e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-34435
EMDEON INC.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
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20-5799664
(I.R.S. Employer
Identification No.)
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3055 Lebanon Pike, Suite 1000
Nashville, TN
(Address of Principal
Executive Offices)
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37214
(Zip Code)
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(615) 932-3000
(Registrants Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Class A common stock, $0.00001 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
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 o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405) is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
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):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of Class A common stock and
Class B common stock held by non-affiliates of the
registrant on June 30, 2009, the last business day of the
registrants most recently completed second fiscal quarter,
is not applicable as the registrants common stock was not
publicly traded as of June 30, 2009. The aggregate market
value of Class A common stock and Class B common stock
held by non-affiliates of the registrant on March 11, 2010
was $497.7 million based on the closing sale price of the
Class A common stock on the New York Stock Exchange on such
date. Class B common stock is not publicly listed for trade
on any exchange or market system; however, Class B common
stock can be exchanged for Class A common stock on a
one-for-one
basis. Accordingly, the market value was calculated based on the
market price of Class A common stock. For purposes of the
foregoing calculation only, the registrant has assumed that all
officers and directors of the registrant are affiliates.
Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest
practicable date:
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Class
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Outstanding as of March 11, 2010
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Class A common stock, $0.00001 par value
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90,460,770
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Class B common stock, $0.00001 par value
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24,716,126
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DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Definitive Proxy Statement for
its 2010 Annual Meeting of Stockholders to be filed subsequently
with the Securities and Exchange Commission are incorporated by
reference into Part III hereof.
Emdeon
Inc.
Table of
Contents
FORWARD-LOOKING
STATEMENTS
This Annual Report on
Form 10-K
(Annual Report) contains forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. 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 Annual
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
Part I, Item 1A. and elsewhere in this Annual Report.
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 Part I, Item 1A. and elsewhere in
this Annual Report, 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 Annual Report.
Unless stated otherwise or the context otherwise requires,
references in this Annual Report to we,
us, our, Emdeon and the
Company refer to Emdeon Inc. and its subsidiaries.
1
PART I
Overview
We are a leading provider of revenue and payment cycle
management solutions, connecting payers, providers and patients
in the U.S. healthcare system. Our product and service
offerings 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, clinical exchange capabilities, claims
management and adjudication, payment distribution, payment
posting and denial management and patient billing and payment
processing. Through the use of our comprehensive suite of
products and services, our customers are able to improve
efficiency, reduce costs, increase cash flow and more
efficiently manage the complex revenue and payment cycle
process. We believe our solutions are critical to payers and
providers as they continue to face increasing financial and
administrative pressures.
We deliver our solutions and operate our business in three
business segments: (i) payer services, which provides
services to commercial insurance companies, third party
administrators and governmental payers; (ii) provider
services, which provides services to hospitals, physicians,
dentists and other healthcare providers, such as labs and home
healthcare providers; and (iii) pharmacy services, which
provides services to pharmacies, pharmacy benefit management
companies and other payers. Through our payer services segment,
we provide payment cycle solutions, both directly and through
our network of companies with which we have contracted,
including healthcare information system vendors, such as
physician practice management system, hospital information
system and electronic medical record vendors, to market and sell
some of our products and services (channel
partners), that simplify the administration of healthcare
related to insurance eligibility and benefit verification,
claims filing and claims and payment distribution. Through our
provider services segment, we provide revenue cycle management
solutions, patient billing and payment services and clinical
exchange capabilities, both directly and through our channel
partners, that simplify providers revenue cycle, reduce
related costs and improve cash flow. Through our pharmacy
services segment, we provide solutions to pharmacies and
pharmacy benefit management companies and government agencies
related to prescription benefit claim filing, adjudication and
management, as well as electronic prescriptions.
Our services are delivered primarily through recurring,
transaction-based processes that leverage our revenue and
payment cycle network, the single largest financial and
administrative information exchange in the U.S. healthcare
system. Our revenue and payment cycle network currently reaches
approximately 1,200 payers, 500,000 providers, 5,000 hospitals,
81,000 dentists and 55,000 pharmacies. In 2009, we processed a
total of approximately 5.3 billion healthcare-related
transactions, including approximately one out of every two
commercial healthcare claims delivered electronically in the
United States. We have developed our network of payers and
providers over 25 years and connect to virtually all
private and government payers, claim-submitting providers and
pharmacies making it difficult, expensive and time-consuming for
competitors to replicate our market position. Our network and
related products and services are designed to easily integrate
with our customers existing technology infrastructures and
administrative workflow and typically require minimal capital
expenditure on the part of the customer, while generating
significant savings and operating efficiencies.
Our solutions drive consistent automated workflows and
information exchanges that support key financial and
administrative processes. Our market leadership is demonstrated
by the long tenure of our payer and provider relationships,
which for our 50 largest customers in 2009 averaged nearly
14 years as of December 31, 2009. We are the exclusive
provider of certain electronic eligibility and benefits
verification
and/or
claims management services under managed gateway agreements
(MGAs) for nearly 400 payer customers (approximately
25% of all U.S. payers). Similarly, we are the sole
provider of certain payment and remittance advice distribution
services for approximately 780 of our payer customers
(approximately 65% of all U.S. payers).
Our business continues to benefit from several healthcare
industry trends that we believe will increase the overall number
of healthcare transactions and the complexity of the
reimbursement process. We believe that payers and providers will
increasingly seek solutions that utilize technology and
outsourced process expertise to automate and simplify the
administrative and clinical processes of healthcare to enhance
their profitability, while minimizing errors and reducing costs.
Our critical products and services enable the healthcare system
to operate more efficiently and help to mitigate the continuing
trend of cost escalation across the industry.
2
Recent
Development
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On March 16, 2010, we entered into a definitive agreement
to acquire Healthcare Technology Management Services, Inc., a
management consulting company focused primarily on the
healthcare payer market, for consideration of $11.0 million
at closing, to be paid $8.5 million in cash and
$2.5 million in our Class A common stock, and
additional contingent payments of $0 to $14.0 million in
cash based upon the financial performance of the acquired
business for the three year period following the closing. This
acquisition will allow us to assist payers in evaluating their
existing information technology strategies, systems and
technologies in order to help our customers implement effective
solutions.
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Organizational
Structure and Corporate History
The Company is a Delaware corporation. Our predecessors have
been in the healthcare information solutions business for
approximately 25 years. We have grown both organically and
through targeted acquisitions in order to offer the full range
of products and services required to automate the patient
encounter administration process.
A brief history of our organizational structure is as follows:
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Prior to November 2006, the group of companies that comprised
Emdeon Business Services (EBS) was owned by HLTH
Corporation (HLTH). EBS Master LLC (EBS
Master) was formed by HLTH to act as a holding company for
EBS. EBS Master, through its 100% owned subsidiary, Emdeon
Business Services LLC (EBS LLC), owns EBS.
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In September 2006, we were formed by General Atlantic LLC
(General Atlantic) as a Delaware limited liability
company for the purpose of making an investment in EBS Master.
In November 2006, we acquired a 52% interest in EBS Master from
HLTH (the 2006 Transaction). HLTH retained a 48%
interest in EBS Master upon closing of the 2006 Transaction.
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In February 2008, HLTH sold its remaining 48% interest in EBS
Master (the 2008 Transaction) to affiliates of
General Atlantic and Hellman & Friedman LLC
(H&F). As a result, following the 2008
Transaction, EBS Master was owned 65.77% by affiliates of
General Atlantic (including us), who we sometimes refer to
herein as the General Atlantic Equityholders, and
34.23% by affiliates of H&F, who we sometimes refer to
herein as the H&F Equityholders. The General
Atlantic Equityholders and H&F Equityholders are sometimes
collectively referred to herein as the Principal
Equityholders.
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In connection with our initial public offering
(IPO), we were converted into a Delaware corporation
and changed our name to Emdeon Inc. in September 2008 and
completed a corporate restructuring on August 5, 2009
(collectively, the reorganization transactions).
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On August 11, 2009, we priced the IPO of our Class A
common stock and began trading on the New York Stock Exchange
(NYSE) under the symbol EM.
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A brief description of businesses we have acquired since
January 1, 2009 is as follows:
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In June 2009, we acquired The Sentinel Group, a healthcare fraud
and abuse management services provider. We acquired The Sentinel
Group to expand our portfolio of offerings to help identify
potential financial risks earlier in the revenue and payment
cycle, creating efficiencies for payers and cost savings for
both payers and providers, and to enhance our data and
analytical capabilities.
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In July 2009, we acquired eRx Network, L.L.C. (eRx),
a provider of electronic pharmacy healthcare solutions. We
acquired eRx to accelerate our development of solutions for our
pharmacy customers, including integrated tools for managing
efficiency and profitability through innovative claims
management, and provide us with an increased presence in
ePrescribing.
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In January 2010, we acquired FutureVision Investment Group,
L.L.C. (FVTech), a provider of outsourced services
specializing in electronic data conversion and information
management solutions. This acquisition will allow us to
electronically process virtually all patient and third party
healthcare payments regardless of the format in which payments
are submitted by combining FVTechs document conversion
technology with our broad connectivity network and revenue cycle
management solutions.
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3
Our
Industry
Payer
and Provider Landscape
Healthcare expenditures are a significant component of the
U.S. economy, representing $2.3 trillion in 2008, or 16.2%
of GDP, and are expected to grow at 6.2% per year to $4.4
trillion, or 20% of GDP, in 2018. We believe the cost of
healthcare administration in the U.S. was approximately
$360 billion in 2008, or 17% of total healthcare
expenditures, and that $150 billion of these costs were
spent by payers and providers on billing and insurance
administration-related activities. We believe the increased need
to slow the rise in healthcare expenditures, particularly during
the current period of U.S. economic weakness, increased
financial pressures on payers and providers and public policy
initiatives to reduce healthcare administrative inefficiencies
should accelerate adoption of our solutions.
Healthcare is generally provided through a fragmented industry
of providers that have, in many cases, historically
under-invested in administrative and clinical information
systems. Within this universe of providers, there are currently
over 5,700 hospitals and over 560,000 office-based doctors.
Approximately 74% of the office-based doctors are in small
physician practices consisting of six or fewer physicians and
have fewer resources to devote to administrative and financial
matters compared to larger practices. In addition, providers can
maintain relationships with 50 or more individual payers, many
of which have customized claim requirements and reimbursement
procedures. The administrative portion of healthcare costs for
providers is expected to continue to expand due in part to the
increasing complexity in the reimbursement process and the
greater administrative burden being placed on providers for
reporting and documentation relating to the care they provide.
These complexities and other factors are compounded by the fact
that many providers lack the technological infrastructure and
human resources to bill, collect and obtain full reimbursement
for their services, and instead rely on inefficient,
labor-intensive processes to perform these functions. These
manual and paper-based processes are more prone to human error
and administrative inefficiencies, often resulting in increased
costs and uncompensated care. As a result, we believe payers and
providers will continue to seek solutions that automate and
simplify the administrative and clinical processes of
healthcare. We benefit from this trend given our expansive suite
of administrative product and service offerings.
At the same time, payers are continually exploring new ways to
increase administrative efficiencies in order to drive greater
profitability and mitigate the impact of decelerating premium
increases and mandated cuts in federal funding to programs such
as Medicare Advantage. Payment for healthcare services generally
occurs through complex and frequently changing reimbursement
mechanisms involving multiple parties. The proliferation of
private-payer benefit plan designs and government mandates (such
as the Health Insurance Portability and Accountability Act of
1996 (HIPAA) format and data content standards)
continues to increase the complexity of the reimbursement
process. For example, preferred provider organizations
(PPOs), health maintenance organizations, point of
service plans and high-deductible health plans
(HDHPs) now cover 97% of employer-sponsored health
insurance beneficiaries and are more complex than traditional
indemnity plans, which covered 73% of healthcare beneficiaries
in 1988. In addition, industry estimates indicate that between
$68 billion and $226 billion in healthcare costs are
attributable to fraud each year. Despite significant
consolidation among private payers in recent years, claims
systems have often not been sufficiently integrated, resulting
in persistently high costs associated with administering these
plans. Government payers also continue to introduce more complex
rules to align payments with the appropriate care provided,
including the expansion of Medicare diagnosis-related group
codes and the implementation of the Recovery Audit Contractor
program, both of which have increased administrative burdens on
providers by requiring more detailed classification of patients
and care provided in order to receive and retain associated
Medicare reimbursement. Further, because we believe there is an
increasing number of drug prescriptions authorized by providers
and an industry-wide shortage of pharmacists, we believe
pharmacists must increasingly be able to efficiently process
transactions in order to maximize their productivity and better
control prescription drug costs. Most payers, providers and many
independent pharmacies are not equipped to handle this increased
complexity and the associated administrative challenges alone.
Increases in patient financial responsibility for healthcare
expenses have put additional pressure on providers to collect
payments at the patient point of care since more than half of
every one percent increase in patient self-pay becomes bad debt.
Several market trends have contributed to this growing bad debt
problem, including the shift towards HDHP and consumer-oriented
plans (which grew to 8.0 million in January 2009,
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up from 6.1 million in January 2008, 4.5 million in
January 2007 and 3.2 million in January 2006), higher
deductibles and co-payments for privately insured individuals
and the increasing ranks of the uninsured (46.3 million or
15.4% of the U.S. population in 2009). We believe the
breadth of our network, coupled with our solutions, positions us
to help providers estimate financial liability and significantly
improve collection at the point of care.
