Form 10-Q
Table of Contents

 

 

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, 2012

Commission file number 333-182786

 

 

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 8, 2012

Common Stock, $0.01 par value   100

 

 

 


Table of Contents

Emdeon Inc.

Table of Contents

 

Part I. Financial Information

  

Item 1. Financial Statements

     2   

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

     41   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     61   

Item 4. Controls and Procedures

     61   

Part II. Other Information

  

Item 1. Legal Proceedings

     62   

Item 1A. Risk Factors

     62   

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

     62   

Item 3. Defaults Upon Senior Securities

     62   

Item 4. Mine Safety Disclosures

     62   

Item 5. Other Information

     62   

Item 6. Exhibits

     62   

Signatures

     63   

Exhibit Index

     64   

Exhibit 31.1

  

Exhibit 31.2

  

Exhibit 32.1

  

Exhibit 32.2

  


Table of Contents
PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

2


Table of Contents

Emdeon Inc.

Condensed Consolidated Balance Sheets

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

 

     September 30,
2012
    December 31,
2011
 
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 50,337     $ 37,925  

Accounts receivable, net of allowance for doubtful accounts of $4,276 and $1,201 at September 30, 2012 and December 31, 2011, respectively

     197,169       188,960  

Deferred income tax assets

     4,772       5,862  

Prepaid expenses and other current assets

     20,914       16,926  
  

 

 

   

 

 

 

Total current assets

     273,192       249,673  

Property and equipment, net

     268,381       277,768  

Goodwill

     1,481,951       1,443,574  

Intangible assets, net

     1,757,783       1,821,897  

Other assets, net

     30,797       39,403  
  

 

 

   

 

 

 

Total assets

   $ 3,812,104     $ 3,832,315  
  

 

 

   

 

 

 
LIABILITIES AND EQUITY   

Current liabilities:

    

Accounts payable

   $ 13,567     $ 8,827  

Accrued expenses

     119,461       132,096  

Deferred revenues

     8,967       5,561  

Current portion of long-term debt

     16,805       16,034  
  

 

 

   

 

 

 

Total current liabilities

     158,800       162,518  

Long-term debt, excluding current portion

     2,005,368       1,945,074  

Deferred income tax liabilities

     469,578       502,044  

Tax receivable agreement obligations to related parties

     132,581       117,477  

Other long-term liabilities

     6,145       1,413  

Commitments and contingencies

    

Equity:

    

Common stock (par value, $.01), 100 shares authorized and outstanding at September 30, 2012 and December 31, 2011, respectively

     —          —     

Additional paid-in capital

     1,128,320       1,120,676  

Accumulated other comprehensive income (loss)

     (3,908     (194

Accumulated deficit

     (84,780     (16,693
  

 

 

   

 

 

 

Total equity

     1,039,632       1,103,789  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 3,812,104     $ 3,832,315  
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


Table of Contents

Emdeon Inc.

Condensed Consolidated Statements of Operations

(unaudited and amounts in thousands)

 

     Successor                Predecessor     Successor                Predecessor  
     Three Months
Ended
September 30,
2012
               Three Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2012
               Nine Months
Ended
September 30,
2011
 

Revenue

   $ 297,075             $ 282,149     $ 877,577             $ 835,758  

Costs and expenses:

                        

Cost of operations (exclusive of depreciation and amortization below)

     184,794               173,455       542,550               515,481  

Development and engineering

     7,994               7,473       24,246               23,602  

Sales, marketing, general and administrative

     35,308               38,342       107,382               105,604  

Depreciation and amortization

     48,572               39,830       140,354               116,786  

Accretion

     2,758               —          15,104               —     
  

 

 

           

 

 

   

 

 

           

 

 

 

Operating income

     17,649               23,049       47,941               74,285  

Interest expense, net

     41,898               12,573       130,539               37,848  

Loss on extinguishment of debt

     —                  —          21,853               —     

Other

     —                  (4,398     —                  (8,036
  

 

 

           

 

 

   

 

 

           

 

 

 

Income (loss) before income tax provision (benefit)

     (24,249             14,874       (104,451             44,473  

Income tax provision (benefit)

     (9,093             8,601       (36,364             21,696  
  

 

 

           

 

 

   

 

 

           

 

 

 

Net income (loss)

     (15,156             6,273       (68,087             22,777  

Net income attributable to noncontrolling interest

     —                  2,906       —                  9,214  
  

 

 

           

 

 

   

 

 

           

 

 

 

Net income (loss) attributable to Emdeon Inc.

   $ (15,156           $ 3,367     $ (68,087           $ 13,563  
  

 

 

         

 

 

   

 

 

         

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

Emdeon Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited and amounts in thousands)

 

     Successor                Predecessor      Successor                Predecessor  
     Three Months
Ended
September 30,
2012
               Three Months
Ended
September 30,
2011
     Nine Months
Ended
September 30,
2012
               Nine Months
Ended
September 30,
2011
 

Net income (loss)

   $ (15,156           $ 6,273      $ (68,087           $ 22,777  

Other comprehensive income (loss):

                         

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

     (1,487             —           (3,821             —     

Other comprehensive income amortization, net of taxes

     —                  838        —                  2,481  

Foreign currency translation adjustment

     (127             118        107               113  
  

 

 

           

 

 

    

 

 

           

 

 

 

Other comprehensive income (loss)

     (1,614             956        (3,714             2,594  
  

 

 

           

 

 

    

 

 

           

 

 

 

Total comprehensive income (loss)

     (16,770             7,229        (71,801             25,371  

Comprehensive income attributable to noncontrolling interest

     —                  3,109        —                  9,767  
  

 

 

           

 

 

    

 

 

           

 

 

 

Comprehensive income (loss) attributable to Emdeon Inc.

   $ (16,770           $ 4,120      $ (71,801           $ 15,604  
  

 

 

         

 

 

    

 

 

         

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

Emdeon Inc.

Condensed Consolidated Statements of Equity

(unaudited and amounts in thousands, except share amounts)

 

   

Class A

Common Stock

   

Class B

Common Stock

    Additional
Paid-in
Capital
    Contingent
Consideration
    Retained
Earnings
(Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
    Non-
Controlling
Interest
    Total
Equity
 
    Shares     Amount     Shares     Amount              

Predecessor Balances:

                   

Balance at January 1, 2011

    91,064,486     $ 1       24,689,142     $ —        $ 738,888     $ 1,955     $ 53,250     $ (2,569   $ 263,763     $ 1,055,288  

Equity compensation expense

    —          —          —          —          13,992       —          —          —          3,618       17,610  

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

    187,866       —          —          —          1,299       —          —          —          (438     861  

Tax receivable agreement with related parties, net of taxes

    —          —          —          —          (58     —          —          —          —          (58

Net income

    —          —          —          —          —          —          13,563       —          9,214       22,777  

Foreign currency translation adjustment

    —          —          —          —          —            —          89       24       113  

Other comprehensive income amortization, net of taxes

    —          —          —          —          —          —          —          1,952       529       2,481  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

    91,252,352     $ 1       24,689,142     $ —        $ 754,121     $ 1,955     $ 66,813     $ (528   $ 276,710     $ 1,099,072  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Successor Balances:

                   

Balance at January 1, 2012

    100     $ —          —        $ —        $ 1,120,676     $ —          (16,693   $ (194   $ —        $ 1,103,789  

Reclassification of liability awards to equity awards

    —          —          —          —          3,675       —          —          —          —          3,675  

Equity compensation expense

    —          —          —          —          3,969       —          —          —          —          3,969  

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

    —          —          —          —          317       —          —          —          —          317  

