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 June 30, 2013

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 August 8, 2013

Common Stock, $0.01 par value   100

 

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

 

 


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

     38  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     57   

Item 4. Controls and Procedures

     58   

Part II. Other Information

  

Item 1. Legal Proceedings

     58   

Item 1A. Risk Factors

     59  

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

     59   

Item 3. Defaults Upon Senior Securities

     59   

Item 4. Mine Safety Disclosures

     59   

Item 5. Other Information

     59   

Item 6. Exhibits

     59   

Signatures

     60   

Exhibit Index

     61   


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)

 

     June 30,
2013
    December 31,
2012
 
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 52,919      $ 31,763   

Accounts receivable, net of allowance for doubtful accounts of $4,399 and $3,585 at June 30, 2013 and December 31, 2012, respectively

     203,734        190,021   

Deferred income tax assets

     5,043        4,184   

Prepaid expenses and other current assets

     30,322        28,160   
  

 

 

   

 

 

 

Total current assets

     292,018        254,128   

Property and equipment, net

     276,685        264,852   

Goodwill

     1,502,531        1,488,134   

Intangible assets, net

     1,683,019        1,730,089   

Other assets, net

     25,129        29,694   
  

 

 

   

 

 

 

Total assets

   $ 3,779,382      $ 3,766,897   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY   

Current liabilities:

    

Accounts payable

   $ 12,244      $ 6,223   

Accrued expenses

     125,792        101,805   

Deferred revenues

     9,656        9,342   

Current portion of long-term debt

     22,094        17,595   
  

 

 

   

 

 

 

Total current liabilities

     169,786        134,965   

Long-term debt, excluding current portion

     2,017,744        1,999,414   

Deferred income tax liabilities

     447,394        466,921   

Tax receivable agreement obligations to related parties

     136,602        125,003   

Other long-term liabilities

     10,651        8,443   

Commitments and contingencies

    

Equity:

    

Common stock (par value, $.01), 100 shares authorized and outstanding at June 30, 2013 and December 31, 2012, respectively

     —          —     

Additional paid-in capital

     1,134,266        1,130,968   

Accumulated other comprehensive income (loss)

     (313     (3,789

Accumulated deficit

     (136,748     (95,028
  

 

 

   

 

 

 

Total equity

     997,205        1,032,151   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 3,779,382      $ 3,766,897   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

Emdeon Inc.

Condensed Consolidated Statements of Operations

(unaudited and amounts in thousands)

 

     Three Months
Ended June 30,
2013
    Three Months
Ended June 30,
2012
    Six Months
Ended June 30,
2013
    Six Months
Ended June 30,
2012
 

Revenue

   $ 311,485      $ 294,467      $ 617,187      $ 580,503   

Costs and expenses:

        

Cost of operations (exclusive of depreciation and amortization below)

     193,816        180,090        383,122        353,236   

Development and engineering

     7,644        8,590        15,366        17,676   

Sales, marketing, general and administrative

     42,945        39,040        82,056        75,169   

Depreciation and amortization

     43,946        46,626        90,762        91,782   

Accretion

     7,459        8,579        11,599        12,346   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     15,675        11,542        34,282        30,294   

Interest expense, net

     37,974        42,902        79,389        88,641   

Loss on extinguishment of debt

     23,160        21,853        23,160        21,853   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision (benefit)

     (45,459     (53,213     (68,267     (80,200

Income tax provision (benefit)

     (17,191     (17,820     (26,547     (27,272
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (28,268   $ (35,393   $ (41,720   $ (52,928
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Three Months
Ended June 30,
2013
    Three Months
Ended June 30,
2012
    Six Months
Ended June 30,
2013
    Six Months
Ended June 30,
2012
 

Net income (loss)

   $ (28,268   $ (35,393   $ (41,720   $ (52,928

Other comprehensive income (loss):

        

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

     3,147        (4,192     3,575        (2,334

Foreign currency translation adjustment

     (64     40        (99     234   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     3,083        (4,152     3,476        (2,100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (25,185   $ (39,545   $ (38,244   $ (55,028
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Emdeon Inc.

Condensed Consolidated Statements of Equity

(unaudited and amounts in thousands, except share amounts)

 

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

Balance at January 1, 2012

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

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

     —           —           317        —          —          317   

Repurchase of Parent common stock

     —           —           (317     —          —          (317

Reclassification of liability awards to equity awards

     —           —           3,675        —          —          3,675   

Net loss

     —           —           —          (52,928     —          (52,928

Foreign currency translation adjustment

     —           —           —          —          234        234   

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

     —           —           —          —          (2,334     (2,334
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

     100       $ —         $ 1,124,351      $ (69,621   $ (2,294   $ 1,052,436   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2013

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

Equity compensation expense

     —           —           3,547        —          —          3,547   

Repurchase of Parent common stock

     —           —           (249     —          —          (249

Net loss

     —           —           —          (41,720     —          (41,720

Foreign currency translation adjustment

     —           —           —          —          (99     (99

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

     —           —           —          —          3,575        3,575   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

     100       $ —         $ 1,134,266      $ (136,748   $ (313   $ 997,205   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Six Months Ended
June 30, 2013
    Six Months Ended
June 30, 2012
 

Operating activities

    

Net income (loss)

   $ (41,720   $ (52,928

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

    

Depreciation and amortization

     90,762        91,782   

Accretion

     11,599        12,346   

Equity compensation

     3,547        —     

Deferred income tax expense (benefit)

     (27,451     (28,066

Amortization of debt discount and issuance costs

     4,717        5,073   

Loss on extinguishment of debt

     22,828        18,293   

Other

     1,861        227   

Changes in operating assets and liabilities:

    

Accounts receivable

     (10,208     1,062   

Prepaid expenses and other

     (697     (3,666

Accounts payable

     5,498        3,231   

Accrued expenses, deferred revenue and other liabilities

     23,539        7,138   

Tax receivable agreement obligations to related parties

     (103     (114
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     84,172        54,378   
  

 

 

   

 

 

 

Investing activities

    

Purchases of property and equipment

     (33,246     (27,430

Payments for acquisitions, net of cash acquired

     (18,291     (59,013
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (51,537     (86,443
  

 

 

   

 

 

 

Financing activities

    

Proceeds from Term Loan Facility

     —          70,351   

Debt principal payments

     (6,472     (6,312

Payments on Revolving Facility

     —          (15,000

Payment of loan costs

     (2,178     (2,060

Repayment of deferred financing arrangements

     (1,844     —     

Repurchase of Parent common stock

     (250     (317

Other

     (735     (135
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (11,479     46,527   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     21,156        14,462   

Cash and cash equivalents at beginning of period

     31,763        37,925   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 52,919      $ 52,387   
  

 

 

   

 

 

 

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 United States 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 information exchange, claims management and adjudication, payment integrity, payment distribution, payment posting and denial management and patient billing and payment processing.

Organization

The Company was formed as a Delaware limited liability company in September 2006 and converted into a Delaware corporation in September 2008 in anticipation of the Company’s August 2009 initial public offering (the “IPO”).

On November 2, 2011, pursuant to an Agreement and Plan of Merger among the Company, Beagle Parent Corp. (“Parent”) and Beagle Acquisition Corp. (“Merger Sub”), Merger Sub merged with and into the Company with the Company surviving the merger (the “Merger”). Subsequent to the Merger, the Company became an indirect wholly-owned subsidiary of Parent, which is controlled by affiliates of The Blackstone Group L.P. (“Blackstone”).

2. Basis of Presentation

Principles of Consolidation

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

Reclassifications

Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation.

Recent Accounting Pronouncements

On January 1, 2013, the Company adopted Financial Accounting Standards Board Accounting Standards Update No. 2013-02, which requires an entity to provide information about the amounts reclassified from accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of its income statement or in its notes, significant amounts reclassified from accumulated other comprehensive income by the net income line item. The adoption of this update had no material impact on the Company’s 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)

 

3. Concentration of Credit Risk

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

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

4. Business Combinations

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

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.