The
Revenue and Payment Cycle
The healthcare revenue and payment cycle consists of all the
processes and efforts that providers undertake to ensure they
are compensated properly by payers for the medical services
rendered to patients. For payers, the payment cycle includes all
the processes necessary to facilitate provider compensation and
use of medical services by members. These processes begin with
the collection of relevant eligibility, financial and
demographic information about the patient before care is
provided and end with the collection of payment from payers and
patients. Providers are required to send invoices, or claims, to
a large number of different payers, including government
agencies, managed care companies and private individuals in
order to be reimbursed for the care they provide.
We believe payers and providers spend approximately
$150 billion annually on these revenue and payment cycle
activities. Major steps in this process include:
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Pre-Care/Medical Treatment: The provider
verifies insurance benefits available to the patient, ensures
treatment will adhere to medical necessity guidelines and
confirms patient personal financial and demographic information.
In addition, in order to receive reimbursement for the care they
provide, providers are often required by payers to obtain
pre-authorizations before patient procedures or in advance of
referring patients to specialists for care. Co-pay and other
self-pay amounts are also collected. The provider then treats
the patient and documents procedures conducted and resources
used.
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Claim Management/Adjudication: The provider
prepares and submits paper or electronic claims to a payer for
services rendered directly or through a clearinghouse, such as
ours. Before submission, claims are validated for payer-specific
rules and corrected as necessary. The payer verifies accuracy,
completeness and appropriateness of the claim and calculates
payment based on the patients health plan design, out of
pocket payments relative to established deductibles and the
existing contract between the payer and provider.
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Payment Distribution: The payer sends payment
and a payment explanation (i.e., remittance advice) to the
provider and sends an explanation of benefits (EOB)
to the patient.
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Payment Posting/Denial Management: The
provider posts payments internally, reconciles payments with
accounts receivable and submits any claims to secondary insurers
if secondary coverage exists. The provider is responsible for
evaluating denial/underpayment of a claim and re-submitting it
to the payer if appropriate.
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Patient Billing and Payment: The provider
sends a bill to the patient for any remaining balance and posts
payments received.
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Recent
Industry Trends
We believe recent federal initiatives to control the rising cost
of healthcare through the elimination of administrative and
clinical inefficiencies will increase payer and provider
adoption of healthcare information systems and electronic
transactions. For example, in July 2008, Congress passed
legislation providing financial incentives to Medicare providers
using electronic prescribing. In addition, the American Recovery
and Reinvestment Act of 2009 (ARRA) included
approximately $19 billion in federal subsidies to
incentivize the implementation and meaningful use of electronic
health records. Some industry reports estimate that the federal
government will spend more than $35 billion on promoting
healthcare information technology through ARRA over the next
decade. In addition, the integration of electronic health
records with computerized physician order entry applications,
such as electronic prescribing, may also promote greater
utilization of electronic transactions. We believe that
increasing provider adoption of electronic prescribing has
contributed to making it one of the fastest growing transaction
types in our business. Currently, we believe only approximately
18% of all prescriptions are transmitted electronically.
Moreover, we believe we are positioned to benefit from federal
policy objectives to promote cost effective healthcare and
reduce fraud and abuse. We believe our historical claims data,
combined with our healthcare fraud and abuse management
services,
5
positions us to benefit from government proposals and our
customers initiatives designed to promote the detection
and prevention of improper or fraudulent healthcare payments.
Reducing administrative costs continues to garner significant
public policy attention. A key component of recent healthcare
reform initiatives includes a focus on reducing inefficiency and
increasing quality of care. For example, separate bills passed
in the U.S. House of Representatives and Senate in 2009, as
well as the most recent White House proposal in February 2010,
include administrative simplification provisions that would
accelerate adoption of standard electronic transactions,
including electronic funds transfer. In late 2008, we launched
the U.S. Healthcare Efficiency
Indextm
(the Index), an industry-wide transparency and
efficiency initiative that identifies and tracks the transition
of specific transactions from
manual-to-electronic-based
formats in order to raise awareness of cost saving opportunities
and the immediate benefits of adopting standard electronic
transactions. The Index estimates that the transition to
electronic medical claims and payment-related transactions could
produce over $30 billion annually in administrative cost
savings.
6
Our
Market Opportunity and Solutions
Opportunities exist to increase efficiencies and cash flow
throughout many steps of the healthcare revenue and payment
cycle. The breadth of our revenue and payment cycle network and
solutions is illustrated in the chart below:
Products
and Services
Our business operations are organized into three reportable
segments: payer services, provider services and pharmacy
services. The selected financial information for each operating
segment is provided in Note 24
7
in the accompanying Notes to Consolidated Financial Statements
contained in Part II, Item 8 of this Annual Report. A
description of our payer, provider and pharmacy solutions
follows:
PAYER
PRODUCTS AND SERVICES
Pre-Care
and Claim Management/Adjudication
Our web-based pre-care solutions interface directly with the
payers own systems allowing providers to process insurance
eligibility and benefits verification tasks prior to the
delivery of care without the need for live payer/provider
interaction. Our claim submission solutions include electronic
data interchange (EDI) and
paper-to-EDI
conversion of insurance claims through high-volume imaging,
batch and real-time healthcare transaction information exchanges
and intelligent routing between payers and our other business
partners. We also validate payer adjudication rules and edit
claims for proper format, including standards in accordance with
HIPAA, before submission to minimize manual processes associated
with pending claims. Our healthcare fraud and abuse management
services business combines sophisticated data analytics
solutions and technology with an experienced team of fraud
investigators to help identify potential financial risks earlier
in the revenue and payment cycle and prevent payment of
fraudulent and abusive claims, creating efficiencies and cost
savings for payers and providers.
The following is a list and brief description of our payer
pre-care and claim management/adjudication products and services:
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Emdeon CareComm
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Enables payers to engage their provider network through pre-care
messaging that leverages a real-time eligibility connection. |
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Emdeon Transform |
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High-volume imaging, data capture and transaction/forms
processing software capable of scanning any form, claim or
document to enable electronic transaction processing. |
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Emdeon
Paper-to-EDI
Conversion |
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Converts paper claims to electronic formats capable of
submission to payer adjudication systems. This service may also
include full mailroom outsourcing. |
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Emdeon Claims Connection |
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A direct connectivity service for claims transactions. |
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Emdeon Eligibility |
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Provides network connection via HIPAA-standard formats
supporting eligibility inquiry and response, claim status, find
provider, healthcare services review request and response,
healthcare services review inquiry and response and claim
financial inquiry. |
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Emdeon Hosted Eligibility |
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Offers payer organizations the functionality for real-time
healthcare transaction exchange in HIPAA-standard formats and
enables real-time eligibility and benefits inquiry and response
capability. |
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Emdeon Patient Responsibility
Estimatorsm |
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An extension of Emdeons eligibility services which
estimates the patients
out-of-pocket
responsibility. |
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Emdeon Electronic Remittance Advice |
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Provides Emdeon network connection via HIPAA-standard format
supporting electronic remittance advice (ERA). |
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Emdeon Advanced Claiming |
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Improves the efficiency of the payment settlement cycle and
lowers processing
cost-per-claim
by providing intelligent routing between payers, PPOs and other
business partners and applying payer-specific pre-adjudication
services to all claims. |
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Emdeon
Visionsm
for Claim Management |
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A web-based application that offers payers claim-level views
into the electronic claim filing process from claim submission
to Emdeon through delivery to the payer. |
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Emdeon Third-Party Liability Analysis |
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Manages the process of mapping Medicaid claims data to
commercial payers eligibility rosters. Helps Medicaid
recover overpaid |
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claim dollars and limit future overpayments by identifying
commercial payers with primary coordination of benefits
responsibility. |
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Emdeon Fraud Prevention Services |
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Analyzes claims data to identify and prevent potential
fraudulent or abusive activity. |
Payment
Distribution
Our payment and remittance distribution solutions facilitate the
paper and electronic distribution of payments and payment
related information by payers to providers, including EOBs to
patients. Because of the breadth and scale of our connectivity
to both payers and providers, our payer customers can realize
significant print and operational cost savings through the use
of either electronic payment and remittance products or our
high-volume co-operative print and mail solutions to
reduce postage and material costs. In addition, we offer
electronic solutions that integrate with our print and mail
platform to drive the conversion to electronic payment and
remittance. We expect to see further transition from paper based
processes to electronic processes over time because of the
substantial cost savings available to payers by adopting
electronic payment, remittance advice and EOB distribution.
The following is a list and brief description of our payer
payment distribution products and services:
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Emdeon Printing and Fulfillment |
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Print and mail service that enables payers to realize postage
and print savings through
state-of-the-art
fulfillment capabilities and efficient management of print and
mailroom processes. |
|
Emdeon Healthpayers USA Postage Cooperative |
|
Consolidates communications to providers, including EOBs,
payments and correspondence, across all of a providers
contracted payers. |
|
Emdeon ePayment |
|
Offers payers the ability to distribute payments to providers
electronically including online access to ERA and payment
information. |
PROVIDER
PRODUCTS AND SERVICES
Pre-Care/Medical
Treatment
Our patient eligibility and verification solutions, including
automated referral approval applications, assist our provider
customers in determining a patients current health
benefits levels and also integrating other information to help
determine a patients ability to pay, as well as the
likelihood of charity care reimbursement. These solutions help
to mitigate a providers exposure to bad debt expense by
providing clarity into a patients insurance coverage,
ultimate
out-of-pocket
responsibility and ability to pay. As part of the medical
treatment process, providers may use our clinical exchange
capabilities to order and access lab reports and for
ePrescribing.
The following is a list and brief description of our provider
pre-care/medical treatment products and services:
|
|
|
Emdeon Assistant |
|
Simplifies patient registration through real-time automation of
patient eligibility and verification tasks. Includes the
capability to verify patient addresses and provide credit
scoring. |
|
Emdeon Patient Responsibility
Estimatorsm |
|
An extension of Emdeons eligibility services which
estimates the patients
out-of-pocket
responsibility by combining contract rate, treatment and
benefits information. |
|
Emdeon Revenue & Reimbursement Analytics |
|
Pre-care batch screenings of patient account information which
allows providers to identify insurance eligible accounts in
their self-pay roster to increase revenue collection and reduce
bad debt expense. |
|
Emdeon Provider Direct |
|
Direct connectivity to the Emdeon network for insurance
eligibility and benefits transactions. |
9
|
|
|
Emdeon Application & Imaging Manager |
|
Automates Medicaid and charity care applications to streamline
workflow, reduce errors and save time for hospitals and other
providers that help patients fill out these applications. |
|
Emdeon Office |
|
Web-based service with the ability to process insurance
eligibility and benefits verification tasks, as well as process
claims for payers connected to the Emdeon network. |
|
Emdeon POS |
|
Point-of-service
terminals for verifying patient insurance and benefits. |
|
Emdeon Dental Direct Solution |
|
A software application that allows dental practices to process
insurance eligibility verification and check claim status
through the Emdeon network. |
|
Emdeon Dental Provider Services |
|
A web-based application designed to provide a simplified,
end-to-end,
single source solution to dental offices, allowing real-time
eligibility and benefits verification and claim status tracking
by connecting users to the Emdeon network of dental payers. |
|
Emdeon Vendor Connect |
|
Direct connectivity to the Emdeon network for insurance
eligibility and benefits, claims processing, claim status and
ERAs for vendors. |
|
Emdeon Clinician |
|
Order entry and reports distribution of any clinical
documentation. Allows physicians and office staff to process lab
orders and access laboratory reports, transcription reports,
radiology reports, face sheets and images from any computer that
has Internet access. |
|
Emdeon ClinicianRx |
|
A web-based ePrescribing solution. Using a personal digital
assistant or secure Internet browser, prescribers have access to
complete medication histories, drug formularies and drug
information at the
point-of-care. |
Claim
Management/Adjudication
Our claims management solutions can be delivered to a provider
via our web-based direct solutions or through our network of
channel partners. In either case, our claim management solutions
leverage our industry leading payer connectivity to deliver
consistent and reliable access to virtually every payer in the
United States. Our solutions streamline reimbursement by
providing (i) tools to improve provider workflow,
(ii) tools to edit claims prior to submission and identify
errors that delay reimbursement and (iii) robust reporting
to providers in order to reduce claim rejections and denials.
The following is a list and brief description of our provider
claim management/adjudication products and services:
|
|
|
Emdeon Claim Master |
|
A web-based billing management solution that allows providers to
manage their billing processes across all facilities. |
|
Emdeon Office |
|
Web-based service with the ability to submit claims to payers
connected to the Emdeon network. |
|
Emdeon Provider Direct |
|
Direct connectivity to the Emdeon network for claims processing. |
|
Emdeon Medicare Secondary Billing-Accelerated |
|
Allows accelerated processing of secondary claims once the
electronic remittance advice is received. Data is automatically
updated and the secondary claim is produced. |
|
Emdeon
72-Hour
RuleCheck |
|
Provides a means of checking Medicare claims for
72-hour
billing conflicts before submission of claim or after
adjudication. |
|
Emdeon Dental Direct Solution |
|
A software application that allows dental practices to submit
claims and check claim status through the Emdeon network. |
10
|
|
|
Emdeon Vendor Connect |
|
Direct connectivity to the Emdeon network for insurance claims
management and claim status for vendors. |
|
Emdeon Revenue & Reimbursement Analytics |
|
Post-care batch screenings of patient account information which
allows providers to identify insurance eligible accounts in
their self-pay roster to increase revenue collection and reduce
bad debt expense. |
|
Emdeon Medi-Cal
Follow-Up
Services |
|
Business process outsourcing services to process denials for
providers submitting Medi-Cal institutional claims. |
|
Emdeon Payment Manager |
|
A web-based payment and reconciliation solution that provides
visibility of remittance data and facilitates the electronic
transfer of funds from the Emdeon payer network to the provider. |
|
Emdeon Automated Secondary Claim Processing |
|
Automatically generates and prints collated secondary claims and
the remittance advice if secondary insurance coverage is
provided. A copy of the remittance advice from the primary payer
is collected and automatically triggers the creation of a
secondary claim with the required attachments. |
|
Emdeon
VisionSM
for Claim Management |
|
A web-based application designed to give providers simplified,
end-to-end
visibility into the claims management cycle. |
Payment
Posting/Denial Management
Our web-based denial management solutions allow providers to
analyze remittance advice or payment data and reconcile it with
the originally submitted claim to determine whether proper
reimbursement has been received. This solution allows providers
to efficiently appeal denials and resubmit claims in a timely
manner, provides insight into patterns of denials and enables
the establishment of procedures that can reduce the number of
inaccurate claims submitted in the future. Our payment posting
solution automates the labor intensive, paper-based payment
reconciliation and manual posting process, which we believe
saves providers time and improves accuracy. As a result of new
capabilities acquired in connection with the FVTech acquisition,
we have the ability to intercept paper payments from both third
party payers and patients and convert them into automated
workflows which can be reconciled and posted.