Repurchase of Parent common stock

    —          —          —          —          (317     —          —          —          —          (317

Net loss

    —          —          —          —          —          —          (68,087     —          —          (68,087

Foreign currency translation adjustment

    —          —          —          —          —          —          —          107       —          107  

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

    —          —          —          —          —          —          —          (3,821     —          (3,821
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

    100     $ —          —        $ —        $ 1,128,320     $ —        $ (84,780   $ (3,908   $ —         

$

1,039,632

 

 

  

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

Emdeon Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited and amounts in thousands)

 

     Successor           Predecessor  
     Nine Months
Ended
September 30, 2012
          Nine Months
Ended
September 30, 2011
 

Operating activities

         

Net income (loss)

   $ (68,087        $ 22,777  

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

         

Depreciation and amortization

     140,354            116,786  

Accretion

     15,104            —     

Equity compensation

     3,969            17,610  

Deferred income tax expense (benefit)

     (37,369          2,611  

Amortization of debt discount and issuance costs

     7,613            10,470  

Amortization of discontinued cash flow hedge from other comprehensive loss

     —               2,843  

Change in contingent consideration

     —               (8,036

Change in fair value of interest rate swap (not subject to hedge accounting)

     —               (7,983

Loss on extinguishment of debt

     18,293            —     

Other

     1,927            36  

Changes in operating assets and liabilities:

         

Accounts receivable

     (5,547          (7,040

Prepaid expenses and other

     (3,686          10,843  

Accounts payable

     5,153            5,888  

Accrued expenses, deferred revenue and other liabilities

     (8,444          16,329  

Tax receivable agreement obligations to related parties

     (114          (2,593
  

 

 

        

 

 

 

Net cash provided by operating activities

     69,166            180,541  
  

 

 

        

 

 

 

Investing activities

         

Purchases of property and equipment

     (40,949          (48,207

Payments for acquisitions, net of cash acquired

     (59,011          (39,422
  

 

 

        

 

 

 

Net cash used in investing activities

     (99,960          (87,629
  

 

 

        

 

 

 

Financing activities

         

Proceeds from Term Loan Facility

     70,351            —     

Debt principal payments

     (9,565          (6,412

Payments on revolver

     (15,000          —     

Payment of loan costs

     (2,060          —     

Repurchase of Parent common stock

     (317          —     

Other

     (203          (620
  

 

 

        

 

 

 

Net cash provided by (used in) financing activities

     43,206            (7,032
  

 

 

        

 

 

 

Net increase in cash and cash equivalents

     12,412            85,880  

Cash and cash equivalents at beginning of period

     37,925            99,188  
  

 

 

        

 

 

 

Cash and cash equivalents at end of period

   $ 50,337          $ 185,068  
  

 

 

        

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

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 and patients of the U.S. healthcare system. The Company’s product and service offerings integrate and automate key business and administrative functions for healthcare payers and healthcare providers throughout the patient encounter, including pre-care patient eligibility and benefits verification and enrollment, clinical exchange capabilities, 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 August 3, 2011, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Beagle Parent Corp. (“Parent”) and Beagle Acquisition Corp. (“Merger Sub”), an indirect wholly-owned subsidiary of Parent. At a special meeting of stockholders held on November 1, 2011, the Company’s stockholders voted to approve the transactions contemplated by the Merger Agreement. On November 2, 2011, 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”). As a result of the consummation of the Merger, each share of Class A common stock, par value $0.00001 (“Class A common stock”) and Class B common stock, par value $0.00001 (“Class B common stock”), of the Company, other than (i) shares owned by the Company and its wholly-owned subsidiaries and (ii) shares owned by Parent and its subsidiaries, including shares and other equity contributed by certain rollover investors in connection with the Merger, was cancelled and/or converted into the right to receive $19.00 in cash, without interest and less any applicable withholding taxes.

The Merger was financed as follows (the following transactions, together with the Merger, are sometimes referred to as the “2011 Transactions”):

 

   

Cash held by the Company at closing;

 

   

$1.224 billion new senior secured term loan credit facility;

 

   

$125.0 million new senior secured revolving credit facility;

 

   

$375.0 million senior notes due 2019;

 

   

$375.0 million senior notes due 2020;

 

   

$966.0 million cash capital contribution from the Company’s new equity investors;

 

   

Contribution by affiliates of Hellman and Friedman (“H&F”) of shares of Class A common stock and membership interests in EBS Master LLC (“EBS Master”) in exchange for shares of common stock of Parent; and

 

   

Contribution by certain of our senior management team members of a limited number of stock options to acquire shares of Class A common stock in exchange for stock options to acquire shares of common stock of Parent.

Immediately following the Merger, the Company repaid all amounts due under the Company’s prior credit agreements and terminated its prior interest rate swap agreement with the proceeds from the 2011 Transactions.

Subsequent to the 2011 Transactions, in April 2012, the Company amended the credit agreement governing the senior credit facilities to reprice the senior credit facilities and borrow $80,000 of additional term loans for general corporate purposes, including acquisitions.

 

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Table of Contents

Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

As a result of the Merger and the change in the basis of the Company’s assets and liabilities, periods prior to the Merger are referred to as “Predecessor” and periods after the Merger are referred to as “Successor”. Because of this change in basis, the Predecessor and Successor period financial statements are not comparable.

2. Basis of Presentation and Summary of Significant New Accounting Policies

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of 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 U.S. generally accepted accounting principles 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.

Recent Accounting Pronouncements

On January 1, 2011, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2009-13, an update to FASB ASC Revenue Recognition Topic, which amends existing accounting standards for revenue recognition for multiple-element arrangements. To the extent a deliverable within a multiple-element arrangement is not accounted for pursuant to other accounting standards, the update establishes a selling price hierarchy that allows for the use of an estimated selling price to determine the allocation of arrangement consideration to a deliverable in a multiple-element arrangement where neither vendor-specific objective evidence nor third-party evidence is available for that deliverable. The adoption of this update had no material effect on the Company’s consolidated financial statements.

On October 1, 2011, the Company adopted FASB ASU No. 2011-08, an update to FASB ASC Intangibles—Goodwill and Other Topic, which amends the existing accounting standards related to the method of assessing goodwill for potential impairment. Specifically, this update limits the requirement for a company to perform a quantitative goodwill impairment test to situations in which management believes it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The adoption of this update had no material effect on the Company’s consolidated financial statements.

On December 31, 2011, the Company retroactively adopted FASB ASU No. 2011-05, an update to FASB ASC Comprehensive Income Topic, which amends the existing accounting standards related to the presentation of comprehensive income in a company’s financial statements. This update requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two statement approach, the first statement would present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. Under either presentation alternative, reclassification adjustments and the effect of those adjustments on net income and other comprehensive income must be presented in the respective statement or statements, as applicable. The Company elected to add a separate statement of comprehensive income (loss) in the accompanying consolidated financial statements to comply with this update; however, the adoption of the provisions of this update had no material impact on the Company’s consolidated financial statements.

 

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Table of Contents

Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

In December 2011, the FASB issued ASU No. 2011-12, which defers the effective date for the requirement to present reclassification adjustments for each component of accumulated other comprehensive income in both income and other comprehensive income on the face of the financial statements. The Company does not expect the adoption of this update to have a material impact on the Company’s consolidated financial statements.