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

 

     Goold     TC3  

Total Consideration Fair Value at Acquisition Date:

    

Cash paid at closing

   $ 19,391      $ 61,351   

Contingent consideration

     5,717        —     

Other

     (701     383   
  

 

 

   

 

 

 
   $ 24,407      $ 61,734   
  

 

 

   

 

 

 

Allocation of the Consideration Transferred:

    

Cash

   $ 1,100      $ 2,340   

Accounts receivable

     3,505        2,662   

Deferred income tax assets

     —          348   

Prepaid expenses and other current assets

     681        155   

Property and equipment

     7,055        10,414   

Identifiable intangible assets:

    

Tradename

     —          530   

Noncompetition agreements

     550        1,300   

Customer relationships

     5,380        18,810   

Goodwill

     14,397        38,634   

Accounts payable

     (532     —     

Accrued expenses

     (2,452     (4,783

Deferred revenues

     (101     —     

Current maturities of long-term debt

     (218     —     

Deferred income tax liabilities

     (4,958     (8,592

Other long-term liabilities

     —          (84
  

 

 

   

 

 

 

Total consideration transferred

   $ 24,407      $ 61,734   
  

 

 

   

 

 

 

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

  

 

For the three months ended June 30, 2013

   $ 254      $ —     

For the three months ended June 30, 2012

   $ —        $ 182   

For the six months ended June 30, 2013

   $ 258      $ —     

For the six months ended June 30, 2012

   $ —        $ 513   

 

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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)

 

     Goold      TC3  

Other Information:

     

Gross contractual accounts receivable

   $ 3,505       $ 2,943   

Amount not expected to be collected

   $ —         $ 281   

Goodwill expected to be deductible for tax purposes

   $ —         $ —     

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

5. Goodwill and Intangible Assets

Goodwill activity during the six months ended June 30, 2013 was as follows:

 

     Payer      Ambulatory
Provider
     Provider
Revenue Cycle
Solutions
     Pharmacy      Total  

Balance at December 31, 2012

   $ 712,585       $ 289,812       $ 315,054       $ 170,683       $ 1,488,134   

Acquisitions

     —           —           —           14,397         14,397   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2013

   $ 712,585       $ 289,812       $ 315,054       $ 185,080       $ 1,502,531   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Intangible assets subject to amortization as of June 30, 2013 consisted of the following:

 

     Weighted
Average
Remaining
Life
   Gross
Carrying
Amount
     Accumulated
Amortization
    Net  

Customer relationships

   17.9    $ 1,647,190       $ (138,778   $ 1,508,412   

Trade names

   18.0      156,530         (13,206     143,324   

Non-compete agreements

   3.2      13,350         (4,339     9,011   

Data sublicense agreement

   4.3      31,000         (8,728     22,272   

Backlog

   —        19,000         (19,000     —     
     

 

 

    

 

 

   

 

 

 

Total

      $ 1,867,070       $ (184,051   $ 1,683,019   
     

 

 

    

 

 

   

 

 

 

Amortization expense was $53,000 and $56,229 for the six months ended June 30, 2013 and 2012, 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:

 

2013 (remainder)

   $ 50,213   

2014

     100,426   

2015

     100,019   

2016

     99,433   

2017

     96,221   

Thereafter

     1,236,707   
  

 

 

 
   $ 1,683,019   
  

 

 

 

6. Long-Term Debt

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

Long-term debt as of June 30, 2013 and December 31, 2012, consisted of the following:

 

     June 30,     December 31,  
     2013     2012  

Senior Credit Facilities

    

$1,301 million Senior Secured Term Loan facility, due November 2, 2018, net of unamortized discount of $17,335 and $32,426 at June 30, 2013 and December 31, 2012, respectively (effective interest rate of 4.21%)

   $ 1,267,376      $ 1,258,758   

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

     —          —     

Senior Notes

    

$375 million 11% Senior Notes due December 31, 2019, net of unamortized discount of $8,097 and $8,506 at June 30, 2013 and December 31, 2012, respectively (effective interest rate of 11.53%)

     366,903        366,494   

$375 million 11.25% Senior Notes due December 31, 2020, net of unamortized discount of $9,989 and $10,393 at June 30, 2013 and December 31, 2012, respectively (effective interest rate of 11.86%)

     365,011        364,607   

Obligation under data sublicense agreement

     26,863        26,863   

Other

     13,685        287   

Less current portion

     (22,094     (17,595
  

 

 

   

 

 

 

Long-term debt

   $ 2,017,744      $ 1,999,414   
  

 

 

   

 

 

 

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

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

to, among other conditions, the absence of any default under the Senior Credit Agreement and the receipt of commitments by existing or additional financial institutions. Proceeds of the Revolving Facility, including up to $30,000 in the form of borrowings on same-day notice, referred to as swingline loans, and up to $50,000 in the form of letters of credits, are available to provide financing for working capital and general corporate purposes.

Borrowings under the Senior Credit Facilities bear interest at an annual rate equal to an applicable margin plus, at the Company’s option, either (a) a base rate determined by reference to the highest of (i) the applicable prime rate, (ii) the federal funds rate plus 0.50% and (iii) a LIBOR rate determined by reference to the costs of funds for United States dollar deposits for an interest period of one month, adjusted for certain additional costs, plus 1.00%, which base rate, in the case of the Term Loan Facility only, shall be no less than 2.25%, or (b) a LIBOR rate determined by reference to the costs of funds for United States dollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, which, in the case of the Term Loan Facility only, shall be no less than 1.25%.

In April 2012, the Company amended the Senior Credit Agreement to reprice the Senior Credit Facilities and borrow $80,000 of additional term loans. Following this amendment, the LIBOR-based interest rate on the Term Loan Facility was LIBOR plus 3.75%, compared to the previous interest rate of LIBOR plus 5.50%. The new LIBOR-based interest rate on the Revolving Facility was LIBOR plus 3.50% (with a potential step-down to LIBOR plus 3.25% based on the Company’s first lien net leverage ratio), compared to the previous interest rate of LIBOR plus 5.25% (with a potential step-down to LIBOR plus 5.00% based on the Company’s first lien net leverage ratio).

In April 2013, the Company again amended the Senior Credit Agreement to further reprice, and also to modify certain financial covenants under, the Senior Credit Facilities. Following this amendment, the interest rate on the Term Loan Facility is LIBOR plus 2.50%, compared to the previous interest rate of LIBOR plus 3.75%. The new interest rate on the Revolving Facility is LIBOR plus 2.50%, compared to the previous interest rate of LIBOR plus 3.50% (or 3.25% based on a specified first lien net leverage ratio). The Term Loan Facility remains subject to a LIBOR floor of 1.25%, and there continues to be no LIBOR floor on the Revolving Facility. In connection with the April 2013 repricing, the Senior Credit Agreement also was amended to, among other things, eliminate the financial covenant related to the consolidated cash interest coverage ratio and modify the financial covenant related to the net leverage test by maintaining the required first lien net leverage ratio at its current level of 5.35 to 1.00 for the remaining term of the Senior Credit Facilities.

These amendments to the Senior Credit Agreement resulted in a loss on extinguishment of debt of $23,160 and $21,853 and other expenses related to fees paid to third parties of $1,151 and $3,558, for the three and six months ended June 30, 2013 and 2012, respectively, which have been reflected within sales, marketing, general and administrative expense in the accompanying consolidated statements of operations.

In addition to paying interest on outstanding principal under the Senior Credit Facilities, the Company is required to pay customary agency fees, letter of credit fees and a 0.50% commitment fee in respect of the unutilized commitments under the Revolving Facility.

The Senior Credit Agreement requires that the Company prepay outstanding loans under the Term Loan Facility, subject to certain exceptions, with (a) 100% of the net cash proceeds of any incurrence of debt other than debt permitted under the Senior Credit Agreement, (b) commencing with the fiscal year ended December 31, 2012, 50% (which percentage will be reduced to 25% and 0% based on the Company’s first lien net leverage ratio) of the Company’s annual excess cash flow and (c) 100% of the net cash proceeds of certain asset sales and casualty and condemnation events, subject to reinvestment rights and certain other exceptions.