The following is a list and brief description of our provider
payment posting/denial management products and services:
|
|
|
Emdeon AccuPost |
|
Works with administrative systems to interpret ERA and
automatically post payments directly to the proper patient
accounts. |
|
Emdeon Denial Manager |
|
Allows providers to organize and manage remittance inventory,
denials and underpayments, and report and view denied and
adjusted amounts. |
|
Emdeon Medicare Manager/DDE Plus |
|
Overall management (viewing, prioritizing, sorting) of
suspended, rejected,
returned-to-provider,
paid and denied Medicare Part A claims. Allows for
correction of claims within the Medicare direct data entry
(DDE) system via the Internet. |
|
Emdeon Wholesale Lockbox |
|
Electronic payment processing capabilities for providers, which
eliminates the need to sort mail, open and post payments, create
deposit tickets or make bank deposits. |
Patient
Billing and Payment
Our patient billing and payment solutions provide an efficient
means for providers to bill their patients for outstanding
balances due, including outsourced print and mail services for
patient statements and other communications, as well as email
updates to patients and online bill presentment and payment
functionality. We believe our solutions are more timely,
cost-effective and consistent than in-house print and mail
operations and improve patient collections. Our patient payment
lockbox allows providers to efficiently process patients
11
paper payments, reconcile them to the original bill and
automatically post these payments. Our eCashiering and Merchant
Services solutions allow providers to collect payments from
patients at the
point-of-service
or online.
The following is a list and brief description of our provider
patient billing and payment products and services:
|
|
|
Emdeon Patient Connect |
|
Provides a bundled offering of patient billing and payment
solutions, including Emdeon ExpressBill Services, Emdeon Return
Mail Manager, Emdeon Patient Pay Online, Emdeon eCashiering and
Emdeon Document Archive. |
|
Emdeon ExpressBill Services |
|
Provides outsourced print and mail services for patient
statements, invoices and other patient communications. |
|
Emdeon Return Mail Manager |
|
Automates the skip tracing process of undeliverable mail in
order to eliminate return mail handling for our customers. |
|
Patient Pay Online |
|
Allows patients to receive email updates linking them to a
secure section of their providers existing website where
they can view, manage and pay their accounts online. |
|
Emdeon eCashiering |
|
Provides an integrated view of all patient payment activity and
web-based access to the entire patient account, enabling
real-time processing of all credit card, check card and
automatic clearing house transactions. |
|
Emdeon Merchant Services |
|
Secure and reliable debit and credit card processing solution. |
|
Emdeon Document Archive |
|
24/7 desktop file retrieval and viewing capabilities allow
providers to view statements and documents online that mirror
those sent to their patients. |
|
Emdeon Patient Lockbox |
|
Provides the ability to receive patient paper payments,
reconcile them to the original billing, deposit payments and
automatically post to accounts receivable. |
|
Emdeon Patient Communications |
|
Statement inserts and other custom printing. |
PHARMACY
PRODUCTS AND SERVICES
Prescription
Benefits Administration (Payers)
Our prescription solutions provide claims processing and other
administrative services for pharmacy payers that are conducted
online, in real-time, according to client benefit plan designs
and present a cost-effective alternative to an in-house pharmacy
claims adjudication system. Our offerings also allow payers to
directly manage more of their pharmacy benefits and include
pharmacy claims adjudication, network and payer administration,
client call center service and support, reporting, rebate
management, as well as implementation, training and account
management.
The following is a list and brief description of our pharmacy
prescription benefits administration (payers) products and
services:
|
|
|
Emdeon SelectRx |
|
Provides real-time claims adjudication in support of
payers in-house prescription benefit programs, including
managed care, discount cash, workers compensation and
voucher/coupon programs. This solution can be augmented with
additional services as needed that are designed to help payers
better control prescription drug costs, including rebate
management, network administration, mail order and specialty and
customer service call center. |
12
Claims
Management and Adjudication (Providers)
Our pharmacy claims, revenue management and ePrescribing
solutions provide pharmacies and providers with integrated tools
for managing efficiency and profitability through innovative
claims management, business intelligence and network
infrastructure. We believe our pharmacy provider products and
services improve pharmacy workflow and customer service,
increase operational efficiency and patient safety, and build
pharmacy revenue and customer loyalty.
The following is a list and brief description of our pharmacy
claims management and adjudication (providers) products and
services:
|
|
|
eRx Connect |
|
Third party claim switching service, which includes real-time
tools for support and monitoring, to all payers covering
pharmacy benefit programs. |
|
eRx Edit |
|
Enables pharmacies to receive real-time pre and post edits to
improve third party reimbursements and in-store productivity. |
|
eRx Pad |
|
Enables pharmacies to exchange secure electronic transactions
with physicians, including new prescriptions, refill requests
and responses and medication change requests through intelligent
routing capabilities. |
|
eRx Print to Pharmacy |
|
Real-time patient printout at the
point-of-service,
including coupons and/or other patient education documents. |
|
eRx Medicare DME |
|
Enables electronic submission of Medicare Part B claims. |
|
eRx Medicaid DME |
|
Enables electronic submission of Medicaid durable medical
equipment (DME) claims. |
|
eRx Flu |
|
Enables electronic submission of Medicare Part B
vaccination claims. |
Payment
Posting and Denial Management (Providers)
Our payment posting and denial management solutions offer
pharmacies efficient ways to monitor and track remittance and
third party payment information, as well as Medicaid and
Medicare denial claims, which we believe allows our pharmacy
customers to improve their collections.
The following is a list and brief description of our pharmacy
payment posting and denial management (providers) and
adjudication (providers) products and services:
|
|
|
eRx Reconciliation |
|
Enables pharmacies to monitor and track payments of third party
sales, remittance and deposit information. Provides online tools
and reports to identify payer issues and allow pharmacies to
view sales and payment, aging and partial pay reports. |
|
eRx Recovery |
|
Provides comprehensive denial management service for pharmacies
billing Medicare and select Medicaid plans. |
Customers
We generally provide our products and services to our payer and
pharmacy customers on a per-transaction or per-document basis
and to our provider customers on a per-transaction, per-document
or monthly flat-fee basis. Our contracts with our payer,
provider and pharmacy customers are generally one to three years
in term and automatically renew for successive terms unless
terminated. We have also entered into MGAs with nearly 400 of
our payer customers under which we are the exclusive provider of
certain eligibility and benefit verification
and/or
claims management services. MGAs generally have terms of three
years and renew automatically for successive terms unless
terminated.
13
Payer
Services
The payer market is comprised of more than 1,200 payers across
four main segments: Medicare, Medicaid, Blue Cross Blue Shield
fiscal intermediaries and private insurance companies. We are
directly connected and provide services to virtually all payers
offering electronic transaction connectivity services. We also
serve the third party administrator market with
print-and-mail
payment and remittance distribution services and the PPO market
with intelligent claim capture and routing services. For the
year ended December 31, 2009, our top 10 payer customers
represented 14.5% of our total revenues and no payer customer
accounted for more than 2% of our total revenues.
Provider
Services
The provider market is composed of three main constituents:
physicians, hospitals and dentists. We currently have
contractual or submitter relationships, directly or through our
channel partners, with approximately 260,000 physicians, 2,700
hospitals and 81,000 dentists. For the year ended
December 31, 2009, our top 10 provider customers
represented 11.5% of our total revenues and no provider customer
accounted for more than 4.8% of our total revenues.
Pharmacy
Services
The pharmacy market is composed of more than 55,000 chains and
independent pharmacies, as well as prescription benefits
solutions marketed directly to payers. We are connected and
provide services to virtually all pharmacies utilizing
electronic transaction connectivity services. For the year ended
December 31, 2009, no pharmacy services customer accounted
for more than 2.1% of our total revenues.
Marketing
and Sales
Our ability to grow the number of healthcare industry
constituents that connect to our network and create an
integrated, comprehensive product and service offering is
critical to our success. Marketing activities for our payer,
provider and pharmacy solutions include direct sales, targeted
direct marketing, advertising, tradeshow exhibits, provider
workshops, web-based marketing activities,
e-newsletters
and conference sponsorships.
As of December 31, 2009, our dedicated payer sales
organization was comprised of 26 sales professionals that sell
our services directly to payers, as well as 18 account managers
that are responsible for managing our ongoing payer
relationships and cross-selling additional solutions to our
existing payer clients.
As of December 31, 2009, direct sales for provider services
are accomplished by a team of 108 professionals that are focused
primarily on sales to larger customers, such as hospitals,
clinics and laboratories, as well as inside sales
(telemarketing) to smaller physician offices.
We market and distribute our pharmacy services solutions
directly to chains and independent pharmacies. As of
December 31, 2009, we had a sales team of 12 sales
professionals that are focused primarily on retail pharmacies,
retail chains, software vendors and distributors. In addition,
we sell prescription benefits solutions directly to payers that
are looking for an alternative to maintaining an in-house
pharmacy claims adjudication system.
As of December 31, 2009, we also had over 600 channel
partner relationships. Our channel partners include physician
and dental practice management system vendors, hospital
information system vendors, pharmacy system vendors and other
vendors that provide software and services to providers. We
integrate our revenue and payment cycle management services into
these channel partners software solutions for distribution
to their provider customers. As of December 31, 2009, we
had a team of 22 professionals that actively manage these
relationships to increase distribution effectiveness. Under the
agreements we enter into with our channel partners, we
(i) charge the channel partner a per transaction or monthly
flat fee
and/or
(ii) grant rebates to the channel partner based on the
transaction fees we receive from our payer customers. Our
contracts with channel partners are generally one to three years
in term and automatically renew for successive terms unless
terminated.
14
Technology
Our technology platforms employ a standard enterprise services
bus in a service-oriented architecture, configured for 24/7
operations. We maintain two secure, interconnected,
environmentally-controlled primary data centers, one in
Nashville, Tennessee and one in Memphis, Tennessee, each with
emergency power generation capabilities. We also operate several
satellite data centers that we plan to consolidate over time to
our two primary data centers. Our software development life
cycle methodology requires that all applications are able to run
in both of our data centers. We use a variety of proprietary and
licensed standards-based technologies to implement our
platforms, including those which provide for orchestration,
interoperability and process control. The platforms also
integrate a data infrastructure to support both transaction
processing and data warehousing for operational support and data
analytics.
Competition
We compete on the basis of the size and reach of our network,
the ability to offer a single-vendor solution, the breadth and
functionality of products and services we offer and are able to
develop, and our pricing models. While we do not believe any
single competitor offers a similarly expansive suite of products
and services, our payer, provider and pharmacy services compete
with:
|
|
|
|
|
transaction processing companies, including those providing EDI
and/or
Internet-based services and those providing services through
other means, such as paper and fax;
|
|
|
|
healthcare information system vendors that support providers,
including physician practice management system, hospital
information system and electronic medical record system vendors;
|
|
|
|
large information technology consulting service providers;
|
|
|
|
health insurance companies, pharmacy benefit management
companies and pharmacies that provide or are developing
electronic transaction services for use by providers
and/or by
their members and customers;
|
|
|
|
healthcare focused print and mail vendors; and
|
|
|
|
financial institutions that have invested in healthcare data
management assets.
|
We also compete, in some cases, with alliances formed by the
above competitors. In addition, major software, hardware,
information systems and business process outsourcing companies,
both with and without healthcare companies as their partners,
offer or have announced their intention to offer competitive
products or services. Major competitors for our products
and/or
services include McKesson (RelayHealth) and UnitedHealth Group
(Ingenix and OptumHealth), as well as other smaller competitors
that typically compete with us in one or more of our product
and/or
service categories.
In addition, some of our existing payer and provider customers
compete with us or plan to do so. In general, these customers
offer services that compete with some of our solutions but do
not offer the full range of products and services we offer. For
example, some payers currently offer, through affiliated
clearinghouses, internet portals and other means, electronic
data transmission services to providers that allow the provider
to have a direct connection to the payer, bypassing third party
EDI service providers such as us. In addition, as part of the
solutions healthcare information system vendors, including our
channel partners, sell, they may offer their customers products
and services that we supply directly or similar products and
services offered by our competitors.
Many of our current and potential competitors have greater
financial and marketing resources than we have. Furthermore, we
believe that the increasing acceptance of automated solutions in
the healthcare marketplace, the adoption of more sophisticated
technology, legislative reform and consolidation within the
payer, provider and pharmacy industries will result in increased
competition. There can be no assurance that we will continue to
maintain our existing customer base or that we will be
successful with any new products or services that we have
introduced or will introduce. See Risk Factors
We face significant competition for our products and
services in Part I, Item 1A. of this Annual
Report.