On January 1, 2012, the Company adopted FASB ASU No. 2011-04, an update to FASB ASC Fair Value Measurement Topic, which clarifies the intent of the FASB regarding existing requirements, changes certain principles for measuring fair value and expands the disclosure requirements related to fair value measurements. Specifically, this update expands the restriction on the use of block discounts to all fair value measurements and provides conditions which must be satisfied prior to the application of other premiums and discounts (e.g., control premiums and discounts for lack of marketability) to fair value measurements. Additionally, this update requires the disclosure of quantitative information about significant unobservable inputs, the valuation processes in place for Level 3 measurements, the sensitivity of fair value measurements to changes in unobservable inputs, the hierarchy classification for assets and liabilities whose fair value is disclosed only in footnotes, any transfers between Level 1 and Level 2 of the fair value hierarchy and the reason nonfinancial assets measured at fair value are being used in a manner that differs from the highest and best use. The adoption of this update had no material impact on the Company’s consolidated financial statements. The disclosures required by this update are presented in Note 8 below to these unaudited condensed consolidated financial statements.

In October 2012, the FASB issued ASU No. 2012-04, which clarifies the FASB Accounting Standards Codification (the “Codification”) and corrects unintended application of guidance. The revisions included in this update are intended to make the Codification easier to understand and the fair value measurement guidance easier to apply by eliminating inconsistencies and providing needed clarifications. Except for the revisions that are subject to transition guidance, the update was effective upon issuance. For revisions included in the update that are subject to transition guidance, the update is effective for periods beginning after December 15, 2012. The Company does not expect the adoption of this update to have a material impact on the Company’s 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

Successor

In May 2012, the Company acquired all of the equity interests of TC3 Health, Inc. (“TC3”), a technology-enabled provider of cost containment and payment integrity solutions for healthcare payers.

On November 2, 2011, Merger Sub merged with and into the Company with the Company surviving the Merger. The Merger was accounted for as a reverse acquisition, and as such, the Company’s assets and liabilities have been adjusted to their fair values as of the Merger date.

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

In connection with the 2011 Transactions, General Atlantic LLC and certain of its affiliates (collectively, “General Atlantic”), the majority owner of the Company prior to the 2011 Transactions, assigned its rights under the Company’s tax receivable agreements to affiliates of Blackstone. This assignment did not affect the Company’s overall payment obligations under the tax receivable agreements; however, because this assignment involved a transaction among owners apart from the consideration transferred for the shares of the Predecessor, the Company reduced the gross consideration transferred in the Merger by $54,525, the fair value of these rights assigned to affiliates of Blackstone.

Predecessor

In May 2011, the Company acquired all of the equity interests of Equiclaim, LLC (“EquiClaim”), a technology-enabled provider of healthcare audit and recovery solutions.

The following table summarizes certain information related to these acquisitions. The preliminary values of the consideration transferred, assets acquired and liabilities assumed in the TC3 acquisition including related tax affects, are subject to a final working capital settlement.

    

 

    

 

 
     Successor      Predecessor  
     TC3     Merger      EquiClaim  

Total Consideration Fair Value at Acquisition Date:

       

Cash paid at closing

   $ 61,351     $ 1,943,218      $ 39,758  

Parent common stock fair value

     —          245,000        —     

Parent options fair value

     —          4,125        —     

Other

     444       —           (350
  

 

 

   

 

 

    

 

 

 
   $ 61,795     $ 2,192,343      $ 39,408  
  

 

 

   

 

 

    

 

 

 

Allocation of the Consideration Transferred:

       

Cash

   $ 2,340     $ 206,376      $ —     

Accounts receivable

     2,662       175,514        1,983  

Deferred income tax assets

     348       1,739        —     

Prepaid expenses and other current assets

     155       20,226        74  

Property and equipment

     10,414       278,122        2,331  

Other assets

     —          4,205        —     

Identifiable intangible assets:

       

Tradename

     530       156,000        160  

Noncompetition agreements

     1,300       11,500        100  

Customer relationships

     18,810       1,623,000        14,030  

Data sublicense

     —          31,000        —     

Backlog

     —          19,000        3,680  

Goodwill

     38,695       1,443,574        18,079  

Accounts payable

     —          (12,346      (98

Accrued expenses

     (4,783     (149,480      (931

Deferred revenues

     —          (4,340      —     

Current maturities of long-term debt

     —          (11,861      —     

Long-term debt

     —          (960,936      —     

Deferred income tax liabilities

     (8,592     (515,725      —     

Tax receivable obligations to related parties

     —          (115,237      —     

Other long-term liabilities

     (84     (7,988      —     
  

 

 

   

 

 

    

 

 

 

Total consideration transferred

   $ 61,795     $ 2,192,343      $ 39,408  
  

 

 

   

 

 

    

 

 

 

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

       

For the three months ended September 30, 2012

   $ —        $ —         $ —     

For the three months ended September 30, 2011

   $ —        $ —         $ 101  

For the nine months ended September 30, 2012

   $ 513     $ —         $ —     

For the nine months ended September 30, 2011

   $ —        $ —         $ 350  

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

    

 

    

 

 
     Successor      Predecessor  
     TC3      Merger      EquiClaim  

Other Information:

        

Total consideration Parent common stock (in shares)

     —           245,000        —     

Gross contractual accounts receivable

   $ 2,943      $ 181,398      $ 2,094  

Amount not expected to be collected

   $ 281      $ 5,884      $ 111  

Goodwill expected to be deductible for tax purposes

   $ —         $ —         $ 39,483  

During the nine months ended September 30, 2012, the Company retrospectively adjusted the goodwill balance, as of the Merger, primarily to reflect a change in the valuation of the Company’s tax receivable agreements to related parties and deferred income tax liabilities that were previously recorded on a provisional basis. The retrospective adjustment resulted in a decrease to goodwill, deferred income tax liabilities and tax receivable obligations to related parties of $26,642, $16,088 and $21,821, respectively. In addition, these retrospective adjustments resulted in a decrease to accretion for the period from November 1, 2011 to December 31, 2011 and for the three months ended March 31, 2012 of $457 and $698, respectively, and an increase (decrease) to income tax benefit for the period from November 1, 2011 to December 31, 2011 and for the three months ended March 31, 2012 of $625 and ($418), respectively, as compared to amounts previously presented.

5. Goodwill and Intangible Assets

Goodwill activity during the nine months ended September 30, 2012 was as follows:

 

     Payer     Provider     Pharmacy     Total  

Balance at December 31, 2011

   $ 508,766     $ 761,870     $ 172,938     $ 1,443,574  

TC3 Acquisition

     38,695       —          —          38,695  

Changes in preliminary purchase price allocation

     (107     (173     (38     (318
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ 547,354     $ 761,697     $ 172,900     $ 1,481,951  
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible assets subject to amortization as of September 30, 2012 consist of the following:

 

     Weighted
Average
Remaining Life
   Gross
Carrying
Amount
     Accumulated
Amortization
    Net  

Customer relationships

   18.7    $ 1,641,810      $ (75,904   $ 1,565,906  

Trade names

   18.7      156,530        (7,224     149,306  

Non-compete agreements

     3.8      12,800        (2,289     10,511  

Data sublicense agreement

     5.0      31,000        (4,801     26,199  

Backlog

     0.4      19,000        (13,139     5,861  
     

 

 

    

 

 

   

 

 

 

Total

      $ 1,861,140      $ (103,357   $ 1,757,783  
     

 

 

    

 

 

   

 

 

 

Amortization expense was $84,753 and $70,290 for the nine months ended September 30, 2012 and 2011, respectively.

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

Aggregate future amortization expense for intangible assets is estimated to be:

 

2012 (remainder)

   $ 27,695  

2013

     102,889  

2014

     99,778  

2015

     99,371  

2016

     98,785  

Thereafter

     1,329,265  
  

 

 

 
   $ 1,757,783  
  

 

 

 

6. Long-Term Debt

In connection with the 2011 Transactions, the Company incurred substantial new indebtedness 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”).