The Company generally may voluntarily prepay outstanding loans under the Senior Credit Facilities at any time without premium or penalty other than breakage costs with respect to LIBOR loans; provided, however, the Company may be subject to a prepayment premium of 1.00% of the aggregate principal amount of the loans so prepaid based on the timing of certain repricing transactions.

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

The Company is required to make quarterly payments equal to 0.25% of the aggregate principal amount of the loans under the Term Loan Facility, with the balance due and payable on November 2, 2018. Any principal amount outstanding under the Revolving Facility is due and payable on November 2, 2016.

Certain of the Company’s United States wholly-owned restricted subsidiaries, together with the Company, are co-borrowers and jointly and severally liable for all obligations under the Senior Credit Facilities. Such obligations of the co-borrowers are unconditionally guaranteed by Beagle Intermediate Holdings, Inc. (a direct wholly-owned subsidiary of Parent), the Company and each of its existing and future United States wholly-owned restricted subsidiaries (with certain exceptions including immaterial subsidiaries). These obligations are secured by a perfected security interest in substantially all of the assets of the co-borrowers and guarantors now owned or later acquired, including a pledge of all of the capital stock of the Company and its United States wholly-owned restricted subsidiaries and 65% of the capital stock of its foreign restricted subsidiaries, subject in each case to the exclusion of certain assets and additional exceptions.

During the three months ended June 30, 2013, the Senior Credit Agreement required the Company to comply with a maximum first lien net leverage ratio financial maintenance covenant, to be tested on the last day of each fiscal quarter. A breach of the first lien net leverage ratio covenant is subject to certain equity cure rights. In addition, the Senior Credit Facilities contain a number of negative covenants that, among other things and subject to certain exceptions, restrict the Company’s ability and the ability of its subsidiaries to:

 

   

incur additional indebtedness or guarantees;

 

   

incur liens;

 

   

make investments, loans and acquisitions;

 

   

consolidate or merge;

 

   

sell assets, including capital stock of subsidiaries;

 

   

pay dividends on capital stock or redeem, repurchase or retire capital stock of the Company or any restricted subsidiary;

 

   

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. 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

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

both, in whole or in part, at its option and on one or more occasions, at a redemption price equal to 100% of the principal amount, plus an applicable premium and accrued and unpaid interest. If the Company experiences specific kinds of changes in control, it must offer to purchase the Senior Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest.

The Senior Notes are senior unsecured obligations and rank equally in right of payment with all of the Company’s existing and future indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness. The Company’s obligations under the Senior Notes are guaranteed on a senior basis by all of its existing and subsequently acquired or organized wholly-owned United States restricted subsidiaries that guarantee the Senior Credit Facilities or its other indebtedness or indebtedness of any affiliate guarantor. The Senior Notes and the related guarantees are effectively subordinated to the Company’s existing and future secured obligations and that of its affiliate guarantors to the extent of the value of the collateral securing such obligations, and are structurally subordinated to all existing and future indebtedness and other liabilities of any of the Company’s subsidiaries that do not guarantee the Senior Notes.

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

 

   

pay dividends on 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 $38,000 remained payable at June 30, 2013). In connection with the Merger, the Company was required to adjust this obligation to its fair value.

Other

During the three months ended March 31, 2013, the Company entered into deferred financing arrangements with certain vendors. The obligations were recorded at the present value of the scheduled payments. Such future payments totaled $14,266 at June 30, 2013.

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

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 six months ended June 30, 2013, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt pursuant to the Term Loan Facility. As of June 30, 2013, the Company had three outstanding interest rate derivatives with a combined notional amount of $640,000 that were designated as cash flow hedges of interest rate risk.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $2,573 will be reclassified as an increase to interest expense.

The following table summarizes the fair value of the Company’s derivative instruments at June 30, 2013 and December 31, 2012:

 

     Fair Values of Derivative Instruments  
    

Asset (Liability) Derivatives

 
    

Balance Sheet Location

   June 30,
2013
    December 31,
2012
 

Derivatives designated as hedging instruments:

       

Interest rate swaps

   Other assets    $ 2,437      $ —     

Interest rate swaps

   Accrued expenses      (2,573     (2,563

Interest rate swaps

   Other long-term liabilities      —          (3,258
     

 

 

   

 

 

 
      $ (136   $ (5,821
     

 

 

   

 

 

 

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

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 six months ended June 30, 2013 and 2012, respectively, is summarized in the following table:

 

     Three Months
Ended June 30,
2013
    Three Months
Ended June 30,
2012
    Six Months
Ended June 30,
2013
    Six Months
Ended June 30,
2012
 

Derivatives in Cash Flow Hedging Relationships

        

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

   $ 4,358      $ 7,306      $ 4,402      $ 4,782   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (645   $ (645   $ (1,283   $ (1,070
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit Risk-related Contingent Features

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

As of June 30, 2013, 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 $787. If the Company had breached any of these provisions at June 30, 2013, the Company could have been required to settle its obligations under the agreements at this termination value. The Company does not offset any derivative instruments and the derivative instruments are not subject to collateral posting requirements.

8. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company’s assets and liabilities that are measured at fair value on a recurring basis consist of the Company’s derivative financial instruments and contingent consideration associated with business combinations. The table below summarizes these items as of June 30, 2013, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

Description

   Balance at
June 30, 2013
    Quoted in
Markets
Identical (Level 1)
     Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Interest rate swaps

   $ (136   $ —         $ (136   $ —     

Contingent consideration obligations

     (5,887     —           —          (5,887
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (6,023   $ —         $ (136   $ (5,887
  

 

 

   

 

 

    

 

 

   

 

 

 

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

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

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. Effective January 2013, the Company revised its valuation methodology for derivatives to discount the future expected cash flows using the overnight index swap rate. This change in methodology had no material effect on the Company’s unaudited condensed consolidated financial statements for the six months ended June 30, 2013.

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 June 30, 2013, 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 agreement and utilizes assumptions with regard to future sales, probabilities of achieving such future sales and a discount rate. Significant increases with respect to assumptions as to future sales and probabilities of achieving such future sales would result in a higher fair value measurement while an increase in the discount rate would result in a lower fair value measurement.

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

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

     Three Months
Ended June 30,
2013
    Three Months
Ended June 30,
2012
    Six Months
Ended June 30,
2013
    Six Months
Ended June 30,
2012
 

Balance at beginning of period

   $ (237   $ (445   $ (296   $ (501

Issuance of contingent consideration

     (5,717     —          (5,717     —     

Settlement of contingent consideration

     67        43        126        99   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ (5,887   $ (402   $ (5,887   $ (402
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

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 June 30, 2013 were:

 

     Carrying
Amount
     Fair Value  

Cash and cash equivalents

   $ 52,919       $ 52,919   

Accounts receivable

   $ 203,734       $ 203,734   

Senior Credit Facilities (Level 1)

   $ 1,267,376       $ 1,278,287   

Senior Notes (Level 2)

   $ 731,914       $ 871,174   

Cost method investment (Level 3)

   $ 3,458       $ 4,522   

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.

10. Income Taxes

Income taxes for the six months ended June 30, 2013 and June 30, 2012 amounted to an income tax benefit of $26,547 and $27,272, respectively. The Company’s effective tax rate was 38.9% for the six months ended June 30, 2013 compared to 34.0% during the same period in 2012. The Company’s effective tax rate is generally affected by deferred tax expense resulting from differences between the book and income tax basis of its investment in EBS Master LLC (“EBS Master”), changes in the Company’s valuation allowances and other factors. In addition, during the six months ended June 30, 2013, we changed our methodology of estimating state income taxes from a separate state return basis to, where permitted by the state taxing authorities, a consolidated state return basis.

11. Tax Receivable Agreement Obligation to Related Parties

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

In November 2011, H&F and certain current and former members of management exchanged all of their remaining EBS Master Units (“EBS Units”) for cash and a combination of cash and shares of Parent, respectively, and the former majority owner of the Company assigned its rights under the tax receivable agreements to affiliates of Blackstone (Blackstone, together with H&F and certain current and former members of management are sometimes referred to collectively as the “TRA Members”). Additionally, effective December 31, 2011, the Company simplified its corporate structure. The tax attributes of the exchange of EBS Units and

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

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. $137,639 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 June 30, 2013. The accompanying unaudited condensed consolidated statement of operations for the six months ended June 30, 2013 and 2012 includes accretion expense of $11,599 and $12,346, respectively, related to this obligation.