15
Intellectual
Property
We rely upon a combination of patent, trade secret, copyright
and trademark laws, license agreements, confidentiality
procedures, nondisclosure agreements and technical measures to
protect the intellectual property used in our business. We
generally enter into confidentiality agreements with our
employees, consultants, vendors and customers. We also seek to
control access to and distribution of our technology,
documentation and other proprietary information.
We use numerous trademarks, trade names and service marks for
our products and services, including
EMDEON®,
EMDEON CLAIM
MASTER®,
HEALTHPAYERS
USA®,
eRx
NETWORK®
and EMDEON
VISIONsm
and we also use numerous domain names, including
emdeon.com and hipaasimplified.com. We
also rely on a variety of intellectual property rights that we
license from third parties. Although we believe that alternative
technologies are generally available to replace such licenses,
these third party technologies may not continue to be available
to us on commercially reasonable terms.
We have several patents and patent applications covering
products and services we provide, including software
applications. Due to the nature of our applications, we believe
that patent protection is less significant than our ability to
further develop, enhance and modify our current products and
services.
The steps we have taken to protect our copyrights, trademarks,
servicemarks and other intellectual property may not be
adequate, and third parties could infringe, misappropriate or
misuse our intellectual property. If this were to occur, it
could harm our reputation and adversely affect our competitive
position or results of operations. See Risk
Factors The protection of our intellectual property
requires substantial resources in Part I,
Item 1A. of this Annual Report.
Regulation
and Legislation
Introduction
Almost all of our revenue is either from the healthcare industry
or could be affected by changes in healthcare spending. The
healthcare industry is subject to changing political, regulatory
and other influences. National healthcare reform is currently a
major focus at the federal level. On November 7, 2009, the
U.S. House of Representatives passed the Affordable Health
Care for America Act. On December 24, 2009, the
U.S. Senate passed the Patient Protections and Affordable
Health Care Act. However, it is uncertain if and how these two
healthcare reform bills will be reconciled or whether the
provisions of either will become law. If healthcare reform
legislation does become law, it may, among other things,
increase governmental involvement in healthcare, lower
reimbursement rates or otherwise change the environment in which
healthcare industry constituents operate. Healthcare industry
constituents may respond by reducing their expenditures or
postponing expenditure decisions, including expenditures for our
product and service offerings.
In addition, the healthcare industry is required to comply with
extensive and complex laws and regulations at the federal and
state levels. Although many regulatory and governmental
requirements do not directly apply to our operations, our
customers are required to comply with a variety of laws, and we
may be impacted by these laws as a result of our contractual
obligations. For many of these requirements, there is little
history of regulatory or judicial interpretation upon which to
rely. We may also be impacted by banking and financial services
industry laws, regulations and industry standards as a result of
payment and remittance services and products we offer through
our third party vendors. We have attempted to structure our
operations to comply with applicable legal requirements, but
there can be no assurance that our operations will not be
challenged or impacted by enforcement initiatives.
We are unable to predict the future course of federal, state or
local legislation and regulatory efforts. Further changes in the
law, regulatory framework or the interpretation of applicable
laws and regulations could reduce our revenue or increase our
costs and have an adverse effect on our business, financial
condition or results of operations.
HIPAA
Administrative Simplification Requirements
General. HIPAA mandated a package of
interlocking administrative simplification rules to establish
standards and requirements for the electronic transmission of
certain healthcare claims and payment transactions. These
regulations are intended to encourage electronic commerce in the
healthcare industry and
16
apply directly to health plans, most providers and healthcare
clearinghouses (Covered Entities). Some of our
businesses, including our healthcare clearinghouse operations,
are considered Covered Entities under HIPAA and its implementing
regulations. Other aspects of our operations are considered a
business associate under HIPAA and are impacted by
the HIPAA regulations as a result of our contractual obligations
to our customers and interactions with other constituents in the
healthcare industry that are Covered Entities (Business
Associates).
Transaction Standards. The standard
transaction regulations established under HIPAA
(Transaction Standards) mandate certain format and
data content standards for the most common electronic healthcare
transactions, using technical standards promulgated by
recognized standards publishing organizations. These
transactions include healthcare claims, enrollment, payment and
eligibility. The Transaction Standards are applicable to that
portion of our business involving the processing of healthcare
transactions among payers, providers, patients and other
healthcare industry constituents. Failure to comply with the
Transaction Standards may subject us to civil and potentially
criminal penalties and breach of contract claims. The Centers
for Medicare & Medicaid Services (CMS) is
responsible for enforcing the Transaction Standards.
Payers and providers who are unable to exchange data in the
required standard formats can achieve Transaction Standards
compliance by contracting with a clearinghouse to translate
between standard and non-standard formats. As a result, use of a
clearinghouse has allowed numerous payers and providers to
establish compliance with the Transaction Standards
independently and at different times, reducing transition costs
and risks. In addition, the standardization of formats and data
standards envisioned by the Transaction Standards has only
partially occurred. Multiple versions of a HIPAA standard claim
have emerged as each payer defines for itself what constitutes a
HIPAA-compliant claim. To date, payers have
published more than 600 different companion
documents setting forth their individual interpretations
and implementation of the government guidelines.
In order to help prevent disruptions in the healthcare payment
system, CMS has permitted the use of contingency
plans under which claims and other covered transactions
can be processed, in some circumstances, in either HIPAA
standard or legacy formats. CMS terminated the Medicare
contingency plan for incoming claims in 2005. The Medicare
contingency plan for HIPAA transactions, other than claims,
remains in effect. Our contingency plan, pursuant to which we
process HIPAA-compliant standard transactions and legacy
transactions, as appropriate, based on the needs of our
customers, remains in effect. We cannot provide assurance
regarding how CMS will enforce the Transaction Standards or how
long CMS will permit constituents in the healthcare industry to
utilize contingency plans. We continue to work with payers and
providers, healthcare information system vendors and other
healthcare constituents to implement fully the Transaction
Standards.
In January 2009, CMS published a final rule adopting updated
standard code sets for diagnoses and procedures known as the
ICD-10 code sets. A separate final rule also published by CMS in
January 2009 resulted in changes to the formats to be used for
electronic transactions subject to the ICD-10 code sets, known
as Version 5010. While use of the ICD-10 code sets is not
mandatory until October 1, 2013 and the use of Version 5010
is not mandatory until January 1, 2012, we have begun to
modify our payment systems and processes to prepare for their
implementation. These changes may result in errors and otherwise
negatively impact our service levels, and we may experience
complications related to supporting customers that are not fully
compliant with the revised requirements as of the applicable
compliance date.
NPI Standard. The national provider identifier
(NPI) regulations established under HIPAA (NPI
Standard) require providers that transmit any health
information in electronic form in connection with a
HIPAA-standard transaction to obtain a single, 10 position
all-numeric NPI and to use the NPI in standard transactions for
which a provider identifier is required. Health plans and
healthcare clearinghouses must use a providers NPI to
identify the provider on all standard transactions requiring a
provider identifier. The NPI Standard took effect on
May 23, 2007; however, CMS permitted Covered Entities to
use legacy identifiers until May 23, 2008.
All of our clearinghouse systems are fully capable of
transmitting transactions that include the NPI. We continue to
process transactions using legacy identifiers for non-Medicare
claims that are sent to us to the extent that the intended
recipients have not instructed us to suppress those legacy
identifiers. We cannot
17
provide assurance regarding how CMS will enforce the NPI
Standard or how CMS will view our practice of including legacy
identifiers for non-Medicare claims. We continue to work with
payers, providers, practice management system vendors and other
healthcare industry constituents to implement the NPI Standard.
Any CMS regulatory change or clarification or enforcement action
that prohibited the processing by healthcare clearinghouses or
private payers of transactions containing legacy identifiers
could have an adverse effect on our business.
Regulation
of Healthcare Relationships and Payments
A number of federal and state laws govern patient referrals,
financial relationships with physicians and other referral
sources and inducements to providers and patients, including
restrictions contained in amendments to the Social Security Act,
commonly known as the federal Anti-Kickback Law. The
federal Anti-Kickback Law prohibits any person or entity from
offering, paying, soliciting or receiving, directly or
indirectly, anything of value with the intent of generating
referrals or orders for services or items covered by a federal
healthcare program, such as Medicare, Medicaid or TriCare.
Violation of the federal Anti-Kickback Law is a felony.
In addition to statutory safe harbors, the Office of the
Inspector General of the U.S. Department of
Health & Human Services (HHS) has created
regulatory safe harbors to the federal Anti-Kickback Law.
Activities that comply precisely with a safe harbor are deemed
protected from prosecution under the federal Anti-Kickback Law.
Failure to meet a safe harbor does not automatically render an
arrangement illegal under the Anti-Kickback Law. The
arrangement, however, does risk increased scrutiny by government
enforcement authorities, based on its particular facts and
circumstances. Our contracts and other arrangements may not meet
a safe harbor. Many states have laws and regulations that are
similar to the federal Anti-Kickback Law. In many cases, these
state requirements are not limited to items or services for
which payment is made by a federal healthcare program.
The laws in this area are both broad and vague and generally are
not subject to frequent regulatory or judicial interpretation.
We review our practices with regulatory experts in an effort to
comply with all applicable laws and regulatory requirements.
However, we are unable to predict how these laws will be
interpreted or the full extent of their application,
particularly to services that are not directly reimbursed by
federal healthcare programs, such as transaction processing
services. Any determination by a state or federal regulatory
agency that any of our practices violate any of these laws could
subject us to civil or criminal penalties and require us to
change or terminate some portions of our business. Even an
unsuccessful challenge by regulatory authorities of our
practices could cause adverse publicity and cause us to incur
significant legal and related costs.
Further, our payment distribution products and services may
impact the ability of our payer customers to comply with state
prompt payment laws. These laws require payers to pay healthcare
claims meeting the statutory or regulatory definition of a
clean claim to be paid within a specified time frame.
False
Claims Laws and Other Fraud and Abuse Restrictions
We provide claims processing and other transaction services to
providers that relate to, or directly involve, the reimbursement
of health services covered by Medicare, Medicaid, other federal
healthcare programs and private payers. In addition, as part of
our data transmission and claims submission services, we may
employ certain edits, using logic, mapping and defaults, when
submitting claims to third party payers. Such edits are utilized
when the information received from providers is insufficient to
complete individual data elements requested by payers.
As a result of these aspects of our business, we may be subject
to, or contractually required to comply with, state and federal
laws that govern various aspects of the submission of healthcare
claims for reimbursement and the receipt of payments for
healthcare items or services. These laws generally prohibit an
individual or entity from knowingly presenting or causing to be
presented claims for payment to Medicare, Medicaid or other
third party payers that are false or fraudulent. False or
fraudulent claims include, but are not limited to, billing for
services not rendered, failing to refund known overpayments,
misrepresenting actual services rendered in order to obtain
higher reimbursement, improper coding and billing for medically
unnecessary goods and services. Further, providers may not
contract with individuals or entities excluded from
participation
18
in any federal healthcare program. Like the federal
Anti-Kickback Law, these provisions are very broad. To avoid
liability, providers and their contractors must, among other
things, carefully and accurately code, complete and submit
claims for reimbursement.
Some of these laws, including restrictions contained in
amendments to the Social Security Act, commonly known as
the federal Civil Monetary Penalty Law, require a
lower burden of proof than other fraud and abuse laws. Federal
and state governments increasingly use the federal Civil
Monetary Penalty Law, especially where they believe they cannot
meet the higher burden of proof requirements under the various
criminal healthcare fraud provisions. Many of these laws provide
significant civil and criminal penalties for noncompliance and
can be enforced by private individuals through
whistleblower or qui tam actions. For example, the
federal Civil Monetary Penalty Law provides for penalties
ranging from $10,000 to $50,000 per prohibited act and
assessments of up to three times the amount claimed or received.
Further, violations of the federal False Claims Act (the
FCA) are punishable by treble damages and penalties
of up to $11,000 per false claim, and whistleblowers may receive
a share of amounts recovered. Whistleblowers, the federal
government and some courts have taken the position that entities
that have violated other statutes, such as the federal
Anti-Kickback Law, have thereby submitted false claims under the
FCA.
From time to time, constituents in the healthcare industry,
including us, may be subject to actions under the FCA or other
fraud and abuse provisions, such as the federal Civil Monetary
Penalty Law. We cannot guarantee that state and federal agencies
will regard any billing errors we process as inadvertent or will
not hold us responsible for any compliance issues related to
claims we handle on behalf of providers and payers. Although we
believe our editing processes are consistent with applicable
reimbursement rules and industry practice, a court, enforcement
agency or whistleblower could challenge these practices. We
cannot predict the impact of any enforcement actions under the
various false claims and fraud and abuse laws applicable to our
operations. Even an unsuccessful challenge of our practices
could cause adverse publicity and cause us to incur significant
legal and related costs.
Requirements
Regarding the Confidentiality, Privacy and Security of Personal
Information
Data Protection and Breaches. In recent years,
there have been a number of well-publicized data breaches
involving the improper dissemination of personal information of
individuals both within and outside of the healthcare industry.
Many states have responded to these incidents by enacting laws
requiring holders of personal information to maintain safeguards
and to take certain actions in response to a data breach, such
as providing prompt notification of the breach to affected
individuals. In many cases, these laws are limited to electronic
data, but states are increasingly enacting or considering
stricter and broader requirements. As required by ARRA, HHS
published an interim final rule on August 24, 2009, which
requires Covered Entities to report breaches of unsecured
protected health information to affected individuals without
unreasonable delay but not to exceed 60 days of discovery
of the breach by a Covered Entity or its agents. Notification
must also be made to HHS and, in certain circumstances involving
large breaches, to the media. Business Associates must report
breaches of unsecured protected health information to Covered
Entities within 60 days of discovery of the breach by the
Business Associate or its agents. In addition, the Federal Trade
Commission (FTC) has prosecuted some data breach
cases as unfair and deceptive acts or practices under the
Federal Trade Commission Act. Further, some of our customers are
subject to a new federal rule requiring creditors, which may
include health providers and health plans, to implement identity
theft prevention programs to detect, prevent, and mitigate
identity theft in connection with customer accounts. We may be
required to apply additional resources to our existing processes
to assist our customers in complying with this rule. We have
implemented and maintain physical, technical and administrative
safeguards intended to protect all personal data and have
processes in place to assist us in complying with all applicable
laws and regulations regarding the protection of this data and
properly responding to any security breaches or incidents.