Long-term debt as of September 30, 2012 and December 31, 2011, consisted of the following:

 

     September 30,     December 31,  
     2012     2011  

Senior Credit Facilities

    

$1,301 million Senior Secured Term Loan facility, due November 2, 2018, net of unamortized discount of $33,634 and $38,160 at September 30, 2012 and December 31, 2011, respectively (effective interest rate of 5.82 % and 7.79% at September 30, 2012 and December 31, 2011, respectively)

   $ 1,260,802     $ 1,185,840  

$125 million Senior Secured Revolving Credit facility, expiring on November 2, 2016 and bearing interest at a variable base rate plus a spread rate

     —          15,000  

Senior Notes

    

$375 million 11% Senior Notes due December 31, 2019, net of unamortized discount of $8,702 and $9,257 at September 30, 2012 and December 31, 2011, respectively (effective interest rate of 11.53% at September 30, 2012)

     366,298       365,743  

$375 million 11.25% Senior Notes due December 31, 2020, net of unamortized discount of $10,586 and $11,134 at September 30, 2012 and December 31, 2011, respectively (effective interest rate of 11.86% at September 30, 2012)

     364,414       363,866  

Obligation under data sublicense agreement

     30,659       30,659  

Less current portion

     (16,805     (16,034
  

 

 

   

 

 

 

Long-term debt

   $ 2,005,368     $ 1,945,074  
  

 

 

   

 

 

 

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

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

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 U.S. dollar deposits for an interest period of one month, adjusted for certain additional costs, plus 1.00% or (b) a LIBOR rate determined by reference to the costs of funds for U.S. 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, we 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 is 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 is LIBOR plus 3.50% (with a potential step-down to LIBOR plus 3.25% based on our first lien net leverage ratio), compared to the previous interest rate of LIBOR plus 5.25% (with a potential step-down to LIBOR plus 5.00% based on our first lien net leverage ratio). 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. The amendments to the Senior Credit Agreement resulted in a loss on extinguishment of debt of $21,853 and other expenses related to fees paid to third parties of $3,558, during the nine months ended September 30, 2012, which have been reflected within sales, marketing, general and administrative expense in the accompanying unaudited condensed 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 ending 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 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; provided, however, that if on or prior to the anniversary of any repricing transaction, the Company prepays any loans under the Term Loan Facility in connection with a repricing transaction, the Company must pay a prepayment premium of 1.00% of the aggregate principal amount of the loans so prepaid.

The Company is required to make quarterly payments equal to 0.25% of the amended 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 U.S. 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 U.S. 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 U.S. 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.

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

The Senior Credit Agreement requires the Company to comply with maximum first lien net leverage ratio and consolidated cash interest coverage ratio financial maintenance covenants, to be tested on the last day of each fiscal quarter. A breach of these covenants 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;

 

   

alter the business of the Company;

 

   

amend, prepay, redeem or purchase subordinated debt;

 

   

engage in transactions with affiliates; and

 

   

enter into agreements limiting dividends and distributions of certain subsidiaries.

The Senior Credit Agreement also contains certain customary representations and warranties, affirmative covenants and provisions relating to events of default (including upon change of control).

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, commencing on June 30, 2012. 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, commencing on March 31, 2012. 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.

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 U.S. 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.

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

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 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 capital stock or redeem, repurchase or retire capital stock;

 

   

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.

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 $45,000 remained payable at September 30, 2012). In connection with the Merger, the Company was required to adjust this obligation to its fair value.

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, 2012, 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, 2012, 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.

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

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 $2,564 will be reclassified as an increase to interest expense.

The following table summarizes the fair value of the Company’s derivative instruments at September 30, 2012 and December 31, 2011:

 

     Fair Values of Derivative Instruments
Asset (Liability) Derivatives
 
     Balance Sheet Location    September 30,
2012
    December 31,
2011
 

Derivatives designated as hedging instruments:

       

Interest rate swaps

   Accrued expenses    $ (2,564   $ —     

Interest rate swaps

   Other long-term liabilities      (3,509     —     
     

 

 

   

 

 

 
      $ (6,073   $ —     
     

 

 

   

 

 

 

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, 2012 and 2011, respectively, is summarized in the following table:

 

     Successor               Predecessor     Successor               Predecessor  
     Three Months
Ended
September 30,
2012
               Three Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2012
               Nine Months
Ended
September 30,
2011
 

Derivatives in Cash Flow Hedging Relationships

                        

Loss related to effective portion of derivative recognized in other comprehensive loss

   $ 3,012             $ —        $ 7,795             $ —     
  

 

 

           

 

 

   

 

 

           

 

 

 

Loss related to effective portion of derivative reclassified from accumulated other comprehensive loss to interest expense

   $ (652           $ (3,836   $ (1,722           $ (11,321
  

 

 

           

 

 

   

 

 

           

 

 

 

Derivatives Not Designated as Hedging Instruments

                        

Gain recognized in interest expense

   $ —                $ 2,820     $ —                $ 7,983  
  

 

 

         

 

 

   

 

 

         

 

 

 

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.

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

As of September 30, 2012, 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 $7,072. If the Company had breached any of these provisions at September 30, 2012, it could have been required to settle its obligations under the agreements at this termination value.

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, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

Description

   Balance at
September  30,
2012
    Quoted  in
Markets
Identical

(Level 1)
     Significant Other
Observable Inputs

(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Interest rate swaps

   $ (6,073   $ —         $ (6,073   $ —     

Contingent consideration obligations

     (344     —           —          (344
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (6,417   $ —         $ (6,073   $ (344
  

 

 

   

 

 

    

 

 

   

 

 

 

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). The variable cash receipts (or payments) are based on an expectation of future interest rates derived from observable market interest rate curves.

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, 2012, 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 determined using a probability weighted discounted cash flow method. This analysis reflects the contractual terms of the purchase agreements and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. Significant increases with respect to assumptions as to future cash flows and probabilities of achieving such future cash flows would result in a higher fair value measurement while an increase in the discount rate would result in a lower fair value measurement.

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

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

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

     Successor                Predecessor     Successor                Predecessor  
     Three Months Ended
September 30,

2012
               Three Months Ended
September 30,

2011
    Nine Months Ended
September 30,
2012
               Nine Months Ended
September 30,
2011
 

Balance at beginning of period

   $ (402           $ (10,995   $ (501           $ (16,046

Issuances of contingent consideration

     —                  173       —                  652  

Settlement of contingent consideration

     58               67       157               1,001  

Total changes included in other income

     —                  4,398       —                  8,036  
  

 

 

           

 

 

   

 

 

           

 

 

 

Balance at end of period

   $ (344           $ (6,357   $ (344           $ (6,357
  

 

 

         

 

 

   

 

 

         

 

 

 

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, 2012 were:

 

     Carrying
Amount
     Fair Value  

Cash and cash equivalents

   $ 50,337      $ 50,337  

Accounts receivable

   $ 197,169      $ 197,169  

Senior Credit Facilities (Level 1)

   $ 1,260,802      $ 1,312,234  

Senior Notes (Level 2)

   $ 730,712      $ 851,250  

Cost method investment (Level 3)

   $ 3,458      $ 4,018  

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. The fair value of the cost method investment is estimated using a probability-weighted discounted cash flow model that includes the costs of equity, long-term sustainable growth rate and a discount for lack of marketability as significant unobservable inputs.