During the three months ended June 30, 2013, the Company changed its estimate of the timing and amount of future cash flows attributable to the tax receivable agreements as a result of the impact of the April 2013 repricing to the Senior Credit Agreement, the Goold acquisition and routine updates to financial projections. These revised estimates resulted in an increase to pretax net loss of $3,293 for the three months ended June 30, 2013.

12. Segment Reporting

Effective January 1, 2013, the Company completed an internal reorganization of its reporting structure which resulted in a change in the composition of its operating segments. The prior period segment information has been restated to reflect the current organizational structure.

Management views the Company’s operating results in four operating segments: (a) payer services, (b) provider revenue cycle solutions, (c) ambulatory provider services and (d) pharmacy services. Listed below are the results of operations for each of the operating 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 operating segments are the same as those described in the summary of significant accounting policies in the notes to the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the SEC.

Payer Services Segment

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

Provider Revenue Cycle Solutions Segment

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

Ambulatory Provider Services Segment

The ambulatory provider services segment provides, both directly and through the Company’s channel partners, revenue cycle management solutions and patient billing and payment services primarily to small physician practices, dentists, labs and other healthcare providers that simplify providers’ revenue cycle and workflow, reduce related costs and improve cash flow.

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

Pharmacy Services Segment

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

Other

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

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

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

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

 

     Three Months Ended June 30, 2013  
     Payer      Ambulatory
Provider
     Provider
Revenue
Cycle
Solutions
     Pharmacy      Corporate and
Eliminations
    Consolidated  

Revenue from external customers:

                

Claims management

   $ 69,069       $ —         $ —         $ —         $ —        $ 69,069   

Payment distribution services

     64,934         —           —           —           —          64,934   

Patient billing and payment services

     —           64,065         —           —           —          64,065   

Physician services

     —           18,832         —           —           —          18,832   

Dental

     —           8,209         —           —           —          8,209   

Revenue cycle technology

     —           —           30,211         —           —          30,211   

Revenue cycle services

     —           —           30,752         —           —          30,752   

Pharmacy

     —           —           —           25,413         —          25,413   

Inter-segment revenue

     1,280         —           425         85         (1,790     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net revenue

   $ 135,283       $ 91,106       $ 61,388       $ 25,498       $ (1,790   $ 311,485   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

                 $ (45,459

Interest expense

                   37,974   

Depreciation and amortization

                   43,946   
                

 

 

 

EBITDA

                   36,461   

Equity compensation

                   1,773   

Acquisition accounting adjustments

                   216   

Acquisition-related costs

                   763   

Transaction-related costs and advisory fees

                   1,825   

Strategic initiatives, duplicative and transition costs

                   1,308   

Severance and retention costs

                   744   

Loss on extinguishment of debt and other related costs

                   24,311   

Accretion expense

                   7,459   

Disposal of assets

                   1,934   

Other

                   357   
                

 

 

 

EBITDA Adjustments

                   40,690   
                

 

 

 

Adjusted EBITDA

   $ 54,981       $ 23,740       $ 23,777       $ 11,369       $ (36,716   $ 77,151   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Capital Expenditures

   $ 1,951       $ 2,496       $ 3,226       $ 930       $ 11,092      $ 19,695   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

     Three Months Ended June 30, 2012  
     Payer      Ambulatory
Provider
     Provider
Revenue
Cycle
Solutions
     Pharmacy      Corporate and
Eliminations
    Consolidated  

Revenue from external customers:

                

Claims management

   $ 60,276       $ —         $ —         $ —         $ —        $ 60,276   

Payment distribution services

     63,919         —           —           —           —          63,919   

Patient billing and payment services

     —           64,661         —           —           —          64,661   

Physician services

     —           17,970         —           —           —          17,970   

Dental

     —           8,028         —           —           —          8,028   

Revenue cycle technology

     —           —           27,335         —           —          27,335   

Revenue cycle services

     —           —           29,394         —           —          29,394   

Pharmacy

     —           —           —           22,884         —          22,884   

Inter-segment revenue

     1,022         —           194         87         (1,303     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net revenue

   $ 125,217       $ 90,659       $ 56,923       $ 22,971       $ (1,303   $ 294,467   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

                 $ (53,213

Interest expense

                   42,902   

Depreciation and amortization

                   46,626   
                

 

 

 

EBITDA

                   36,315   

Acquisition accounting adjustments

                   1,496   

Acquisition-related costs

                   2,727   

Transaction-related costs and advisory fees

                   2,514   

Strategic initiatives, duplicative and transition costs

                   1,627   

Severance and retention costs

                   316   

Loss on extinguishment of debt and other related costs

                   25,411   

Accretion expense

                   8,579   

Disposal of assets

                   75   

Other

                   1,040   
                

 

 

 

EBITDA Adjustments

                   43,785   
                

 

 

 

Adjusted EBITDA

   $ 50,785       $ 24,778       $ 23,478       $ 11,473       $ (30,414   $ 80,100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Capital Expenditures

   $ 3,206       $ 1,455       $ 2,704       $ 849       $ 4,070      $ 12,284   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

22


Table of Contents

Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

     Six Months Ended June 30, 2013  
     Payer      Ambulatory
Provider
     Provider
Revenue
Cycle
Solutions
     Pharmacy      Corporate and
Eliminations
    Consolidated  

Revenue from external customers:

                

Claims management

   $ 135,150       $ —         $ —         $ —         $ —        $ 135,150   

Payment distribution services

     130,884         —           —           —           —          130,884   

Patient billing and payment services

     —           127,146         —           —           —          127,146   

Physician services

     —           37,252         —           —           —          37,252   

Dental

     —           16,411         —           —           —          16,411   

Revenue cycle technology

     —           —           59,277         —           —          59,277   

Revenue cycle services

     —           —           61,101         —           —          61,101   

Pharmacy

     —           —           —           49,966         —          49,966   

Inter-segment revenue

     2,114         —           661         179         (2,954     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net revenue

   $ 268,148       $ 180,809       $ 121,039       $ 50,145       $ (2,954   $ 617,187   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

                 $ (68,267

Interest expense

                   79,389   

Depreciation and amortization

                   90,762   
                

 

 

 

EBITDA

                   101,884   

Equity compensation

                   3,547   

Acquisition accounting adjustments

                   490   

Acquisition-related costs

                   1,260   

Transaction-related costs and advisory fees

                   3,325   

Strategic initiatives, duplicative and transition costs

                   2,468   

Severance and retention costs

                   1,629   

Loss on extinguishment of debt and other related costs

                   24,311   

Accretion expense

                   11,599   

Disposal of assets

                   1,903   

Other

                   779   
                

 

 

 

EBITDA Adjustments

                   51,311   
                

 

 

 

Adjusted EBITDA

   $ 105,645       $ 47,654       $ 47,838       $ 23,716       $ (71,658   $ 153,195   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Capital Expenditures

   $ 6,832       $ 3,624       $ 5,783       $ 2,177       $ 14,830      $ 33,246   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

23


Table of Contents

Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

     Six Months Ended June 30, 2012  
     Payer      Ambulatory
Provider
     Provider
Revenue
Cycle
Solutions
     Pharmacy      Corporate and
Eliminations
    Consolidated  

Revenue from external customers:

                

Claims management

   $ 114,961       $ —         $ —         $ —         $ —        $ 114,961   

Payment distribution services

     127,795         —           —           —           —          127,795   

Patient billing and payment services

     —           127,374         —           —           —          127,374   

Physician services

     —           36,899         —           —           —          36,899   

Dental

     —           16,200         —           —           —          16,200   

Revenue cycle technology

     —           —           53,399         —           —          53,399   

Revenue cycle services

     —           —           57,369         —           —          57,369   

Pharmacy

     —           —           —           46,506         —          46,506   

Inter-segment revenue

     1,905         —           438         180         (2,523     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net revenue

   $ 244,661       $ 180,473       $ 111,206       $ 46,686       $ (2,523   $ 580,503   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

                 $ (80,200

Interest expense

                   88,641   

Depreciation and amortization

                   91,782   
                

 

 

 

EBITDA

                   100,223   

Acquisition accounting adjustments

                   3,433   

Acquisition-related costs

                   3,655   

Transaction-related costs and advisory fees

                   4,662   

Strategic initiatives, duplicative and transition costs

                   6,243   

Severance and retention costs

                   917   

Loss on extinguishment of debt and other related costs

                   25,411   

Accretion expense

                   12,346   

Disposal of assets

                   51   

Other

                   1,602   
                

 

 

 

EBITDA Adjustments

                   58,320   
                

 

 

 

Adjusted EBITDA

   $ 99,922       $ 49,590       $ 45,328       $ 23,446       $ (59,743   $ 158,543   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Capital Expenditures

   $ 5,766       $ 2,877       $ 3,902       $ 1,414       $ 13,471      $ 27,430   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

24


Table of Contents

Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

13. Accumulated Other Comprehensive Income (Loss)

The following is a summary of the accumulated other comprehensive income (loss) balances, net of taxes, as of and for the six months ended June 30, 2013.