HIPAA Privacy Standards and Security
Standards. The privacy regulations established
under HIPAA (Privacy Standards) and the security
regulations established under HIPAA (Security
Standards) apply directly as a Covered Entity to our
operations as a healthcare clearinghouse and indirectly as a
Business Associate to other aspects of our operations as a
result of our contractual obligations to our customers.
Effective February 17, 2010, ARRA extended the direct
application of some provisions of the Privacy Standards and
Security Standards to us when we are functioning as a Business
Associate of our payer or
19
provider customers. The Privacy Standards extensively regulate
the use and disclosure of individually identifiable health
information by Covered Entities and their Business Associates.
For example, the Privacy Standards permit Covered Entities and
their Business Associates to use and disclose individually
identifiable health information for treatment and to process
claims for payment, but other uses and disclosures, such as
marketing communications, require written authorization from the
individual or must meet an exception specified under the Privacy
Standards. The Privacy Standards also provide patients with
rights related to understanding and controlling how their health
information is used and disclosed. Effective February 17,
2010 or later (in the case of restrictions tied to the issuance
of implementing regulations), ARRA imposes stricter limitations
on certain types of uses and disclosures, such as additional
restrictions on marketing communications and the sale of
individually identifiable health information. To the extent
permitted by the Privacy Standards, ARRA and our contracts with
our customers, we may use and disclose individually identifiable
health information to perform our services and for other limited
purposes, such as creating de-identified information.
Determining whether data has been sufficiently de-identified to
comply with the Privacy Standards and our contractual
obligations may require complex factual and statistical analyses
and may be subject to interpretation. The Security Standards
require Covered Entities and their Business Associates to
implement and maintain administrative, physical and technical
safeguards to protect the security of individually identifiable
health information that is electronically transmitted or
electronically stored.
If we are unable to properly protect the privacy and security of
health information entrusted to us, we could be found to have
breached our contracts with our customers. Further, HIPAA
includes civil and criminal penalties for Covered Entities that
violate the Privacy Standards or the Security Standards. ARRA
significantly increased the amount of the civil penalties, with
penalties of up to $50,000 per violation for a maximum civil
penalty of $1,500,000 in a calendar year for violations of the
same requirement. As of February 17, 2010, Business
Associates are directly subject to civil and criminal penalties
for violation of these standards. Recently, the HHS Office for
Civil Rights, which enforces the Security Standards and Privacy
Standards, appears to have increased its enforcement activities.
ARRA has strengthened the enforcement provisions of HIPAA, which
may result in further increases in enforcement activity. For
example, HHS is required by ARRA to conduct periodic compliance
audits of Covered Entities and their Business Associates. ARRA
also authorizes state attorneys general to bring civil actions
seeking either injunctions or damages in response to violations
of HIPAA privacy and security regulations that threaten the
privacy of state residents.
We have implemented and maintain policies and processes to
assist us in complying with the Privacy Standards, the Security
Standards and our contractual obligations. We cannot provide
assurance regarding how these standards will be interpreted,
enforced or applied to our operations.
Other Requirements. In addition to HIPAA,
numerous other state and federal laws govern the collection,
dissemination, use, access to and confidentiality of
individually identifiable health information and healthcare
provider information. In addition, some states are considering
new laws and regulations that further protect the
confidentiality, privacy and security of medical records or
other types of medical information. In many cases, these state
laws are not preempted by the HIPAA Privacy Standards and may be
subject to interpretation by various courts and other
governmental authorities. Further, the U.S. Congress and a
number of states have considered or are considering prohibitions
or limitations on the disclosure of medical or other information
to individuals or entities located outside of the United States.
Banking
and Financial Services Industry
The banking and financial services industry is subject to
numerous laws, regulations and industry standards, some of which
may impact our operations and subject us, our vendors or our
customers to liability as a result of the payment distribution
products and services we offer. Although we are not and do not
act as a bank, we offer products and services that involve banks
or vendors who contract with banks and other regulated providers
of financial services. As a result, we may be impacted by
banking and financial services industry laws, regulations and
industry standards, such as licensing requirements, solvency
standards, requirements to maintain privacy of nonpublic
personal financial information and Federal Deposit Insurance
Corporation (FDIC) deposit insurance limits.
20
Employees
As of February 28, 2010, we had approximately
2,100 employees.
Available
Information
We file our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports with the Securities and Exchange
Commission (the SEC). You may obtain copies of these
documents by visiting the SECs Public Reference Room at
100 F Street, N.E., Washington, D.C. 20549, by
calling the SEC at
1-800-SEC-0330
or by accessing the SECs website at www.sec.gov.
Our corporate website address is www.emdeon.com. You also can
obtain on our website, free of charge, a copy of our annual
reports on
Form 10-K,
our quarterly reports on
Form 10-Q,
our current reports on
Form 8-K,
and any amendments to those reports, as soon as reasonably
practicable after we electronically file such reports or
amendments with, or furnish them to, the SEC. Also available on
our website, free of charge, are copies of our Code of Business
Conduct and Ethics, our Corporate Governance Guidelines and the
charters for each of the committees of our board of
directors the Audit Committee, the Compensation
Committee and the Nominating and Corporate Governance Committee.
Our internet website and the information contained therein or
connected thereto are not intended to be incorporated by
reference into this Annual Report.
Overview
You should consider carefully the risks and uncertainties
described below, and all information contained in this Annual
Report, in evaluating our company and our business. The
occurrence of any of the following risks or uncertainties
described below could significantly and adversely affect our
business, prospects, financial condition, and operating results.
Risks
Related to our Business
We
face significant competition for our products and
services.
The markets for our various products and services are intensely
competitive, continually evolving and, in some cases, subject to
rapid technological change. We face competition from many
healthcare information systems companies and other technology
companies within segments of the revenue and payment cycle
markets. We also compete with certain of our customers that
provide internally some of the same products and services that
we offer. Our key competitors include: (i) healthcare
transaction processing companies, including those providing EDI
and/or
Internet-based services and those providing services through
other means, such as paper and fax; (ii) healthcare
information system vendors that support providers, including
physician practice management system, hospital information
system and electronic medical record system vendors;
(iii) large information technology consulting service
providers; and (iv) health insurance companies, pharmacy
benefit management companies and pharmacies that provide or are
developing electronic transaction services for use by providers
and/or by
their members and customers. In addition, major software,
hardware, information systems and business process outsourcing
companies, both with and without healthcare companies as their
partners, offer or have announced their intention to offer
products or services that are competitive with products and
services that we offer.
Within certain of the products and services markets in which we
operate, we face competition from entities that are
significantly larger and have greater financial resources than
we do and have established reputations for success in
implementing healthcare electronic transaction processing
systems. Other companies have targeted these markets for growth,
including by developing new technologies utilizing
Internet-based systems. We may not be able to compete
successfully with these companies, and these or other
competitors may commercialize products, services or technologies
that render our products, services or technologies obsolete or
less marketable.
21
Some
of our customers compete with us and some, instead of using a
third party provider, perform internally some of the same
services that we offer.
Some of our existing customers compete with us or may plan to do
so or belong to alliances that compete with us or plan to do so,
either with respect to the same products and services we provide
to them or with respect to some of our other lines of business.
For example, some of our payer customers currently
offer through affiliated clearinghouses, Web portals
and other means electronic data transmission
services to providers that allow the provider to bypass third
party EDI service providers such as us, and additional payers
may do so in the future. The ability of payers to replicate our
products and services may adversely affect the terms and
conditions we are able to negotiate in our agreements with them
and our transaction volume with them, which directly relates to
our revenues. We may not be able to maintain our existing
relationships for connectivity services with payers or develop
new relationships on satisfactory terms, if at all. In addition,
some of our products and services allow payers to outsource
business processes that they have been or could be performing
internally and, in order for us to be able to compete, use of
our products and services must be more efficient for them than
use of internal resources.
If we
are unable to retain our existing customers, our business,
financial condition and results of operations could
suffer.
Our success depends substantially upon the retention of our
customers, particularly due to our transaction-based, recurring
revenue model. We may not be able to retain some of our existing
customers if we are unable to continue to provide products and
services that our payer customers believe enable them to achieve
improved efficiencies and cost-effectiveness, and that our
provider customers believe allow them to more effectively manage
their revenue cycle, increase reimbursement rates and improve
cash flows. We also may not be able to retain customers if our
electronic
and/or
paper-based solutions contain errors or otherwise fail to
perform properly, if our pricing structure is no longer
competitive or upon expiration of our contracts. Historically,
we have enjoyed high customer retention rates; however, we may
not be able to maintain high retention rates in the future. Our
transaction-based, recurring revenues depend in part upon
maintaining this high customer retention rate, and if we are
unable to maintain our historically high customer retention
rate, our business, financial condition and results of
operations could be adversely impacted.
If we
are unable to connect to a large number of payers and providers,
our product and service offerings would be limited and less
desirable to our customers.
Our business largely depends upon our ability to connect
electronically to a substantial number of payers, such as
insurance companies, Medicare and Medicaid agencies and pharmacy
benefit managers, and providers, such as hospitals, physicians,
dentists and pharmacies. The attractiveness of some of the
solutions we offer to providers, such as our claims management
and submission services, depends in part on our ability to
connect to a large number of payers, which allows us to
streamline and simplify workflows for providers. These
connections may either be made directly or through a
clearinghouse. We may not be able to maintain our links with a
large number of payers on terms satisfactory to us and we may
not be able to develop new connections, either directly or
through other clearinghouses, on satisfactory terms. The failure
to maintain these connections could cause our products and
services to be less attractive to our provider customers. In
addition, our payer customers view our connections to a large
number of providers as essential in allowing them to receive a
high volume of transactions and realize the resulting cost
efficiencies through the use of our products and services. Our
failure to maintain existing connections with payers, providers
and other clearinghouses or to develop new connections as
circumstances warrant, or an increase in the utilization of
direct links between payers and providers, could cause our
electronic transaction processing system to be less desirable to
healthcare constituents, which would reduce the number of
transactions that we process and for which we are paid,
resulting in a decrease in revenues and an adverse effect on our
financial condition and results of operations.
22
The
failure to maintain our relationships with our channel partners
or significant changes in the terms of the agreements we have
with them may have an adverse effect on our ability to
successfully market our products and services.
We have entered into contracts with channel partners to market
and sell some of our products and services. Most of these
contracts are on a non-exclusive basis. However, under contracts
with some of our channel partners, we may be bound by provisions
that restrict our ability to market and sell our products and
services to potential customers. Our arrangements with some of
these channel partners involve negotiated payments to them based
on percentages of revenues they generate. If the payments prove
to be too high, we may be unable to realize acceptable margins,
but if the payments prove to be too low, the channel partners
may not be motivated to produce a sufficient volume of revenues.
The success of these contractual arrangements will depend in
part upon the channel partners own competitive, marketing
and strategic considerations, including the relative advantages
of using alternative products being developed and marketed by
them or our competitors. If any of these channel partners are
unsuccessful in marketing our products and services or seek to
amend the financial or other terms of the contracts we have with
them, we will need to broaden our marketing efforts to increase
focus on the solutions they sell and alter our distribution
strategy, which may divert our planned efforts and resources
from other projects. In addition, as part of the packages these
channel partners sell, they may offer a choice to their
customers between products and services that we supply and
similar products and services offered by our competitors or by
the channel partners directly. If our products and services are
not chosen for inclusion in vendor packages, the revenues we
earn from these relationships will decrease. Lastly, we could be
subject to claims and liability, as a result of the activities,
products or services of these channel partners or other
resellers of our products and services. Even if these claims do
not result in liability to us, investigating and defending these
claims could be expensive, time-consuming and result in adverse
publicity that could harm our business.
Our
business and future success may depend on our ability to
cross-sell our products and services.
Our ability to generate revenue and growth partly depends on our
ability to cross-sell our products and services to our existing
customers and new customers. We expect our ability to
successfully cross-sell our products and services will be one of
the most significant factors influencing our growth. We may not
be successful in cross-selling our products and services because
our customers may find our additional products and services
unnecessary or unattractive. Our failure to sell additional
products and services to existing customers could affect our
ability to grow our business.
We
have faced and will continue to face increasing pressure to
reduce our prices, which may reduce our margins, profitability
and competitive position.
As electronic transaction processing further penetrates the
healthcare market or becomes highly standardized, competition
among electronic transaction processors is increasingly focused
on pricing. This competition has placed, and could place
further, intense pressure on us to reduce our prices in order to
retain market share. If we are unable to reduce our costs
sufficiently to offset declines in our prices, or if we are
unable to introduce new, innovative product and service
offerings with higher margins, our results of operations could
decline.
In addition, many healthcare industry constituents are
consolidating to create integrated healthcare delivery systems
with greater market power. As provider networks, such as
hospitals, and payer organizations, such as private insurance
companies, consolidate, competition to provide the types of
products and services we provide will become more intense, and
the importance of establishing and maintaining relationships
with key industry constituents will become greater. These
industry constituents have, in the past, and may, in the future,
try to use their market power to negotiate price reductions for
our products and services. If we are forced to reduce prices,
our margins will decrease and our results of operations will
decline, unless we are able to achieve corresponding reductions
in expenses.
