (75,516   $ (51,018   $ 51,018      $ (75,516
  

 

 

   

 

 

   

 

 

   

 

 

 

 

31


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

Condensed Consolidating Statement of Operations

 

     Nine Months Ended September 30, 2013  
     Emdeon Inc.     Guarantor
Subsidiaries
     Consolidating
Adjustments
    Consolidated  

Revenue

   $ —        $ 922,452       $ —        $ 922,452   

Costs and expenses:

         

Cost of operations (exclusive of depreciation and amortization below)

     —          563,146         —          563,146   

Development and engineering

     —          23,201         —          23,201   

Sales, marketing, general and administrative

     7,023        116,446         —          123,469   

Depreciation and amortization

     6,753        131,190         —          137,943   

Accretion

     18,712        —           —          18,712   

Impairment of long-lived assets

     —          1,887         —          1,887   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss)

     (32,488     86,582         —          54,094   

Equity in earnings of consolidated subsidiaries

     (6,216     —           6,216        —     

Interest expense, net

     70,621        45,769         —          116,390   

Loss on extinguishment of debt

     485        22,675         —          23,160   

Contingent consideration

     —          1,879         —          1,879   

Other

     (2,925     —           —          (2,925
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income tax provision (benefit)

     (94,453     16,259         (6,216     (84,410

Income tax provision (benefit)

     (36,465     10,043         —          (26,422
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ (57,988   $ 6,216       $ (6,216   $ (57,988
  

 

 

   

 

 

    

 

 

   

 

 

 

 

32


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

Condensed Consolidating Statement of Comprehensive Income (Loss)

 

     Three Months Ended September 30, 2014  
     Emdeon Inc.     Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Net income (loss)

   $ (13,002   $ 10,110      $ (10,110   $ (13,002

Other comprehensive income (loss):

        

Changes in fair value of interest rate swap, net of taxes

     732        —          —          732   

Foreign currency translation adjustment

     —          (127     —          (127

Equity in other comprehensive earnings

     (127     —          127        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     605        (127     127        605   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (12,397   $ 9,983      $ (9,983   $ (12,397
  

 

 

   

 

 

   

 

 

   

 

 

 

 

33


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

Condensed Consolidating Statement of Comprehensive Income (Loss)

 

     Three Months Ended September 30, 2013  
     Emdeon Inc.     Guarantor
Subsidiaries
     Consolidating
Adjustments
    Consolidated  

Net income (loss)

   $ (16,265   $ 3,766       $ (3,766   $ (16,265

Other comprehensive income (loss):

         

Changes in fair value of interest rate swap, net of taxes

     (1,064     —           —          (1,064

Foreign currency translation adjustment

     —          35         —          35   

Equity in other comprehensive earnings

     35        —           (35     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss)

     (1,029     35         (35     (1,029
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (17,294   $ 3,801       $ (3,801   $ (17,294
  

 

 

   

 

 

    

 

 

   

 

 

 

 

34


Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

Condensed Consolidating Statement of Comprehensive Income (Loss)

 

     Nine Months Ended September 30, 2014  
     Emdeon Inc.     Guarantor
Subsidiaries
    Consolidating
Adjustments
     Consolidated  

Net income (loss)

   $ (75,516   $ (51,018   $ 51,018       $ (75,516

Other comprehensive income (loss):

         

Changes in fair value of interest rate swap, net of taxes

     (127