 

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

Balance at January 1, 2013

   $ (127   $ (3,662   $ (3,789

Change associated with foreign currency translation

     (99     —          (99

Change associated with current period hedging

     —          2,930        2,930   

Reclassification into earnings

     —          645        645   
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ (226   $ (87   $ (313
  

 

 

   

 

 

   

 

 

 

14. Supplemental Condensed Consolidating Financial Information

In lieu of providing separate annual and interim financial statements for each guarantor of the Senior Notes, Regulation S-X provides companies, if certain criteria are satisfied, with the option to instead provide condensed consolidating financial information for its issuers, guarantors and non-guarantors. In the case of the Company, the applicable criteria include the following: (i) the Senior Notes are fully and unconditionally guaranteed on a joint and several basis, (ii) each of the guarantors of the Senior Notes is a direct or indirect wholly-owned subsidiary of the Company and (iii) any non-guarantors are considered minor as that term is defined in Regulation S-X. Because each of these criteria has been satisfied by the Company, condensed consolidating balance sheets as of June 30, 2013 and December 31, 2012, condensed consolidating statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2013 and 2012, respectively, and condensed consolidating cash flows for the six months ended June 30, 2013 and 2012, respectively, for the Company, segregating the issuer, the subsidiary guarantors and consolidating adjustments, are reflected below. Prior period amounts have been reclassified to conform to the current year presentation.

 

25


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

 

     As of June 30, 2013  
     Emdeon Inc.      Guarantor
Subsidiaries
     Consolidating
Adjustments
    Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 31,898       $ 21,021       $ —        $ 52,919   

Accounts receivable, net of allowance for doubtful accounts

     —           203,734         —          203,734   

Deferred income tax assets

     —           5,043         —          5,043   

Prepaid expenses and other current assets

     4,844         25,478         —          30,322   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     36,742         255,276         —          292,018   

Property and equipment, net

     1         276,684         —          276,685   

Due from affiliates

     —           64,308         (64,308     —     

Investment in consolidated subsidiaries

     1,795,128         —           (1,795,128     —     

Goodwill

     —           1,502,531         —          1,502,531   

Intangible assets, net

     147,000         1,536,019         —          1,683,019   

Other assets, net

     42,948         15,674         (33,493     25,129   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,021,819       $ 3,650,492       $ (1,892,929   $ 3,779,382   
  

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

          

Current liabilities:

          

Accounts payable

   $ —         $ 12,244       $ —        $ 12,244   

Accrued expenses

     39,159         86,633         —          125,792   

Deferred revenues

     —           9,656         —          9,656   

Current portion of long-term debt

     4,597         17,497         —          22,094   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     43,756         126,030         —          169,786   

Due to affiliates

     64,308         —           (64,308     —     

Long-term debt, excluding current portion

     779,948         1,237,796         —          2,017,744   

Deferred income tax liabilities

     —           480,887         (33,493     447,394   

Tax receivable agreement obligations to related parties

     136,602         —           —          136,602   

Other long-term liabilities

     —           10,651         —          10,651   

Commitments and contingencies

          

Equity

     997,205         1,795,128         (1,795,128     997,205   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 2,021,819       $ 3,650,492       $ (1,892,929   $ 3,779,382   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

26


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

 

     As of December 31, 2012  
     Emdeon Inc.      Guarantor
Subsidiaries
     Consolidating
Adjustments
    Consolidated  

ASSETS

  

Current assets:

          

Cash and cash equivalents

   $ 754       $ 31,009       $ —        $ 31,763   

Accounts receivable, net of allowance for doubtful accounts

     —           190,021         —          190,021   

Deferred income tax assets

     —           4,184         —          4,184   

Prepaid expenses and other current assets

     2,059         26,101         —          28,160   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     2,813         251,315         —          254,128   

Property and equipment, net

     3         264,849         —          264,852   

Due from affiliates

     —           62,933         (62,933     —     

Investment in consolidated subsidiaries

     1,839,748         —           (1,839,748     —     

Goodwill

     —           1,488,134         —          1,488,134   

Intangible assets, net

     151,500         1,578,589         —          1,730,089   

Other assets, net

     18,539         22,275         (11,120     29,694   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,012,603       $ 3,668,095       $ (1,913,801   $ 3,766,897   
  

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

          

Current liabilities:

          

Accounts payable

   $ —         $ 6,223       $ —        $ 6,223   

Accrued expenses

     5,845         95,960         —          101,805   

Deferred revenues

     —           9,342         —          9,342   

Current portion of long-term debt

     4,600         12,995         —          17,595   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     10,445         124,520         —          134,965   

Due to affiliates

     62,933         —           (62,933     —     

Long-term debt, excluding current portion

     778,813         1,220,601         —          1,999,414   

Deferred income tax liabilities

     —           478,041         (11,120     466,921   

Tax receivable agreement obligations to related parties

     125,003         —           —          125,003   

Other long-term liabilities

     3,258         5,185         —          8,443   

Commitments and contingencies

          

Equity

     1,032,151         1,839,748         (1,839,748     1,032,151   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 2,012,603       $ 3,668,095       $ (1,913,801   $ 3,766,897   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

27


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

 

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

Revenue

   $ —        $ 311,485      $ —        $ 311,485   

Costs and expenses:

        

Cost of operations (exclusive of depreciation and amortization below)

     —          193,816        —          193,816   

Development and engineering

     —          7,644        —          7,644   

Sales, marketing, general and administrative

     2,732        40,213        —          42,945   

Depreciation and amortization

     2,251        41,695        —          43,946   

Accretion

     7,459        —          —          7,459   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (12,442     28,117        —          15,675   

Equity in earnings of consolidated subsidiaries

     5,525        —          (5,525     —     

Interest expense, net

     23,489        14,485        —          37,974   

Loss on extinguishment of debt

     485        22,675        —          23,160   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision (benefit)

     (41,941     (9,043     5,525        (45,459

Income tax provision (benefit)

     (13,673     (3,518     —          (17,191
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (28,268   $ (5,525   $ 5,525      $ (28,268
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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 Statement of Operations

 

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

Revenue

   $ —        $ 294,467      $ —        $ 294,467   

Costs and expenses:

        

Cost of operations (exclusive of depreciation and amortization below)

     —          180,090        —          180,090   

Development and engineering

     —          8,590        —          8,590   

Sales, marketing, general and administrative

     2,730        36,310        —          39,040   

Depreciation and amortization

     2,251        44,375        —          46,626   

Accretion

     8,579        —          —          8,579   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (13,560     25,102        —          11,542   

Equity in earnings of consolidated subsidiaries

     12,030        —          (12,030     —     

Interest expense, net

     23,693        19,209        —          42,902   

Loss on extinguishment of debt

     495        21,358        —          21,853   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision (benefit)

     (49,778     (15,465     12,030        (53,213

Income tax provision (benefit)

     (14,385     (3,435     —          (17,820
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (35,393   $ (12,030   $ 12,030      $ (35,393
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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 Statement of Operations