23
Our
ability to generate revenue could suffer if we do not continue
to update and improve our existing products and services and
develop new ones.
We must improve the functionality of our existing products and
services in a timely manner and introduce new and valuable
healthcare information technology and service solutions in order
to respond to technological and regulatory developments and,
thereby, retain existing customers and attract new ones. For
example, from time to time, government agencies may alter format
and data code requirements applicable to electronic
transactions. We may not be successful in responding to
technological and regulatory developments and changing customer
needs. The pace of change in the markets we serve is rapid, and
there are frequent new product and service introductions by our
competitors and by channel partners who use our products and
services in their offerings. If we do not respond successfully
to technological and regulatory changes and evolving industry
standards, our products and services may become obsolete.
Technological changes may also result in the offering of
competitive products and services at lower prices than we are
charging for our products and services, which could result in
our losing sales unless we lower the prices we charge. If we do
lower our prices on some of our products and services, we will
need to increase our margins on these products and services in
order to maintain our overall profitability. In addition, the
products and services we develop or license may not be able to
compete with the alternatives available to our customers.
Achieving
market acceptance of new or updated products and services is
necessary in order for them to become profitable and will likely
require significant efforts and expenditures.
Our future financial results will depend in part on whether our
new or updated products and services receive sufficient customer
acceptance. These products and services include, without
limitation:
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electronic billing, payment and remittance services for payers
and providers that complement our existing paper-based patient
billing and payment and payment distribution services;
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electronic prescriptions from healthcare providers to pharmacies
and pharmacy benefit managers;
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our other pre- and post-adjudication services for payers and
providers; and
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decision support, clinical exchange, payment integrity, fraud
and abuse management or other business intelligence solutions.
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Achieving market acceptance for new or updated products and
services is likely to require substantial marketing efforts and
expenditure of significant funds to create awareness and demand
by constituents in the healthcare industry. In addition,
deployment of new or updated products and services may require
the use of additional resources for training our existing sales
force and customer service personnel and for hiring and training
additional salespersons and customer service personnel. Failure
to achieve broad penetration in target markets with respect to
new or updated products and services could have an adverse
effect on our business prospects and financial results.
There
are increased risks of performance problems during times when we
are making significant changes to our products and services or
to systems we use to provide services. In addition,
implementation of our products and services and efficiency
measures and other cost savings initiatives may cost more, may
not provide the benefits expected or may take longer than
anticipated.
In order to respond to technological and regulatory changes and
evolving industry standards, our products and services must be
continually updated and enhanced. The software and systems that
we sell and that we use to provide services are inherently
complex and, despite testing and quality control, we cannot be
certain that errors will not be found in any changes,
enhancements, updates and new versions that we market or use.
Even if new or modified products and services do not have
performance problems, our technical and customer service
personnel may have difficulties in installing them or in their
efforts to provide any necessary training and support to
customers.
Implementation of changes in our technology and systems may cost
more or take longer than originally expected and may require
more testing than originally anticipated. While the new hardware
and software will be tested before it is used in production, we
cannot be sure that the testing will uncover all problems that
may occur in actual use. If significant problems occur as a
result of these changes, we may fail to meet our contractual
obligations to customers, which could result in claims being
made against us or in the loss of
24
customer relationships. In addition, changes in our technology
and systems may not provide the additional functionality or
other benefits that were expected.
In addition, we also periodically implement efficiency measures
and other cost saving initiatives to improve our operating
performance. These efficiency measures and other cost saving
initiatives may not provide the benefits anticipated or do so in
the time frame expected.
Disruptions
in service or damages to our data or other operation centers, or
other software or systems failures, could adversely affect our
business.
Our data centers and operation centers are essential to our
business. Our operations depend on our ability to maintain and
protect our computer systems, many of which are located in our
primary data centers that we operate in Memphis and Nashville,
Tennessee. We also operate several satellite data centers that
we plan to consolidate over time to our primary data centers.
Our business and results of operations are also highly dependent
on our print and mail operations, which are primarily conducted
in print and mail operations centers in Bridgeton, Missouri and
Toledo, Ohio. We conduct business continuity planning and
maintain insurance against fires, floods, other natural
disasters and general business interruptions to mitigate the
adverse effects of a disruption, relocation or change in
operating environment at one of our data centers, print and mail
facilities or other locations; however, the situations we plan
for and the amount of insurance coverage may not be adequate in
any particular case. The occurrence of any of these events could
result in interruptions, delays or cessations in service to
users of our products and services, which could impair or
prohibit our ability to provide our products and services,
reduce the attractiveness of our products and services to our
customers and adversely impact our financial condition and
results of operations.
In addition, despite the implementation of security measures,
our infrastructure, data centers or systems that we interface
with, including the Internet and related systems, may be
vulnerable to physical break-ins, hackers, improper employee or
contractor access, computer viruses, programming errors,
denial-of-service
attacks, terrorist attacks or other attacks by third parties or
similar disruptive problems. Any of these can cause system
failure, including network, software or hardware failure, which
can result in service disruptions or increased response time for
our products and services. As a result, we may be required to
expend significant capital and other resources to protect
against security breaches and hackers or to alleviate problems
caused by such breaches.
We also rely on a limited number of suppliers to provide us with
a variety of products and services, including telecommunications
and data processing services necessary for our transaction
services and processing functions and software developers for
the development and maintenance of certain software products we
use to provide our solutions. If these suppliers do not fulfill
their contractual obligations or choose to discontinue their
products or services, our business and operations could be
disrupted, our brand and reputation could be harmed and our
financial condition and operating results could be adversely
affected.
We may
be liable to our customers and may lose customers if we provide
poor service, if our products and services do not comply with
our agreements or if our software products or transmission
systems contain errors or experience failures.
We must meet our customers service level expectations and
our contractual obligations with respect to our products and
services. Failure to do so could subject us to liability, as
well as cause us to lose customers. In some cases, we rely upon
third party contractors to assist us in providing our products
and services. Our ability to meet our contractual obligations
and customer expectations may be impacted by the performance of
our third party contractors and their ability to comply with
applicable laws and regulations. For example, our electronic
payment and remittance services depend in part on the ability of
our vendors to comply with applicable banking and financial
service requirements and their failure to do so could cause an
interruption in the services we provide or require us to seek
alternative solutions or relationships.
Errors in the software and systems we provide to customers or
the software and systems we use to provide our products and
services also could cause serious problems for our customers. In
addition, because of the large amount of data we collect and
manage, it is possible that hardware failures and errors in our
systems would result in data loss or corruption or cause the
information that we collect to be incomplete or contain
inaccuracies that our customers regard as significant. For
example, errors in our transaction processing systems
25
can result in payers paying the wrong amount, making payments to
the wrong payee or delaying payments. Since some of our products
and services relate to laboratory ordering and reporting and
electronic prescriptions, an error in our systems also could
result in injury to a patient. If problems like these occur, our
customers may seek compensation from us or may seek to terminate
their agreements with us, withhold payments due to us, seek
refunds from us of part or all of the fees charged under our
agreements, a loan or advancement of funds, or initiate
litigation or other dispute resolution procedures. In addition,
we may be subject to claims against us by others affected by any
such problems.
In addition, our activities and the activities of our third
party contractors involve the storage, use and transmission of
personal health information. Accordingly, security breaches of
our or their computer systems or at print and mail operation
centers could expose us to a risk of loss or litigation,
government enforcement actions and contractual liabilities. We
cannot be certain that contractual provisions attempting to
limit our liability in these areas will be successful or
enforceable, or that other parties will accept such contractual
provisions as part of our agreements. Any security breaches also
could impact our ability to provide our products and services,
as well as impact the confidence of our customers in our
products and services, either of which could have an adverse
effect on our business, financial condition and results of
operations.
We attempt to limit, by contract, our liability for damages
arising from our negligence, errors, mistakes or security
breaches. However, contractual limitations on liability may not
be enforceable or may otherwise not provide sufficient
protection to us from liability for damages. We maintain
liability insurance coverage, including coverage for errors and
omissions. It is possible, however, that claims could exceed the
amount of our applicable insurance coverage, if any, or that
this coverage may not continue to be available on acceptable
terms or in sufficient amounts. Even if these claims do not
result in liability to us, investigating and defending against
them could be expensive and time consuming and could divert
managements attention away from our operations. In
addition, negative publicity caused by these events may delay
market acceptance of our products and services, including
unrelated products and services, or may harm our reputation and
our business.
Our
business will suffer if we fail to successfully integrate
acquired businesses and technologies or to appropriately assess
the risks in particular transactions.
We have historically acquired and, in the future, plan to
acquire, businesses, technologies, services, product lines and
other assets. For example, in January 2010, we acquired FVTech
and intend to integrate its operations with our business. The
successful integration of any businesses and assets we acquire
into our operations, on a cost-effective basis, can be critical
to our future performance. The amount and timing of the expected
benefits of any acquisition, including potential synergies
between our current business and the acquired business, are
subject to significant risks and uncertainties. These risks and
uncertainties include, but are not limited to, those relating to:
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our ability to maintain relationships with the customers of the
acquired business;
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our ability to cross-sell products and services to customers
with which we have established relationships and those with
which the acquired businesses have established relationships;
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our ability to retain or replace key personnel;
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potential conflicts in payer, provider, pharmacy, vendor or
marketing relationships;
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our ability to coordinate organizations that are geographically
diverse and may have different business cultures; and
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compliance with regulatory requirements.
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We cannot guarantee that any acquired businesses will be
successfully integrated with our operations in a timely or
cost-effective manner, or at all. Failure to successfully
integrate acquired businesses or to achieve anticipated
operating synergies, revenue enhancements or cost savings could
have an adverse effect on our business, financial condition and
results of operations.
Although our management attempts to evaluate the risks inherent
in each transaction and to evaluate acquisition candidates
appropriately, we may not properly ascertain all such risks and
the acquired businesses and assets may not perform as we expect
or enhance the value of our company as a whole. In addition,
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acquired companies or businesses may have larger than expected
liabilities that are not covered by the indemnification, if any,
that we are able to obtain from the sellers.
We
have a substantial amount of indebtedness, which could affect
our financial condition.
As of December 31, 2009, we had an aggregate of
$894.0 million of outstanding indebtedness (before
deduction of unamortized debt discount of $53.3 million and
including an obligation under our data sublicense agreement of
$37.6 million) and we had the ability to borrow an
additional $44.2 million under our revolving credit
facility. If we cannot generate sufficient cash flow from
operations to service our debt, we may need to refinance our
debt, dispose of assets or issue equity to obtain necessary
funds. We do not know whether we will be able to take any of
such actions on a timely basis or on terms satisfactory to us or
at all.
Our substantial amount of indebtedness could limit our ability
to:
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obtain necessary additional financing for working capital,
capital expenditures or other purposes in the future;
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plan for, or react to, changes in our business and the
industries in which we operate;
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make future acquisitions or pursue other business
opportunities; and
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react in an extended economic downturn.
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Despite our substantial indebtedness, we may still be able to
incur significantly more debt. The incurrence of additional debt
could increase the risks associated with our substantial
leverage, including our ability to service our indebtedness. In
addition, because borrowings under our credit agreements bear
interest at a variable rate, our interest expense could
increase, and thus exacerbate these risks. For instance,
assuming an aggregate principal balance of $856.4 million
outstanding under our credit agreements, which was the amount
outstanding as of December 31, 2009, and considering the
effect of our interest rate swap agreement, a 1% increase in the
interest rate we are charged on our debt would increase our
annual interest expense by $5.0 million.
Recent
events in the credit markets may affect our ability to refinance
our existing debt or obtain additional debt financing on
acceptable terms.
We may need or seek additional financing in the future to either
refinance our existing indebtedness or to fund our operations,
fund acquisitions, develop additional products and services or
implement other projects. Given the state of the current credit
environment resulting from, among other things, the general
weakening of the global economy, it may be difficult to
refinance our existing indebtedness or obtain any such
additional financing on acceptable terms, which could have an
adverse effect on our financial condition, including our results
of operations
and/or
business plans. In addition, if as a result of the current
conditions in the credit markets any of the lenders
participating in our revolving credit facility are unable to
fund borrowings under such facility, our liquidity could be
adversely affected.
The
terms of our credit agreements may restrict our current and
future operations, which would adversely affect our ability to
respond to changes in our business and to manage our
operations.
Our credit agreements contain, and any future indebtedness of
ours would likely contain, a number of restrictive covenants
that impose significant operating and financial restrictions on
us, including restrictions on our ability to, among other things:
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incur additional debt;
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issue preferred stock;
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create liens;
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create or incur contingent obligations;
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engage in sales of assets and subsidiary stock;
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enter into sale-leaseback transactions;
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make investments and acquisitions;
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enter into hedging arrangements;
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make capital expenditures;
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pay dividends and make other restricted payments;
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enter into transactions with affiliates; and
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transfer all or substantially all of our assets or enter into
merger or consolidation transactions.
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Our credit agreements also require us to maintain certain
financial ratios, including a maximum total leverage ratio and a
minimum interest coverage ratio. A failure by us to comply with
the covenants or financial ratios contained in our credit
agreements could result in an event of default under the
applicable facility which could adversely affect our ability to
respond to changes in our business and manage our operations. A
change of control of our company is also an event of default
under our credit agreements. Under our credit agreements, a
change of control of our company will occur if any person other
than the Principal Equityholders or us or our subsidiaries
acquires, directly or indirectly, more than 35% of the
outstanding equity interests of EBS Master and at the time of
the acquisition the Principal Equityholders do not collectively
hold equity interests of EBS Master representing greater voting
power in EBS Master than such person. In the event of any
default under our first lien credit agreement, the lenders under
that agreement will not be required to lend any additional
amounts to us. In addition, upon the occurrence of an event of
default under either of our credit agreements, the lenders under
both credit agreements could elect to declare all amounts
outstanding to be due and payable and require us to apply all of
our available cash to repay these amounts. If the indebtedness
under our credit agreements were to be accelerated, there can be
no assurance that our assets would be sufficient to repay this
indebtedness in full.