9. Legal Proceedings

In the normal course of business, the Company is subject to claims, lawsuits and legal proceedings. While it is not possible to ascertain the ultimate outcome of such matters, in management’s opinion, the liabilities, if any, in excess of amounts provided or covered by insurance, are not expected to have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

10. Noncontrolling Interests

The Company executed transactions that both increased and decreased its ownership interest in EBS Master in the Predecessor period. In connection with the 2011 Transactions, all of the noncontrolling interests were acquired by affiliates of the Company. The changes in noncontrolling interests are summarized in the following table:

 

     Successor               Predecessor  
     Nine Months
Ended
September 30,
2012
              Nine Months
Ended
September 30,
2011
 

Net income (loss) attributable to Emdeon Inc.

   $ (68,087          $ 13,563  
  

 

 

          

 

 

 

Transfers from the noncontrolling interest:

           
 

Increase in Emdeon Inc. paid-in capital for issuance of EBS

           

Units in connection with equity compensation plans

     —                 1,299  
  

 

 

          

 

 

 

Net transfers from noncontrolling interest

     —                 1,299  
  

 

 

          

 

 

 

Change from net income (loss) attributable to Emdeon Inc. and transfers from noncontrolling interest

   $ (68,087          $ 14,862  
  

 

 

        

 

 

 

11. Equity-Based Compensation Plans

Effect of the Merger

In connection with the 2011 Transactions, the Company’s outstanding stock options, EBS Master units (“EBS Units”) and restricted stock units under various equity compensation programs, including the 2009 Equity Incentive Plan (the “2009 Plan”), became fully vested immediately prior to the closing of the Merger in accordance with the award agreements and were settled in cash, canceled or, for certain members of senior management, exchanged for new options of Parent common stock (the “Rollover Options”). Except for the Rollover Options, each option holder received an amount in cash, without interest and less applicable withholding taxes, equal to $19.00 less the exercise price of each option. Additionally, each EBS Unit and restricted stock unit holder received $19.00 in cash, without interest and less applicable withholding taxes.

The exercise price of the Rollover Options and the number of shares of Parent common stock underlying the Rollover Options were adjusted as a result of the Merger. Additionally, the Rollover Options provided each of the holders a right, which expired in June 2012, to require Parent to repurchase shares issued upon exercise of the Rollover Options at their initial fair value. As the repurchase rights were within the control of the option holder, the Company initially included the fair value ($4,125) of these Rollover Options in accrued expenses in the accompanying condensed consolidated balance sheet at December 31, 2011. Upon the expiration of the repurchase rights, the fair value associated with remaining Rollover Options was reclassified to equity in the accompanying unaudited condensed consolidated balance sheet at September 30, 2012.

Parent Awards

Parent assumed the 2009 Plan by adopting the Beagle Parent Corp. Amended and Restated 2009 Equity Incentive Plan (the “Parent Equity Plan”). Pursuant to the Parent Equity Plan, 125,718 shares of Parent common stock have been reserved for the issuance of equity awards to employees, directors and consultants of Parent and its affiliates.

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

In July 2012, Parent granted options to certain employees and an independent director to purchase shares of Parent common stock under the Parent Equity Plan. Grants under the Parent Equity Plan consist of one, or a combination, of time-vested options and/or performance-based options. In each case, the options are subject to certain call rights by Parent in the event of termination of service by the option holder and put rights by the option holder or his/her beneficiaries in the event of death or disability.

Time-Vested Options

The time-vested options consist of the following:

(i) Tier I Time Options were granted with an exercise price equal to the fair value of Parent common stock on the date of grant and generally vest in equal 20% installments on the first through fifth anniversary of the Merger, subject to the optionee’s continued employment through each vesting date. The Company estimated the fair value of the Tier I Time Options using the Black-Scholes option pricing model. As of September 30, 2012, unrecognized compensation expense related to Tier I Time Options was $22,680. This expense is expected to be recognized over a weighted average period of 2.4 years.

(ii) Tier II Time Options were granted with an exercise price greater than the fair value of Parent common stock on the date of grant and generally vest in equal 20% installments on the first through fifth anniversary of the Merger, subject to the option holder’s continued employment through each vesting date. As the Tier II Time Options were granted with an exercise price that was significantly out of the money as of the grant date, the Tier II Time Options contain an implied market condition. As a result, the requisite service period is the longer of the explicit and derived service periods. The Company estimated the fair value of the Tier II Time Options using a Monte Carlo simulation. As of September 30, 2012, unrecognized compensation expense related to the Tier II Time Options was $6,511. This expense is expected to be recognized over a weighted average period of 2.7 years.

Performance Options

The performance options were granted with an exercise price equal to the fair value of Parent common stock on the date of grant and vest, subject to the employee’s continued employment through the vesting date, on the date when Blackstone has sold at least 25% of the maximum number of Parent shares held by it (i.e. a liquidity event) and achieved a specified rate of return. The Company has valued the performance options using a Monte Carlo simulation. Because vesting of the performance options is contingent upon the occurrence of a liquidity event, no compensation expense has been recorded related to the performance options. In the event that a sale by Blackstone of at least 25% of its stock occurs, the Company will record all related compensation expense at that time. As of September 30, 2012, unrecognized compensation expense related to the performance options was $19,934.

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

Activity Summary

A summary of option activity under the Parent Equity Plan for the nine months ended September 30, 2012, is presented separately below for options valued using the Black Scholes option pricing model and a Monte Carlo simulation.

Options Valued Using the Black Scholes Option Pricing Model

 

                                                                                                                                                       
    Options     Weighted Average
Exercise Price
    Weighted Average
Remaining

Contractual Term
    Aggregate Intrinsic Value  
    Tier I
Time Options
    Rollover
Options
    Tier I
Time Options
    Rollover
Options
    Tier I
Time Options
    Rollover
Options
    Tier I
Time Options
    Rollover
Options
 

Outstanding at January 1, 2012

    —          5,410     $ —        $ 250         9.8     $ —        $ 4,058  

Granted

    46,065       —          1,000       —             

Exercised

    —          —          —          —             

Expired

    —          —          —          —             

Forfeited

    —          —          —          —             

Rollover Options settled

    —          (590     —          250          
 

 

 

   

 

 

             

Outstanding at September 30, 2012

    46,065       4,820     $ 1,000     $ 250       9.8       9.1     $ —        $ 3,615  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable at September 30, 2012

    —          4,820     $ —        $ —          —          9.1     $ —        $ 3,615  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Options Valued Using a Monte Carlo Simulation   
    Options     Weighted Average
Exercise Price
    Weighted Average
Remaining

Contractual Term
    Aggregate Intrinsic Value  
    Tier II
Time Options
    Performance
Options
    Tier II
Time Options
    Performance
Options
    Tier II
Time Options
    Performance
Options
    Tier II
Time Options
    Performance
Options
 

Outstanding at January 1, 2012

    —          —        $ —        $ —            $ —        $ —     

Granted

    18,350       45,965       2,500       1,000          

Exercised

    —          —          —          —             

Expired

    —          —          —          —             

Forfeited

    —          —          —          —             
 

 

 

   

 

 

             

Outstanding at September 30, 2012

    18,350       45,965     $ 2,500     $ 1,000       9.8       9.8     $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding and Exercisable at September 30, 2012

    —          —        $ —        $ —          —          —        $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

Black-Scholes and Monte Carlo Simulation Option Pricing Model Assumptions

The following table summarizes the weighted average fair values of awards valued using the Black-Scholes and Monte Carlo Simulation option pricing models, as appropriate, and the weighted average assumptions used to develop the fair value estimates under each of the valuation models for the nine months ended September 30, 2012:

 

     Rollover
Options
    Tier I
Time Options
    Tier II
Time Options
    Performance
Options
 

Weighted average fair value

   $ 762.51     $ 567.88     $ 381.50     $ 433.67  

Expected dividend yield

     —          —          —          —     

Expected volatility

     29.16     61.80     57.63     57.63

Risk-free interest rate

     0.90     0.84     1.57     1.57

Expected term (years)

     5.0       6.15       N/A        N/A   

Expected dividend yield — The Company is subject to limitations on the payment of dividends under its Senior Credit Facilities as further discussed in Note 6 above to these unaudited condensed consolidated financial statements. An increase in the dividend yield will decrease compensation expense.