 

     Six Months Ended June 30, 2013  
     Emdeon Inc.     Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Revenue

   $ —        $ 617,187      $ —        $ 617,187   

Costs and expenses:

        

Cost of operations (exclusive of depreciation and amortization below)

     —          383,122        —          383,122   

Development and engineering

     —          15,366        —          15,366   

Sales, marketing, general and administrative

     5,026        77,030        —          82,056   

Depreciation and amortization

     4,502        86,260        —          90,762   

Accretion

     11,599        —          —          11,599   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (21,127     55,409        —          34,282   

Equity in earnings of consolidated subsidiaries

     (2,451     —          2,451        —     

Interest expense, net

     47,041        32,348        —          79,389   

Loss on extinguishment of debt

     485        22,675        —          23,160   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision (benefit)

     (66,202     386        (2,451     (68,267

Income tax provision (benefit)

     (24,482     (2,065     —          (26,547
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (41,720   $ 2,451      $ (2,451   $ (41,720
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     Six Months Ended June 30, 2012  
     Emdeon Inc.     Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Revenue

   $ —        $ 580,503      $ —        $ 580,503   

Costs and expenses:

        

Cost of operations (exclusive of depreciation and amortization below)

     —          353,236        —          353,236   

Development and engineering

     —          17,676        —          17,676   

Sales, marketing, general and administrative

     4,654        70,515        —          75,169   

Depreciation and amortization

     4,502        87,280        —          91,782   

Accretion

     12,346        —          —          12,346   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (21,502     51,796        —          30,294   

Equity in earnings of consolidated subsidiaries

     7,742        —          (7,742     —     

Interest expense, net

     46,851        41,790        —          88,641   

Loss on extinguishment of debt

     495        21,358        —          21,853   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision (benefit)

     (76,590     (11,352     7,742        (80,200

Income tax provision (benefit)

     (23,662     (3,610     —          (27,272
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (52,928   $ (7,742   $ 7,742      $ (52,928
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

Condensed Consolidating Statement of Comprehensive Income (Loss)

 

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

Net income (loss)

   $ (28,268   $ (5,525   $ 5,525       $ (28,268

Other comprehensive income (loss):

         

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

     3,147        —          —           3,147   

Foreign currency translation adjustment

     —          (64     —           (64

Equity in other comprehensive earnings

     (64     —          64         —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income (loss)

     3,083        (64     64         3,083   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total comprehensive income (loss)

   $ (25,185   $ (5,589   $ 5,589       $ (25,185
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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Emdeon Inc.

Notes to Condensed Consolidated Financial Statements

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

 

Condensed Consolidating Statement of Comprehensive Income (Loss)

 

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

Net income (loss)

   $ (35,393   $ (12,030   $ 12,030      $ (35,393

Other comprehensive income (loss):

        

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

     (4,192     —          —          (4,192

Foreign currency translation adjustment

     —          40        —          40   

Equity in other comprehensive earnings

     40        —          (40     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (4,152     40        (40     (4,152
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (39,545   $ (11,990   $ 11,990      $ (39,545
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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)

 

     Six Months Ended June 30, 2013  
     Emdeon Inc.     Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Net income (loss)

   $ (41,720   $ 2,451      $ (2,451   $ (41,720

Other comprehensive income (loss):

        

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

     3,575        —          —          3,575   

Foreign currency translation adjustment

     —          (99     —          (99

Equity in other comprehensive earnings

     (99     —          99        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     3,476        (99     99        3,476   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (38,244   $ 2,352      $ (2,352   $ (38,244
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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)

 

     Six Months Ended June 30, 2012  
     Emdeon Inc.     Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Net income (loss)

   $ (52,928   $ (7,742   $ 7,742      $ (52,928

Other comprehensive income (loss):

        

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

     (2,334     —          —          (2,334

Foreign currency translation adjustment

     —          234        —          234   

Equity in other comprehensive earnings

     234        —          (234     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (2,100     234        (234     (2,100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (55,028   $ (7,508   $ 7,508      $ (55,028
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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

 

     Six Months Ended June 30, 2013  
     Emdeon Inc.     Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Operating activities

        

Net income (loss)

   $ (41,720   $ 2,451      $ (2,451   $ (41,720

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

        

Depreciation and amortization

     4,502        86,260        —          90,762   

Accretion expense

     11,599        —          —          11,599   

Equity compensation expense

     88        3,459        —          3,547   

Deferred income tax benefit

     (24,482     (2,969     —          (27,451

Amortization of debt discount and issuance costs

     1,243        3,474        —          4,717   

Equity in earnings of consolidated subsidiaries

     (2,451     —          2,451        —     

Loss on extinguishment of debt

     478        22,350        —          22,828   

Other

     —          1,861        —          1,861   

Changes in operating assets and liabilities:

        

Accounts receivable

     —          (10,208     —          (10,208

Prepaid expenses and other

     (1,023     326        —          (697

Accounts payable

     —          5,498        —          5,498   

Accrued expenses, deferred revenue, and other liabilities

     31,499        (7,960     —          23,539   

Tax receivable agreement obligations to related parties

     (103     —          —          (103

Due to/from affiliates

     1,375        (1,375     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (18,995     103,167        —          84,172   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities

        

Purchases of property and equipment

     —          (33,246     —          (33,246

Payments for acquisitions, net of cash acquired

     —          (18,291     —          (18,291

Investment in subsidiaries, net

     50,281        —          (50,281     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     50,281        (51,537     (50,281     (51,537
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

        

Distributions to Emdeon Inc., net

     —          (50,281     50,281        —     

Debt principal payments

     (142     (6,330     —          (6,472

Payment of loan costs

     —          (2,178     —          (2,178

Repayment of deferred financing arrangements

     —          (1,844     —          (1,844

Repurchase of Parent common stock

     —          (250     —          (250

Other

     —          (735     —          (735
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (142     (61,618     50,281        (11,479
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     31,144        (9,988     —          21,156   

Cash and cash equivalents at beginning of period

     754        31,009        —          31,763   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 31,898      $ 21,021      $ —        $ 52,919   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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

 

     Six Months Ended June 30, 2012  
     Emdeon Inc.     Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Operating activities

        

Net income (loss)

   $ (52,928   $ (7,742   $ 7,742      $ (52,928

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

        

Depreciation and amortization

     4,503        87,279        —          91,782   

Accretion expense

     12,346        —          —          12,346   

Deferred income tax benefit

     (23,662     (4,404     —          (28,066

Amortization of debt discount and issuance costs

     1,096        3,977        —          5,073   

Equity in earnings of consolidated subsidiaries

     7,742        —          (7,742     —     

Loss on extinguishment of debt

     —          18,293        —          18,293   

Other

     —          227        —          227   

Changes in operating assets and liabilities:

        

Accounts receivable

     —          1,062        —          1,062   

Prepaid expenses and other

     (1,623     (2,043     —          (3,666

Accounts payable

     —          3,231        —          3,231   

Accrued expenses, deferred revenue, and other liabilities

     26,379        (19,241     —          7,138   

Tax receivable agreement obligations to related parties

     (114     —          —          (114

Due to/from affiliates

     4,246        (4,246     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (22,015     76,393        —          54,378   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities

        

Purchases of property and equipment

     —          (27,430     —          (27,430

Payments for acquisitions, net of cash acquired

     —          (59,013     —          (59,013

Investment in subsidiaries, net

     21,866        —          (21,866     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     21,866        (86,443     (21,866     (86,443
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

        

Distributions to Emdeon Inc., net

     —          (21,866     21,866        —     

Proceeds from Term Loan Facility

     (207     70,558        —          70,351   

Debt principal payments

     (135     (6,177     —          (6,312

Payments on Revolving Facility

     —          (15,000     —          (15,000

Payment of loan costs

     (34     (2,026     —          (2,060

Repurchase of Parent common stock

     —          (317     —          (317

Other

     —          (135     —          (135
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (376     25,037        21,866        46,527   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (525     14,987        —          14,462   

Cash and cash equivalents at beginning of period

     572        37,353        —          37,925   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 47      $ 52,340      $ —        $ 52,387   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the accompanying notes in Part I, Item 1 of this Quarterly Report on Form 10-Q (“Quarterly Report”), together with the risk factors contained in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012 (“Form 10-K”) on file with the Securities and Exchange Commission (“SEC”).