Recent
and future developments in the healthcare industry could
adversely affect our business.
National healthcare reform is currently a major focus at the
federal level. Both houses of the U.S. Congress have passed
healthcare reform bills in recent months, but it is uncertain if
and how these bills will be reconciled or whether the provisions
of either bill will become law. In addition, there are currently
numerous federal, state and private initiatives and studies
seeking ways to increase the use of information technology in
healthcare as a means of improving care and reducing costs.
These initiatives may result in additional or costly legal and
regulatory requirements that are applicable to us and our
customers, may encourage more companies to enter our markets,
may provide advantages to our competitors and may result in the
development of technology solutions that compete with ours.
Any such reforms or initiatives, whether private or
governmental, may result in a reduction of expenditures by
customers or potential customers in the healthcare industry,
which could have an adverse effect on our business. General
reductions in expenditures by healthcare industry constituents
could result from, among other things:
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government regulation or private initiatives that affect the
manner in which providers interact with patients, payers or
other healthcare industry constituents, including changes in
pricing or means of delivery of healthcare products and services;
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reductions in governmental funding for healthcare; and
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adverse changes in business or economic conditions affecting
payers, providers, pharmaceutical companies, medical device
manufacturers or other healthcare industry constituents.
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Even if general expenditures by industry constituents remain the
same or increase, other developments in the healthcare industry
may result in reduced spending on information technology and
services or in some or all of the specific markets we serve or
are planning to serve. In addition, our customers
expectations regarding pending or potential industry
developments may also affect their budgeting processes and
spending plans with respect to the types of products and
services we provide. For example, use of our products and
services could be affected by:
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changes in the billing patterns of providers;
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changes in the design of health insurance plans;
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changes in the contracting methods payers use in their
relationships with providers; and
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decreases in marketing expenditures by pharmaceutical companies
or medical device manufacturers, as a result of governmental
regulation or private initiatives that discourage or prohibit
promotional activities by pharmaceutical or medical device
companies.
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The healthcare industry has changed significantly in recent
years and we expect that significant changes will continue to
occur. The timing and impact of developments in the healthcare
industry are difficult to predict. We cannot be sure that the
markets for our products and services will continue to exist at
current levels or that we will have adequate technical,
financial and marketing resources to react to changes in those
markets.
Government
regulation creates risks and challenges with respect to our
compliance efforts and our business strategies.
The healthcare industry is highly regulated and is subject to
changing political, legislative, regulatory and other
influences. Many healthcare laws are complex, and their
application to specific services and relationships may not be
clear. In particular, many existing healthcare laws and
regulations, when enacted, did not anticipate the healthcare
information products and services that we provide, and these
laws and regulations may be applied to our products and services
in ways that we do not anticipate. Federal and state
legislatures and agencies periodically consider proposals to
reform or revise aspects of the healthcare industry or to revise
or create additional statutory and regulatory requirements. In
the final months of 2009, both houses of the U.S. Congress
passed separate bills intended to reform the healthcare system.
While neither of these bills has yet become law, such laws or
similar proposals, if implemented, could impact our operations,
the use of our products or services and our ability to market
new products and services, or could create unexpected
liabilities for us. We may also be impacted by non-healthcare
laws as a result of some of our products and services. For
example, laws, regulations and industry standards regulating the
banking and financial services industry may impact our
operations as a result of the electronic payment and remittance
services we offer directly or through third party vendors. We
are unable to predict what changes to laws or regulations might
be made in the future or how those changes could affect our
business or the costs of compliance.
We have attempted to structure our operations to comply with
legal requirements applicable to us directly and to our clients
and third party contractors, but there can be no assurance that
our operations will not be challenged or impacted by enforcement
initiatives. Any determination by a court or agency that our
products and services violate, or cause our customers to
violate, applicable laws or regulations could subject us or our
customers to civil or criminal penalties. Such a determination
could also require us to change or terminate portions of our
business, disqualify us from serving customers who are or do
business with government entities, or cause us to refund some or
all of our service fees or otherwise compensate our customers.
In addition, failure to satisfy laws or regulations could
adversely affect demand for our products and services and could
force us to expend significant capital, research and development
and other resources to address the failure. Even an unsuccessful
challenge by regulatory authorities or private whistleblowers
could result in loss of business, exposure to adverse publicity
and injury to our reputation and could adversely affect our
ability to retain and attract clients. Laws and regulations
impacting our operations include the following:
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Data Protection and Breaches. In recent years,
there have been a number of well-publicized data breaches
involving the improper dissemination of personal information of
individuals both within and outside of the healthcare industry.
Many states have responded to these incidents by enacting laws
requiring holders of personal information to maintain safeguards
and to take certain actions in response to a data breach, such
as providing prompt notification of the breach to affected
individuals. In many cases, these laws are limited to electronic
data, but states are increasingly enacting or considering
stricter and broader requirements. As required by ARRA, HHS
published an interim final rule on August 24, 2009, which
requires Covered Entities to report breaches of unsecured
protected health information to affected individuals without
unreasonable delay but not to exceed 60 days of discovery
of the breach by a Covered Entity or its agents. Notification
must also be made to HHS and, in certain circumstances involving
large breaches, to the media. Business Associates must report
breaches of unsecured protected health information to Covered
Entities within 60 days of discovery of the breach by the
Business Associate or its agents. In addition, the FTC has
prosecuted some data breach cases as
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unfair and deceptive acts or practices under the Federal Trade
Commission Act. Further, some of our customers are subject to a
new federal rule requiring creditors, which may include health
providers and health plans, to implement identity theft
prevention programs to detect, prevent, and mitigate identity
theft in connection with customer accounts. We may be required
to apply additional resources to our existing process to assist
our customers in complying with this rule. We have implemented
and maintain physical, technical and administrative safeguards
intended to protect all personal data and have processes in
place to assist us in complying with all applicable laws and
regulations regarding the protection of this data and properly
responding to any security breaches or incidents; however, we
cannot be sure that these safeguards are adequate to protect all
personal data or assist us in complying with all applicable laws
and regulations regarding the protection of personal data.
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HIPAA and Other Privacy and Security
Requirements. There are numerous federal and
state laws and regulations related to the privacy and security
of personal health information. In particular, regulations
promulgated pursuant to HIPAA established privacy and security
standards that limit the use and disclosure of individually
identifiable health information and that require the
implementation of administrative, physical and technological
safeguards to ensure the confidentiality, integrity and
availability of individually identifiable health information in
electronic form. Our operations as a healthcare clearinghouse
are directly subject to the Privacy Standards and Security
Standards. In addition, our payer and provider customers are
also directly subject to the Privacy Standards and Security
Standards and are required to enter into written agreements with
us, known as business associate agreements, which require us to
safeguard individually identifiable health information and
restrict how we may use and disclose such information. Effective
February 17, 2010, ARRA extended the direct application of
certain provisions of the Privacy Standards and Security
Standards to us when we are functioning as a Business Associate
of our payer or provider customers.
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Violations of the Privacy Standards and Security Standards may
result in civil and criminal penalties, and ARRA has increased
the penalties for HIPAA violations and strengthened the
enforcement provisions of HIPAA. Recently, enforcement
activities appear to have increased, and ARRA may further
increase such enforcement activities. For example, ARRA
authorizes state attorneys general to bring civil actions
seeking either injunctions or damages in response to violations
of Privacy Standards and Security Standards that threaten the
privacy of state residents.
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HIPAA Transaction and Identifier
Standards. HIPAA and its implementing regulations
also mandate format, data content and provider identifier
standards that must be used in certain electronic transactions,
such as claims, payment advice and eligibility inquiries.
Although our systems are fully capable of transmitting
transactions that comply with these requirements, some payers
and healthcare clearinghouses with which we conduct business
interpret HIPAA transaction requirements differently than we do
or may require us to use legacy formats or include legacy
identifiers as they transition to full compliance. Where payers
or healthcare clearinghouses require conformity with their
interpretations or require us to accommodate legacy transactions
or identifiers as a condition of successful transactions, we
seek to comply with their requirements, but may be subject to
enforcement actions as a result. In January 2009, CMS published
a final rule adopting updated standard code sets for diagnoses
and procedures known as the ICD-10 code sets. A separate final
rule also published by CMS in January 2009 resulted in changes
to the formats to be used for electronic transactions subject to
the ICD-10 code sets, known as Version 5010. While use of the
ICD-10 code sets is not mandatory until October 1, 2013 and
the use of Version 5010 is not mandatory until January 1,
2012, we have begun to modify our payment systems and processes
to prepare for their implementation. We may not be successful in
responding to these changes and any responsive changes we make
to our transactions and software may result in errors or
otherwise negatively impact our service levels. We may also
experience complications related to supporting customers that
are not fully compliant with the revised requirements as of the
applicable compliance date.
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Anti-Kickback and Anti-Bribery Laws. A number
of federal and state laws govern patient referrals, financial
relationships with physicians and other referral sources and
inducements to providers and patients. For example, the federal
Anti-Kickback Law prohibits any person or entity from offering,
paying, soliciting or receiving, directly or indirectly,
anything of value with the intent of generating
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referrals of patients covered by Medicare, Medicaid or other
federal healthcare programs. Many states also have similar
anti-kickback laws that are not necessarily limited to items or
services for which payment is made by a federal healthcare
program. Moreover, both federal and state laws forbid bribery
and similar behavior. Any determination by a state or federal
regulatory agency that any of our activities or those of our
customers or vendors violate any of these laws could subject us
to civil or criminal penalties, could require us to change or
terminate some portions of our business, could require us to
refund a portion of our service fees, could disqualify us from
providing services to customers doing business with government
programs and could have an adverse effect on our business. Even
an unsuccessful challenge by regulatory authorities of our
activities could result in adverse publicity and could require a
costly response from us.
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False or Fraudulent Claim Laws. There are
numerous federal and state laws that prohibit false or
fraudulent claims. False or fraudulent claims include, but are
not limited to, billing for services not rendered, failing to
refund known overpayments, misrepresenting actual services
rendered, improper coding and billing for medically unnecessary
items or services. The FCA and some state false claims laws
contain whistleblower provisions that allow private individuals
to bring actions on behalf of the government alleging that the
defendant has defrauded the government. Whistleblowers, the
federal government and some courts have taken the position that
entities that have violated other statutes, such as the federal
anti-kickback law, have thereby submitted false claims under the
FCA.
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We rely on our customers to provide us with accurate and
complete information. Errors and the unintended consequences of
data manipulations by us or our systems with respect to entry,
formatting, preparation or transmission of claim information may
be determined or alleged to be in violation of these laws and
regulations or could adversely impact the compliance of our
customers.
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Banking and Financial Services Industry
Laws. The banking and is subject to numerous
laws, regulations and industry standards, some of which may
impact our operations and subject us, our vendors or our
customers to liability as a result of the payment distribution
products and services we offer. Although we do not act as a
bank, we offer products and services that involve banks, or
vendors who contract with banks and other regulated providers of
financial services. As a result, we may be impacted by banking
and financial services industry laws, regulations and industry
standards, such as licensing requirements, solvency standards,
requirements to maintain the privacy and security of nonpublic
personal financial information and FDIC deposit insurance
limits. Further, our payment distribution products and services
may impact the ability of our payer customers to comply with
state prompt payment laws. These laws require payers to pay
healthcare claims meeting the statutory or regulatory definition
of a clean claim to be paid within a specified time
frame.
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Legislative
changes may impede our ability to utilize our off-shore service
capabilities.
In our operations, we have contractors in India and China who
may have access to patient health information in order to assist
us in performing services to our customers. In recent sessions,
the U.S. Congress has considered legislation that would
restrict the transmission of personally identifiable information
regarding a U.S. resident to any foreign affiliate,
subcontractor or unaffiliated third party without adequate
privacy protections or without providing notice of the
transmission and an opportunity to opt out. Some of the
proposals considered would have required patient consent and
imposed liability on healthcare businesses arising from the
improper sharing or other misuse of personally identifiable
information. Congress also has considered creating a private
civil cause of action that would allow an injured party to
recover damages sustained as a result of a violation of these
proposed restrictions. A number of states have also considered,
or are in the process of considering, prohibitions or
limitations on the disclosure of medical or other personal
information to individuals or entities located outside of the
United States. If legislation of this type is enacted, our
ability to utilize off-shore resources may be impeded, and we
may be subject to sanctions for failure to comply with the new
mandates of the legislation. In addition, the enactment of such
legislation could result in such work being performed at a lower
margin of profitability, or even at a loss. Further, as a result
of concerns regarding the possible misuse of personally
identifiable information, some of our customers have
contractually limited our ability to use our off-shore
resources. Use of off-shore resources may increase our risk of
violating
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our contractual obligations to our customers to protect the
privacy and security of individually identifiable health
information provided to us, which could adversely impact our
reputation and operating results.
Failure
by our customers to obtain proper permissions or provide us with
accurate and appropriate data may result in claims against us or
may limit or prevent our use of data which could harm our
business.
We require our customers to provide necessary notices and to
obtain necessary permissions for the use and disclosure of the
information that we receive. If they do not provide necessary
notices or obtain necessary permissions, then our use and
disclosure of information that we receive from them or on their
behalf may be limited or prohibited by state or federal privacy
laws or other laws. Such failures by our customers could impair
our functions, processes and databases that reflect, contain or
are based upon such data. For example, as part of our claims
submission services, we rely on our customers to provide us with
accurate and appropriate data and directives for our actions.