Expected volatility — This is a measure of the amount by which the price of the equity instrument has fluctuated or is expected to fluctuate. For the Rollover Options, the expected volatility was estimated based on a weighted average of the Company’s Class A common stock historical volatility prior to the Merger and the median historical volatility of a group of guideline companies (weighted based upon proportion of the expected term represented by the Company’s historical volatility and the volatility of the guideline companies, respectively). For options granted following the Merger, the expected volatility was based upon the levered median historical volatility of a group of guideline companies. An increase in the expected volatility will increase compensation expense.

Risk-free interest rate — This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the award. An increase in the risk-free interest rate will increase compensation expense.

Expected term — This is the period of time over which the awards are expected to remain outstanding. The Company estimates the expected term as the mid-point between the actual or expected vesting date and the contractual term. An increase in the expected term will increase compensation expense.

Summary of Equity Compensation Expense

For the nine months ended September 30, 2012 and 2011, the Company recognized expense of $3,969 and $17,610, respectively, in the aggregate related to its equity compensation arrangements.

12. Income Taxes

Income taxes for the nine months ended September 30, 2012 and September 30, 2011 amounted to an income tax benefit of ($36,364) and an income tax expense of $21,696, respectively. The Company’s effective tax rate was 34.8% for the nine months ended September 30, 2012 compared with 48.8% during the same period in 2011. The Company’s effective tax rate is affected by deferred tax expense resulting from differences between the book and income tax basis of its investment in EBS Master, changes in the Company’s valuation allowances and other factors. For periods prior to the Merger, the effective rate was also affected by noncontrolling interest.

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

13. 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 General Atlantic, 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, including the 2011 Transactions. The Company will retain the benefit of the remaining 15% of these tax savings.

In connection with the 2011 Transactions, H&F and certain current and former members of management exchanged all of their remaining EBS Units (and corresponding shares of Class B common stock) for cash and a combination of cash and shares of Parent, respectively, and General Atlantic assigned their rights under the tax receivable agreements to affiliates of Blackstone (Blackstone, together with H&F and certain current and former members of management are hereinafter 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 $354,000. $132,800 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, 2012. The accompanying unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2012 includes accretion expense of $2,758 and $15,104, respectively, related to this obligation.

During the nine months ended September 30, 2012, the Company changed its estimate of the timing and amount of expected future cash flows attributable to the tax receivable agreements as a result of the impact of the amendments to the Senior Credit Agreement, the TC3 acquisition and an increase in state income tax rates. These revised estimates resulted in an increase to pretax net loss of $3,436 for the nine months ended September 30, 2012.

 

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Table of Contents

Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

14. Segment Reporting

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. 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 reportable 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 Registration Statement on Form S-4, as amended (File No. 333-182786), for the Senior Notes as filed with the Securities & Exchange Commission (“SEC”).

Payer Services Segment

The payer services segment provides payment cycle solutions to healthcare payers, both directly and through the Company’s channel partners, that simplify the administration of healthcare related to insurance eligibility and benefit verification, claims filing, payment integrity and claims and payment distribution. Additionally, the payer services segment provides consulting services primarily to healthcare payers.

Provider Services Segment

The provider services segment provides revenue cycle management solutions, patient billing and payment services, government program eligibility and enrollment services and clinical exchange capabilities, both directly and through the Company’s channel partners, 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 and other electronic solutions to pharmacies, pharmacy benefit management companies and government agencies related to prescription benefit claim filing, adjudication and management.

Other

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

Corporate and eliminations includes personnel and other costs associated with the Company’s management, administrative and other corporate services functions and eliminations to remove inter-segment revenues and expenses.

The revenue and total segment contribution for the reportable segments are as follows:

 

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Table of Contents

Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

Successor — Three Months Ended September 30, 2012

 

     Payer      Provider      Pharmacy      Corporate &
Eliminations
    Consolidated  

Revenue from external customers

             

Claims management

   $ 62,253      $ —         $ —         $ —        $ 62,253  

Payment services

     64,996        —           —           —          64,996  

Patient statements

     —           63,758        —           —          63,758  

Revenue cycle management

     —           74,681        —           —          74,681  

Dental

     —           7,828        —           —          7,828  

Pharmacy services

     —           —           23,559        —          23,559  

Inter-segment revenues

     1,211        205        90        (1,506     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net revenue

     128,460        146,472        23,649        (1,506     297,075  

Costs and expenses:

             

Cost of operations

     84,716        91,380        10,145        (1,447     184,794  

Development and engineering

     2,610        3,715        1,669        —          7,994  

Sales, marketing, general and administrative

     10,388        9,914        1,343        13,663       35,308  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment contribution

   $ 30,746      $ 41,463      $ 10,492      $ (13,722     68,979  
  

 

 

    

 

 

    

 

 

    

 

 

   

Depreciation and amortization

                48,572  

Accretion

                2,758  

Interest expense, net

                41,898  
             

 

 

 

Loss before income tax benefit

              $ (24,249
             

 

 

 

Predecessor — Three Months Ended September 30, 2011

 

     Payer      Provider      Pharmacy      Corporate &
Eliminations
    Consolidated  

Revenue from external customers

             

Claims management

   $ 53,153      $ —         $ —         $ —        $ 53,153  

Payment services

     61,770        —           —           —          61,770  

Patient statements

     —           64,273        —           —          64,273  

Revenue cycle management

     —           73,439        —           —          73,439  

Dental

     —           7,860        —           —          7,860  

Pharmacy services

     —           —           21,654        —          21,654  

Inter-segment revenue

     853        151        —           (1,004     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net revenue

     115,776        145,723        21,654        (1,004     282,149  

Costs and expenses:

             

Cost of operations

     77,303        88,292        8,799        (939     173,455  

Development and engineering

     2,877        2,918        1,678        —          7,473  

Sales, marketing, general and administrative

     7,863        10,263        1,716        18,500       38,342  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment contribution

   $ 27,733      $ 44,250      $ 9,461      $ (18,565     62,879  
  

 

 

    

 

 

    

 

 

    

 

 

   

Depreciation and amortization

                39,830  

Interest expense, net

                12,573  

Other

                (4,398
             

 

 

 

Income before income tax provision

              $ 14,874  
             

 

 

 

 

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Table of Contents

Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

Successor — Nine Months Ended September 30, 2012

 

     Payer      Provider      Pharmacy      Corporate &
Eliminations
    Consolidated  

Revenue from external customers

             

Claims management

   $ 173,166      $ —         $ —         $ —        $ 173,166  

Payment services

     195,691        —           —           —          195,691  

Patient statements

     —           190,861        —           —          190,861  

Revenue cycle management

     —           223,647        —           —          223,647  

Dental

     —           24,028        —           —          24,028  

Pharmacy services

     —           —           70,184        —          70,184  

Inter-segment revenues

     3,117        643        270        (4,030     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net revenue

     371,974        439,179        70,454        (4,030     877,577  

Costs and expenses:

             