Unless stated otherwise or the context otherwise requires, references in this Quarterly Report to “we”, “us”, “our”, “Emdeon” and “the Company” refer to Emdeon Inc. and its subsidiaries.

Forward-Looking Statements

This Quarterly Report includes certain forward-looking statements within the meaning of the federal securities laws regarding, among other things, our or management’s intentions, plans, beliefs, expectations or predictions of future events, which are considered forward-looking statements. You should not place undue reliance on those statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions. These statements are based upon assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. As you read this Quarterly Report, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions, including those described under the heading “Risk Factors” in our Form 10-K. Although we believe that these forward-looking statements are based upon reasonable assumptions, you should be aware that many factors, including those described under the heading “Risk Factors” in our Form 10-K, could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements.

Our forward-looking statements made herein speak only as of the date on which made. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements made herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Quarterly Report.

Overview

We are a leading provider of revenue and payment cycle management and clinical information exchange solutions connecting payers, providers and patients in the United States healthcare system. Our solutions integrate and automate key business and administrative functions of our payer and provider customers throughout the patient encounter, including pre-care patient eligibility and benefits verification and enrollment, clinical information exchange capabilities, claims management and adjudication, payment integrity, payment distribution, payment posting and denial management and patient billing and payment services. Our customers are able to improve efficiency, reduce costs, increase cash flow and more efficiently manage the complex revenue and payment cycle and clinical information exchange processes by using our comprehensive suite of solutions.

We deliver our solutions and operate our business in four operating segments: (i) payer services, which provides solutions to commercial insurance companies, third party administrators and governmental payers; (ii) provider revenue cycle solutions, which provides solutions primarily to hospitals and large physician practices; (iii) ambulatory provider services, which provides solutions, both directly and through our channel partners, primarily to small physician practices, dentists, labs and other healthcare providers; and (iv) pharmacy services, which provides solutions to pharmacies, pharmacy benefit management companies, government agencies and other payers. Through our payer services segment, we provide payment cycle solutions that simplify the administration of

 

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healthcare related to insurance eligibility and benefit verification, claims management, payment integrity and payment distribution. Additionally, we provide consulting services through our payer services segment. Through our provider revenue cycle solutions segment, we provide revenue cycle management solutions, government program eligibility and enrollment services and provider payment integrity solutions that simplify providers’ revenue cycle and workflow, reduce related costs and improve cash flow. Through our ambulatory provider services segment, we provide, both directly and through our channel partners, revenue cycle management solutions and patient billing and payment services that simplify providers’ revenue cycle and workflow, reduce related costs and improve cash flow. Through our pharmacy services segment, we provide electronic prescribing and other electronic solutions related to prescription benefit claim filing, adjudication and management.

There are a number of company-specific initiatives and industry trends that may affect our transaction volumes, revenues, cost of operations and margins. As part of our strategy, we encourage our customers to migrate from paper-based claim, patient billing and payment, payment distribution and other transaction processing to electronic, automated processing in order to improve efficiency. Our business is aligned with our customers to support this transition, and as they migrate from paper-based transaction processing to electronic processing, even though our revenues for an applicable customer generally will decline, our margins and profitability will typically increase. For example, because the cost of postage is included in our revenues for patient billing and payment services (which is then also deducted as a cost of operations), when our customers transition to electronic processing, our revenues and costs of operations are expected to decrease as we will no longer incur or be required to charge for postage. As another example, as our payer customers migrate to exclusive or other comprehensive management services agreements with us, our electronic transaction volume usually increases while the rebates we pay and the per transaction rates we charge under these agreements are typically reduced.

Part of our strategy also includes the development and introduction of new solutions. Our new and updated solutions are likely to require us to incur development and engineering expenditures, both operating and capital, and related sales and marketing costs at levels greater than recent years’ expenditures in order to successfully develop and achieve market acceptance of such solutions. We also may acquire, or enter into agreements with third parties to assist us in providing, new solutions. For example, we offer our electronic payment solutions through banks or vendors who contract with banks and other financial service firms. The costs of these initiatives or the failure to achieve broad penetration in target markets with respect to new or updated solutions may negatively affect our results of operations, margins and cash flow. Because newly introduced solutions generally will have lower margins initially as compared to our existing and more mature solutions, our margins and our margin growth may be adversely affected on a percentage basis until these new solutions achieve scale and maturity.

In addition to our internal development efforts, we actively evaluate opportunities to improve and expand our solutions through strategic acquisitions. Our acquisition strategy focuses on identifying acquisitions that improve and streamline the business and administrative functions of healthcare. We believe our broad customer footprint allows us to deploy acquired solutions into our installed base, which, in turn, can help accelerate growth of our acquired businesses. We also believe our management team’s ability to identify acquisition opportunities that are complementary and synergistic to our business, and to integrate them into our existing operations with minimal disruption, will continue to play an important role in the expansion of our business and our growth. Our success in acquiring and integrating acquired businesses into our existing operations, the associated costs of such acquisitions, including integration costs, and the operating characteristics of the acquired businesses also may impact our results of operations and margins. Because the businesses we acquire sometimes have lower margins than our existing businesses, primarily as a result of their lack of scale and maturity, our margins on a percentage basis may be adversely affected in the periods subsequent to an acquisition from revenue mix changes and integration activities associated with these acquisitions.

We also expect to continue to be affected by general economic, regulatory and demographic factors affecting the healthcare industry. For several years, there has been pricing pressure in our industry, particularly as it relates to our claims management solutions, which has led and is expected to continue to lead to reduced prices for the same services. We have sought in the past and will continue to seek to mitigate pricing pressure by providing additional value-added solutions, increasing the volume of solutions we provide and managing our costs. In addition, significant changes in regulatory schemes, such as the updated Health Insurance Portability and Accountability Act of 1996, American Recovery and Reinvestment Act of 2009, the Patient Protection and Affordable Care Act (“ACA”) and other federal healthcare policy initiatives, impact our customers’ healthcare activities and can result in increased operating costs and capital expenditures for us. In particular, we believe the ACA will significantly affect the regulatory

 

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environment in which we and our customers operate by changing how healthcare services are covered, delivered and reimbursed through expanded coverage of uninsured individuals, reduced federal healthcare program spending, increased efforts to link federal healthcare program payments to quality and efficiency and insurance market reforms. Also, changes in federal and state reimbursement patterns and rates can impact the revenues in certain of our business lines, particularly our government program eligibility and enrollment solutions.

Demographic trends affecting the healthcare industry, such as population growth and aging or continued high unemployment rates as a result of recent adverse economic conditions, also could affect the frequency and nature of our customers’ healthcare transactional activity. The impact of such changes could impact our revenues, cost of operations and infrastructure expenses and thereby affect our results of operations and the way we operate our business. For example, an increase in the United States population, if such increase is accompanied by an increase in the United States population that has health benefits, or the aging of the United States population, which requires an overall increased need for healthcare services, may result in an increase in our transaction volumes which, in turn, may increase our revenues and cost of operations. Alternatively, a recurrence of the recent general economic downturn, which reduces the number of discretionary health procedures by patients, or a persistent high unemployment rate, which lessens healthcare utilization, may decrease or offset other growth in our transaction volumes, which, in turn, may adversely impact our revenues and cost of operations.

Recent Developments

Effective January 1, 2013, we reorganized our operating segments as payer services, provider revenue cycle solutions, ambulatory provider services and pharmacy services. This discussion and analysis related to prior periods has been restated to reflect our current organizational structure.

In April 2013, we amended the credit agreement (the “Senior Credit Agreement”) governing our senior secured term loan facility (the “Term Loan Facility”) and senior secured revolving credit facility (the “Revolving Facility”; together with the Term Loan Facility, the “Senior Credit Facilities”) to reprice the Senior Credit Facilities. Following this amendment, the interest rate on the Term Loan Facility is LIBOR plus 2.50%, compared to the previous interest rate of LIBOR plus 3.75%. The new interest rate on the Revolving Facility is LIBOR plus 2.50%, compared to the previous interest rate of LIBOR plus 3.50% (or 3.25% based on a specified first lien net leverage ratio). The Term Loan Facility remains subject to a LIBOR floor of 1.25%, and there continues to be no LIBOR floor on the Revolving Facility. In connection with the repricing, the Senior Credit Agreement also was amended to, among other things, eliminate the financial covenant related to the consolidated cash interest coverage ratio and modify the financial covenant related to the net leverage test by maintaining the required first lien net leverage ratio at its current level for the remaining term of the Senior Credit Facilities.

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

Our Revenues and Expenses

We generate virtually all of our revenue by using technology solutions to provide our customers services that automate and simplify business and administrative functions for payers, providers and pharmacies generally on either a per transaction, per document, per communication, per member per month, monthly flat-fee, contingent fee or hourly basis.

Cost of operations consists primarily of costs related to services we provide to customers and costs associated with the operation and maintenance of our networks. These costs primarily include postage and materials costs related to our patient billing and payment and payment distribution services, rebates paid to our channel partners and data communications costs, all of which generally vary with our revenues and/or volumes. Cost of operations also includes personnel costs associated with production, network operations, customer support and other personnel, facilities expenses and equipment maintenance, all of which vary less directly with our revenue and/or volumes due to the fixed or semi-fixed nature of these expenses.

 

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The largest component of our cost of operations is postage, which is incurred in our patient billing and payment and payment distribution services businesses and which is also a component of our revenue in those businesses. Our postage costs increase as our patient billing and payment services volumes increase and also when the United States Postal Service (“USPS”) increases postage rates. Postage rate increases, while generally billed as pass-through costs to our customers, affect our cost of operations as a percentage of revenue. In prior years, we have offset the impact of postage rate increases on cost of operations as a percentage of revenue through cost reductions from efficiency measures, including data communication expense reductions and production efficiencies. Though we plan to implement additional efficiency measures, we may not be able to offset the impact of postage rate increases in the future and, as a result, cost of operations as a percentage of revenue may increase if postage rate increases continue. Although the USPS historically has increased postage rates annually in most recent years, including in January 2013, the frequency and nature of such annual increases may not occur as regularly in the future.

Rebates are paid to channel partners for electronic and other volumes delivered through our network to certain payers and can be impacted by the number of exclusive or other comprehensive management services agreements we execute with payers, the associated rate structure with our payer customers, the success of our direct sales efforts to providers and the extent to which direct connections to payers are developed by our channel partners.

Our data communication expense consists of telecommunication and transaction processing charges.

Our material costs relate primarily to our patient billing and payment and payment distribution services volumes, and consist primarily of paper and printing costs.

Development and engineering expense consists primarily of personnel costs related to the development, management and maintenance of our current and future solutions. We may invest more in this area in the future as we develop new and enhance existing solutions.

Sales, marketing, general and administrative expense consists primarily of personnel costs associated with our sales, account management and marketing functions, as well as management, administrative and other shared corporate services related to the operations of our operating segments and overall business operations.

Our development and engineering expense and sales, marketing, general and administrative expense, while related to our current operations, also are affected and influenced by our future plans including the development of new solutions, business strategies and enhancement and maintenance of our infrastructure.

Our depreciation and amortization expense is related to depreciation of our property and equipment, including technology assets, and amortization of intangible assets acquired and recorded in conjunction with acquisition method accounting. As a result, the amount of depreciation and amortization expense is affected by the level of our recent investment in property and equipment and acquisition activity.

Our interest expense consists principally of cash interest associated with our long-term debt obligations and non-cash interest associated with the amortization of borrowing costs and discounts related to debt issuance. If market interest rates on the variable portion of our long-term debt increase in the future, and our long-term debt obligations remain stable or increase, our interest expense will increase.

Our income taxes consist of federal and state income taxes. These amounts include current income taxes payable, as well as income taxes for which the payment is deferred to future periods and dependent on the occurrence of future events. Our income tax expense may vary from the expense that would be expected based on statutory rates due principally to our organizational structure and differences in the book and tax basis of our investment in EBS Master LLC. The recognition of valuation allowances related to certain net operating loss carryovers also can affect our income tax expense.

 

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Significant Items Affecting Comparability

Certain significant items or events should be considered to better understand differences in our results of operations from period to period. We believe that the following items or events have had a significant impact on our results of operations for the periods discussed below or may have a significant impact on our results of operations in future periods:

Acquisitions and Divestitures

We actively evaluate opportunities to improve and expand our business through targeted acquisitions that are consistent with our strategy. On occasion, we also may dispose of certain components of our business that no longer fit within our overall strategy. Because of our acquisition activity, our results of operations may not be directly comparable among periods. The following summarizes our acquisition transactions since January 1, 2012 and affected segments:

 

Date

  

Business

  

Description

  

Affected Segment

May 2012            

   TC3 Health, Inc. (“TC3”)            Technology-enabled provider of cost containment and payment integrity solutions    Payer Services

June 2013

   Goold    Technology-enabled provider of pharmacy benefit and related services primarily to State Medicaid agencies    Pharmacy Services

Income Taxes

Our blended statutory federal and state income tax rate ranges from 37% to 40%. Our effective income tax rate, however, can be affected by several factors. The following table and subsequent commentary reconcile our federal statutory rate to our effective income tax rate, and the subsequent commentary describes the more significant of the reconciling factors:

 

     Six Months Ended
June 30, 2013
    Six Months Ended
June 30, 2012
 

Statutory United States federal tax rate

     35.0     35.0

State income taxes (net of federal benefit)

     4.3        (0.6

Other

     (0.4     (0.4
  

 

 

   

 

 

 

Effective income tax rate

     38.9     34.0
  

 

 

   

 

 

 

State Income Taxes—Our effective tax rate for state income taxes is generally impacted by changes in our uncertain tax positions and apportionment. In addition, during the six months ended June 30, 2013, we changed our methodology of estimating state income taxes from a separate state return basis to, where permitted by the state taxing authorities, a consolidated state return basis.

Stock-Based and Equity Compensation Expense

Beagle Parent Corp. (“Parent”) has granted equity-based awards to certain employees and directors to purchase shares of Parent common stock. In connection with these equity-based award grants, we incurred equity compensation expense of $1.8 million and $3.5 million for the three and six months ended June 30, 2013. No equity compensation expense was recognized for the three and six months ended June 30, 2012.

Amendments of the Senior Credit Agreement

Our interest expense primarily is affected by the amount of debt funding and the applicable variable interest rates, including a fixed spread, under our Senior Credit Agreement. In April 2012, we amended the Senior Credit Agreement to reprice the Senior Credit Facilities and borrow $80.0 million of additional term loans for general corporate purposes, including acquisitions. As a result of these amendments, the LIBOR-based interest rate applicable to the Senior Credit Facilities was generally reduced by 175 basis points. The Senior Credit Agreement was further amended in April 2013 to further reduce the LIBOR-based interest rate by an additional 125 basis points, and also to modify certain financial covenants.

 

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Critical Accounting Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if:

 

   

it requires assumptions to be made that were uncertain at the time the estimate was made; and

 

   

changes in the estimate or different estimates that could have been made could have a material impact on our consolidated results of operations and financial condition.

We believe the current assumptions and other considerations used to estimate amounts reflected in our unaudited condensed consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our unaudited condensed consolidated financial statements, the resulting changes could have a material adverse effect on our unaudited condensed consolidated results of operations and financial condition.

We believe there have been no significant changes during the three and six months ended June 30, 2013 to the items we disclosed as our critical accounting estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K.

 

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Results of Operations

The following table summarizes our consolidated results of operations for the three and six months ended months ended June 30, 2013 and 2012, respectively (amounts in thousands).

 

    Three Months Ended
June 30, 2013
    Three Months Ended
June 30, 2012
    Six Months Ended
June 30, 2013
    Six Months Ended
June 30, 2012
 
    Amount     % of
Revenue
    Amount     % of
Revenue
    Amount &n