Cost of operations

     244,704        272,429        29,258        (3,841     542,550  

Development and engineering

     8,270        11,041        4,935        —          24,246  

Sales, marketing, general and administrative

     26,511        29,170        4,416        47,285       107,382  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment contribution

   $ 92,489      $ 126,539      $ 31,845      $ (47,474     203,399  
  

 

 

    

 

 

    

 

 

    

 

 

   

Depreciation and amortization

                140,354  

Accretion

                15,104  

Interest expense, net

                130,539  

Loss on extinguishment of debt

                21,853  
             

 

 

 

Loss before income tax benefit

              $ (104,451
             

 

 

 

Predecessor — Nine Months Ended September 30, 2011

 

     Payer      Provider      Pharmacy      Corporate &
Eliminations
    Consolidated  

Revenue from external customers

             

Claims management

   $ 153,679      $ —         $ —         $ —        $ 153,679  

Payment services

     186,512        —           —           —          186,512  

Patient statements

     —           192,813        —           —          192,813  

Revenue cycle management

     —           216,238        —           —          216,238  

Dental

     —           23,464        —           —          23,464  

Pharmacy services

     —           —           63,052        —          63,052  

Inter-segment revenue

     2,572        390        —           (2,962     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net revenue

     342,763        432,905        63,052        (2,962     835,758  

Costs and expenses:

             

Cost of operations

     229,501        262,654        26,100        (2,774     515,481  

Development and engineering

     7,827        10,635        5,140        —          23,602  

Sales, marketing, general and administrative

     23,185        32,611        4,579        45,229       105,604  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment contribution

   $ 82,250      $ 127,005      $ 27,233      $ (45,417     191,071  
  

 

 

    

 

 

    

 

 

    

 

 

   

Depreciation and amortization

                116,786  

Interest expense, net

                37,848  

Other

                (8,036
             

 

 

 

Income before income tax provision

              $ 44,473  
             

 

 

 

 

27


Table of Contents

Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

15. 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, 2012.

 

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

Balance at January 1, 2012

   $ (194   $ —        $ (194

Change associated with foreign currency translation

     107       —          107  

Change associated with current period hedging

     —          (2,099     (2,099

Reclassification into earnings

     —          (1,722     (1,722
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ (87   $ (3,821   $ (3,908
  

 

 

   

 

 

   

 

 

 

16. 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 of the SEC Guidelines, Rules, and Regulations (“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, summarized condensed consolidating balance sheets as of September 30, 2012 and December 31, 2011, unaudited condensed consolidating statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2012 and 2011, respectively, and condensed consolidating cash flows for the nine months ended September 30, 2012 and September 30, 2011, respectively, for the Company, segregating the issuer, the subsidiary guarantors and consolidating adjustments, are reflected below. Prior year amounts have been reclassified to conform to the current year presentation.

 

28


Table of Contents

Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

Condensed Consolidating Balance Sheet

    

 

 
     Successor  
     As of September 30, 2012  
     Emdeon Inc.      Guarantor
Subsidiaries
     Consolidating
Adjustments
    Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 11,263      $ 39,074      $ —        $ 50,337  

Accounts receivable, net of allowance for doubtful accounts

     —           197,169        —          197,169  

Deferred income tax assets

     —           4,772        —          4,772  

Prepaid expenses and other current assets

     2,104        18,810        —          20,914  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     13,367        259,825        —          273,192  

Property and equipment, net

     4        268,377        —          268,381  

Due from affiliates

     —           59,764        (59,764     —     

Investment in consolidated subsidiaries

     1,871,279        —           (1,871,279     —     

Goodwill

     —           1,481,951        —          1,481,951  

Intangible assets, net

     153,750        1,604,033        —          1,757,783  

Other assets, net

     13,016        22,010        (4,229     30,797  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,051,416      $ 3,695,960      $ (1,935,272   $ 3,812,104  
  

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

          

Current liabilities:

          

Accounts payable

   $ —         $ 13,567      $ —        $ 13,567  

Accrued expenses

     29,125        90,336        —          119,461  

Deferred revenues

     —           8,967        —          8,967  

Current portion of long-term debt

     4,075        12,730        —          16,805  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     33,200        125,600        —          158,800  

Due to affiliates

     59,764        —           (59,764     —     

Long-term debt, excluding current portion

     782,730        1,222,638        —          2,005,368  

Deferred income tax liabilities

     —           473,807        (4,229     469,578  

Tax receivable agreement obligations to related parties

     132,581        —           —          132,581  

Other long-term liabilities

     3,509        2,636        —          6,145  

Commitments and contingencies

          

Equity

     1,039,632        1,871,279        (1,871,279     1,039,632  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 2,051,416      $ 3,695,960      $ (1,935,272   $ 3,812,104  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

29


Table of Contents

Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

Condensed Consolidating Balance Sheet

    

 

 
     Successor  
     As of December 31, 2011  
     Emdeon Inc.      Guarantor
Subsidiaries
     Consolidating
Adjustments
    Consolidated  

ASSETS

  

Current assets:

          

Cash and cash equivalents

   $ 572      $ 37,353      $ —        $ 37,925  

Accounts receivable, net of allowance for doubtful accounts

     —           188,960        —          188,960  

Deferred income tax assets

     —           5,862        —          5,862  

Prepaid expenses and other current assets

     2,072        14,854        —          16,926  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     2,644        247,029        —          249,673  

Property and equipment, net

     8        277,760        —          277,768  

Due from affiliates

     —           55,471        (55,471     —     

Investment in consolidated subsidiaries

     1,941,142        —           (1,941,142     —     

Goodwill

     —           1,443,574        —          1,443,574  

Intangible assets, net

     160,500        1,661,397        —          1,821,897  

Other assets, net

     9,256        30,147        —          39,403  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,113,550      $ 3,715,378      $ (1,996,613   $ 3,832,315  
  

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

          

Current liabilities:

          

Accounts payable

   $ —         $ 8,827      $ —        $ 8,827  

Accrued expenses

     19,283        112,813        —          132,096  

Deferred revenues

     —           5,561        —          5,561  

Current portion of long-term debt

     4,074        11,960        —          16,034  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     23,357        139,161        —          162,518  

Due to affiliates

     55,471        —           (55,471     —     

Long-term debt, excluding current portion

     781,575        1,163,499        —          1,945,074  

Deferred income tax liabilities

     31,881        470,163        —          502,044  

Tax receivable agreement obligations to related parties

     117,477        —           —          117,477  

Other long-term liabilities

     —           1,413        —          1,413  

Commitments and contingencies

          

Equity

     1,103,789        1,941,142        (1,941,142     1,103,789  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 2,113,550      $ 3,715,378      $ (1,996,613   $ 3,832,315  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

30


Table of Contents

Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

Condensed Consolidating Statement of Operations

 

    

 

 
     Successor  
     Three Months Ended September 30, 2012  
     Emdeon Inc.     Guarantor
Subsidiaries
     Consolidating
Adjustments
    Consolidated  

Revenue

   $ —        $ 297,075      $ —        $ 297,075  

Costs and expenses:

         

Cost of operations (exclusive of depreciation and amortization below)

     —          184,794        —          184,794  

Development and engineering

     —          7,994        —          7,994  

Sales, marketing, general and administrative

     2,606       32,702        —          35,308  

Depreciation and amortization

     2,251       46,321        —          48,572  

Accretion

     2,758       —           —          2,758  
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss)

     (7,615     25,264        —          17,649  

Equity in earnings of consolidated subsidiaries

     (5,937     —           5,937       —     

Interest expense, net

     23,673       18,225        —          41,898  
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income tax benefit

     (25,351     7,039        (5,937     (24,249

Income tax benefit

     (10,195     1,102        —          (9,093
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ (15,156   $ 5,937      $ (5,937   $ (15,156
  

 

 

   

 

 

    

 

 

   

 

 

 

 

31


Table of Contents

Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

Condensed Consolidating Statement of Operations

 

    

 

 
     Predecessor  
     Three Months Ended September 30, 2011  
     Emdeon
Inc.
    Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Revenue

   $ —        $ 282,149     $ —        $ 282,149  

Costs and expenses:

        

Cost of operations (exclusive of depreciation and amortization below)

     —          173,455       —          173,455  

Development and engineering

     —          7,473       —          7,473  

Sales, marketing, general and administrative

     2,207       36,135       —          38,342  

Depreciation and amortization

     1       39,829       —          39,830  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (2,208     25,257       —          23,049  

Equity in earnings of consolidated subsidiaries

     (10,889     —          10,889       —     

Interest expense, net

     752       11,821       —          12,573  

Other

     —          (4,398     —          (4,398
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

     7,929       17,834       (10,889     14,874  

Income tax provision

     4,562       4,039       —          8,601  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     3,367       13,795       (10,889     6,273  

Net income attributable to noncontrolling interest

     —          —          2,906       2,906  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Emdeon Inc.

   $ 3,367     $ 13,795     $ (13,795   $ 3,367  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

Condensed Consolidating Statement of Operations

 

    

 

 
     Successor  
     Nine Months September 30, 2012  
     Emdeon
Inc.
    Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Revenue

   $ —        $ 877,577     $ —        $ 877,577  

Costs and expenses:

        

Cost of operations (exclusive of depreciation and amortization below)

     —          542,550       —          542,550  

Development and engineering

     —          24,246       —          24,246  

Sales, marketing, general and administrative

     7,261       100,121       —          107,382  

Depreciation and amortization

     6,753       133,601       —          140,354  

Accretion

     15,104       —          —          15,104  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (29,118     77,059       —          47,941  

Equity in earnings of consolidated subsidiaries

     1,807       —          (1,807     —     

Interest expense, net

     70,524       60,015       —          130,539  

Loss on extinguishment of debt

     495       21,358       —          21,853  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax benefit

     (101,944     (4,314     1,807       (104,451

Income tax benefit

     (33,857     (2,507     —          (36,364
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (68,087   $ (1,807   $ 1,807     $ (68,087
  

 

 

   

 

 

   

 

 

   

 

 

 

 

33


Table of Contents

Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

Condensed Consolidating Statement of Operations

 

    

 

 
     Predecessor  
     Nine Months September 30, 2011  
     Emdeon
Inc.
    Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Revenue

   $ —        $ 835,758     $ —        $ 835,758  

Costs and expenses:

        

Cost of operations (exclusive of depreciation and amortization below)

     —          515,481       —          515,481  

Development and engineering

     —          23,602       —          23,602  

Sales, marketing, general and administrative

     3,943       101,661       —          105,604  

Depreciation and amortization

     3       116,783       —          116,786  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (3,946     78,231       —          74,285  

Equity in earnings of consolidated subsidiaries

     (31,784     —          31,784       —     

Interest expense, net

     2,219       35,629       —          37,848  

Other

     —          (8,036     —          (8,036
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

     25,619       50,638       (31,784     44,473  

Income tax provision

     12,056       9,640       —          21,696  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     13,563       40,998       (31,784     22,777  

Net income attributable to noncontrolling interest

     —          —          9,214       9,214  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Emdeon Inc.

   $ 13,563     $ 40,998     $ (40,998   $ 13,563  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

34


Table of Contents

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)

    

 

 
     Successor  
     Three Months Ended September 30, 2012  
     Emdeon
Inc.
    Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Net income (loss)

   $ (15,156   $ 5,937      $ (5,937   $ (15,156

Other comprehensive income (loss):

        

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

     (1,487     —          —          (1,487

Foreign currency translation adjustment

     —          (127     —          (127

Equity in other comprehensive earnings

     (127     —          127       —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (1,614     (127     127       (1,614
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (16,770   $ 5,810     $ (5,810   $ (16,770
  

 

 

   

 

 

   

 

 

   

 

 

 

 

35


Table of Contents

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

    

 

 
     Predecessor  
     Three Months Ended September 30, 2011  
     Emdeon
Inc.
     Guarantor
Subsidiaries
     Consolidating
Adjustments
    Consolidated  

Net income (loss)

   $ 3,367      $ 13,795      $ (10,889   $ 6,273  

Other comprehensive income (loss):

          

Other comprehensive income amortization net of taxes

     —           838        —          838  

Foreign currency translation adjustment

     —           118        —          118  

Equity in other comprehensive earnings

     753        —           (753     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss)

     753        956        (753     956  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income (loss)

     4,120        14,751        (11,642     7,229  

Comprehensive income attributable to noncontrolling interest

     —           —           3,109       3,109  
  

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income (loss) attributable to Emdeon Inc.

   $ 4,120      $ 14,751      $ (14,751   $ 4,120  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

36


Table of Contents

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)

 

    

 

 
     Successor  
     Nine Months September 30, 2012  
     Emdeon
Inc.
    Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Net income (loss)

   $ (68,087   $ (1,807   $ 1,807     $ (68,087

Other comprehensive income (loss):

        

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

     (3,821     —          —          (3,821

Foreign currency translation adjustment

     —          107       —          107  

Equity in other comprehensive earnings

     107       —          (107     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (3,714     107       (107     (3,714
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (71,801   $ (1,700   $ 1,700     $ (71,801
  

 

 

   

 

 

   

 

 

   

 

 

 

 

37


Table of Contents

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

    

 

 
     Predecessor  
     Nine Months September 30, 2011  
     Emdeon
Inc.
     Guarantor
Subsidiaries
     Consolidating
Adjustments
    Consolidated  

Net income (loss)

   $ 13,563      $ 40,998      $ (31,784   $ 22,777  

Other comprehensive income (loss):

          

Other comprehensive income amortization net of taxes

     —           2,481        —          2,481  

Foreign currency translation adjustment

     —           113        —          113  

Equity in other comprehensive earnings

     2,041        —           (2,041     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss)

     2,041        2,594        (2,041     2,594  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income (loss)

     15,604        43,592        (33,825     25,371  

Comprehensive income attributable to noncontrolling interest

     —           —           9,767       9,767  
  

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income (loss) attributable to Emdeon Inc.

   $ 15,604      $ 43,592      $ (43,592   $ 15,604  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

38


Table of Contents

Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

Condensed Consolidating Statement of Cash Flows

    

 

 
     Successor  
     Nine Months September 30, 2012  
     Emdeon
Inc.
    Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Operating activities

        

Net income (loss)

   $ (68,087   $ (1,807   $ 1,807     $ (68,087

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

        

Depreciation and amortization

     6,753       133,601       —          140,354  

Equity compensation expense

     7       3,962       —          3,969  

Deferred income tax benefit

     (33,857     (3,512     —          (37,369

Equity in earnings of consolidated subsidiaries

     1,807       —          (1,807     —     

Accretion expense

     15,104       —          —          15,104  

Amortization of debt discount and issuance costs

     1,674       5,939       —          7,613  

Loss on extinguishment of debt

     419       17,874       —          18,293  

Other

     —          1,927       —          1,927  

Changes in operating assets and liabilities:

        

Accounts receivable

     —          (5,547     —          (5,547

Prepaid expenses and other

     (31     (3,655     —          (3,686

Accounts payable

     —       </