While we have implemented features and safeguards designed to
maximize the accuracy and completeness of claims content, these
features and safeguards may not be sufficient to prevent
inaccurate claims data from being submitted to payers. In
addition, such failures by our customers could interfere with or
prevent creation or use of rules, analyses or other data-driven
activities that benefit us. Accordingly, we may be subject to
claims or liability for inaccurate claims data submitted to
payers or for use or disclosure of information by reason of lack
of valid notice or permission. These claims or liabilities could
damage our reputation, subject us to unexpected costs and
adversely affect our financial condition and operating results.
Certain
of our products and services present the potential for
embezzlement, identity theft or other similar illegal behavior
by our employees or contractors with respect to third
parties.
Among other things, our products and services include printing
and mailing checks
and/or
facilitating electronic funds transfers for our payer customers
and handling mail and payments from payers and from patients for
many of our customers. These services frequently include
handling original checks
and/or
credit card information and occasionally may include currency.
Even in those cases in which we do not facilitate payments or
handle original documents or mail, our services also involve the
use and disclosure of personal and business information that
could be used to impersonate third parties or otherwise gain
access to their data or funds. If any of our employees or
contractors takes, converts or misuses such funds, documents or
data, or we experience a data breach creating a risk of identity
theft, we could be liable for damages, and our business
reputation could be damaged or destroyed. In addition, we could
be perceived to have facilitated or participated in illegal
misappropriation of funds, documents or data and, therefore, be
subject to civil or criminal liability. Federal and state
regulators may take the position that a data breach or
misdirection of data constitutes an unfair or deceptive act or
trade practice. We also may be required to notify individuals
affected by any data breaches. Further, a data breach or similar
incident could impact the ability of our customers that are
creditors to comply with the federal red flags rule,
which requires the implementation of identity theft prevention
programs to detect, prevent, and mitigate identity theft in
connection with customer accounts.
Contractual
relationships with customers that are governmental agencies or
are funded by government programs may impose special burdens on
us and provide special benefits to those
customers.
A portion of our revenues comes from customers that are
governmental agencies or are funded by government programs. Our
contracts and subcontracts may be subject to some or all of the
following:
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termination when appropriated funding for the current fiscal
year is exhausted;
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termination for the governmental customers convenience,
subject to a negotiated settlement for costs incurred and profit
on work completed, along with the right to place contracts out
for bid before the full contract term, as well as the right to
make unilateral changes in contract requirements, subject to
negotiated price adjustments;
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compliance and reporting requirements related to, among other
things, agency specific policies and regulations, equal
employment opportunity, affirmative action for veterans and
workers with disabilities and accessibility for the disabled;
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broad audit rights; and
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specialized remedies for breach and default, including setoff
rights, retroactive price adjustments and civil or criminal
fraud penalties, as well as mandatory administrative dispute
resolution procedures instead of state contract law remedies.
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In addition, certain violations of federal and state law may
subject us to having our contracts terminated and, under certain
circumstances, suspension
and/or
debarment from future government contracts. We are also subject
to
conflict-of-interest
rules that may affect our eligibility for some government
contracts, including rules applicable to all
U.S. government contracts, as well as rules applicable to
the specific agencies with which we have contracts or with which
we may seek to enter into contracts.
The
protection of our intellectual property requires substantial
resources.
We rely upon a combination of patent, trade secret, copyright
and trademark laws, license agreements, confidentiality
procedures, nondisclosure agreements and technical measures to
protect the intellectual property used in our business. The
steps we have taken to protect and enforce our proprietary
rights and intellectual property may not be adequate. For
instance, we may not be able to secure trademark or service mark
registrations for marks in the U.S. or in foreign countries
or take similar steps to secure patents for our proprietary
applications. Third parties may infringe upon or misappropriate
our patents, copyrights, trademarks, service marks and similar
proprietary rights, which could have an adverse affect on our
business, financial condition and results of operations. If we
believe a third party has misappropriated our intellectual
property, litigation may be necessary to enforce and protect
those rights, which would divert management resources, would be
expensive and may not effectively protect our intellectual
property. As a result, if anyone misappropriates our
intellectual property, it may have an adverse effect on our
business, financial condition and results of operations.
Third
parties may claim that we are infringing their intellectual
property, and we could suffer significant litigation or
licensing expenses or be prevented from selling products or
services.
We could be subject to claims that we are misappropriating or
infringing intellectual property or other proprietary rights of
others. These claims, even if not meritorious, could be
expensive to defend and divert managements attention from
our operations. If we become liable to third parties for
infringing these rights, we could be required to pay a
substantial damage award and to develop non-infringing
technology, obtain a license or cease selling the products or
services that use or contain the infringing intellectual
property. We may be unable to develop non-infringing products or
services or obtain a license on commercially reasonable terms,
or at all. We may also be required to indemnify our customers if
they become subject to third party claims relating to
intellectual property that we license or otherwise provide to
them, which could be costly.
A
write-off of all or a part of our identifiable intangible assets
or goodwill would hurt our operating results and reduce our net
worth.
We have significant identifiable intangible assets and goodwill,
which represents the excess of the total purchase price of our
acquisitions over the estimated fair value of the net assets
acquired. As of December 31, 2009, we had
$989.3 million of identifiable intangible assets and
$703.0 million of goodwill on our balance sheet, which
represented in excess of 75.8% of our total assets. We amortize
identifiable intangible assets over their estimated useful lives
which range from 1 to 20 years. We also evaluate our
goodwill for impairment at least annually using a combination of
valuation methodologies. Because one of the valuation
methodologies we use is impacted by market conditions, the
likelihood and severity of an impairment charge increases during
periods of market volatility, such as the one that recently
occurred as a result of the general weakening of the global
economy. We are not permitted to amortize goodwill under
U.S. accounting standards. In the event an impairment of
goodwill is identified, a charge to earnings would be recorded.
Although it does not affect our cash flow, a write-off in future
periods of all or a part of these assets would adversely affect
our operating results and financial condition. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies Goodwill and Intangible
Assets in Part II, Item 7. of this Annual Report.
33
We are
dependent on the continued service of key executives, the loss
of any of whom could adversely affect our
business.
Our performance is substantially dependent on the performance of
our senior management team including, George I. Lazenby, IV
(Chief Executive Officer), Tracy Bahl (Executive Chairman), Bob
A. Newport, Jr. (Chief Financial Officer), Gregory T.
Stevens (Executive Vice President, General Counsel and
Secretary), J. Philip Hardin (Executive Vice
President Provider Services), Gary D. Stuart
(Executive Vice President Payer Services) and Mark
Lyle (Senior Vice President Pharmacy Services). We
have entered into agreements with each member of our senior
management team that restrict their ability to compete with us
should they decide to leave our company. Even though we have
entered into these agreements, we cannot be sure that any member
of our senior management team will remain with us or that they
will not compete with us in the future. The loss of any member
of our senior management team could impair our ability to
execute our business plan and growth strategy, cause us to lose
customers and reduce revenues, or lead to employee morale
problems
and/or the
loss of key employees.
Our
success depends in part on our ability to identify, recruit and
retain skilled management and technical personnel. If we fail to
recruit and retain suitable candidates or if our relationship
with our employees changes or deteriorates, there could be an
adverse effect on our business.
Our future success depends upon our continuing ability to
identify, attract, hire and retain highly qualified personnel,
including skilled technical, management, product and technology
and sales and marketing personnel, all of whom are in high
demand and are often subject to competing offers. Competition
for qualified personnel in the healthcare information technology
and services industry is intense, and we cannot assure you that
we will be able to hire or retain a sufficient number of
qualified personnel to meet our requirements, or that we will be
able to do so at salary, benefit and other compensation costs
that are acceptable to us. A loss of a substantial number of
qualified employees, or an inability to attract, retain and
motivate additional highly skilled employees required for
expansion of our business, could have an adverse effect on our
business. In addition, while none of our employees are currently
unionized, unionization of our employees is possible in the
future. Such unionizing activities could be costly to address
and, if successful, would likely adversely impact our operations.
A
prolonged economic downturn could have a material adverse effect
on our business, financial condition and results of
operations.
The U.S. economy is currently experiencing a significant
economic downturn. We are unable to predict the likely duration
or ultimate severity of the economic downturn and there can be
no assurance that current economic conditions will not worsen. A
prolonged or further weakening of economic conditions could lead
to reductions in demand for our products and services. For
example, a sustained recession could reduce the amount of income
patients are able to spend on healthcare services. As a result,
patients may elect to delay or forgo seeking healthcare
services, which could decrease our transaction volumes or
decrease payer and provider demand for our products and
services. Also, prolonged high unemployment rates could cause
commercial payer membership to decline which could result in
lower transaction volumes in our business. In addition, as a
result of weak economic conditions, we may experience the
negative effects of increased financial pressures on our payer
and provider customers. For instance, our business, financial
condition and results of operations could be negatively impacted
by increased competitive pricing pressure and a decline in our
customers credit worthiness, which could result in us
incurring increased bad debt expense. If we are not able to
timely and appropriately adapt to changes resulting from a weak
economic environment, our business, results of operations and
financial condition may be materially and adversely affected.
Lengthy
sales, installation and implementation cycles for some of our
applications may result in delays or an inability to generate
revenues from these applications.
Sales of complex revenue and payment cycle management solutions
and electronic medical records applications may result in longer
sales, contracting and implementation cycles for our customers.
These sales may be subject to delays due to customers
internal procedures for deploying new technologies and processes
and implementation may be subject to delays based on the
availability of the internal customer resources needed. The use
of our solutions may also be delayed due to reluctance to change
or modify existing
34
procedures. We are unable to control many of the factors that
will influence the timing of the buying decisions of potential
customers or the pace at which installation and training may
occur. If we experience longer sales, contracting and
implementation cycles for our solutions, we may experience
delays in generating, or an inability to generate revenue from
these solutions, which could have an adverse effect on our
financial results.
Risks
Related to our Organization and Structure
We are
a holding company and our principal asset is our ownership of
equity interests in EBS Master, and we are accordingly dependent
upon distributions from EBS Master to pay dividends, if any,
taxes and other expenses.
We are a holding company and our principal asset is our
ownership of units of membership interest in EBS Master
(EBS Units). We have no independent means of
generating revenue. We intend to cause EBS Master to make
distributions to its unitholders, including us, in an amount
sufficient to cover all applicable taxes payable but are limited
in our ability to cause EBS Master to make these and other
distributions to us (including for purposes of paying corporate
and other overhead expenses and dividends) due to the terms of
our credit agreements. To the extent that we need funds and EBS
Master is restricted from making such distributions under
applicable law or regulation, as a result of the terms in our
credit agreements or is otherwise unable to provide such funds,
it could adversely affect our liquidity and financial condition.
We are controlled by our Principal Equityholders whose interest
in our business may be different than the interests of our other
stockholders, and certain statutory provisions afforded to
stockholders are not applicable to us.
Together, our Principal Equityholders control approximately
72.6% of the combined voting power of our Class A common
stock. We are subject to a Stockholders Agreement with the
General Atlantic Equityholders, the H&F Equityholders and
certain individuals, including certain members of our senior
management team and board of directors that received EBS Units
and unvested options to purchase shares of our Class A
common stock as part of the reorganization of the Company prior
to our IPO (the EBS Equity Plan Members). Under the
Stockholders Agreement, our Principal Equityholders are entitled
to nominate a majority of the members of our board of directors
and each of the Principal Equityholders has agreed to vote for
all of such nominees.
Accordingly, our Principal Equityholders can exercise
significant influence over our business policies and affairs,
including the power to nominate a majority our board of
directors. In addition, the Principal Stockholders can control
any action requiring the general approval of our stockholders,
including the adoption of amendments to our certificate of
incorporation and bylaws and the approval of mergers or sales of
substantially all of our assets. The concentration of ownership
and voting power of our Principal Equityholders may also delay,
defer or even prevent an acquisition by a third party or other
change of control of our company and may make some transactions
more difficult or impossible without the support of our
Principal Equityholders, even if such events are in the best
interests of minority stockholders. The concentration of voting
power among the Principal Equityholders may have an adverse
effect on the price of our Class A common stock.
We have opted out of section 203 of the General Corporation
Law of the State of Delaware, which we refer to as the
Delaware General Corporation Law, which prohibits a
publicly held Delaware corporation from engaging in a business
combination transaction with an interested stockholder for a
period of three years after the interested stockholder became
such unless the transaction fits within an applicable exemption,
such as board approval of the business combination or the
transaction which resulted in such stockholder becoming an
interested stockholder. Therefore, the General Atlantic
Equityholders and the H&F Equityholders are able to
transfer control of us to a third party by transferring their
common stock (subject to the restrictions in the Stockholders
Agreement), which would not require the approval of our board of
directors or our other stockholders.
Our amended and restated certificate of incorporation provides
that the doctrine of corporate opportunity will not
apply against the General Atlantic Equityholders, the H&F
Equityholders or any of our directors who are employees of the
Principal Equityholders, in a manner that would prohibit them
from investing in competing businesses or doing business with
our customers. To the extent they invest in such other
businesses,
35
our Principal Equityholders may have differing interests than
our other stockholders. In addition, under the EBS Master LLC
Agreement, the members of EBS Master, including the EBS Equity
Plan Members and the affiliates of the H&F Equityholders
that hold EBS Units or their successors (the H&F
Continuing LLC Members), have agreed that the H&F
Continuing LLC Members
and/or one
or more of their respective affiliates are permitted to engage
in business activities or invest in or acquire businesses which
may compete with our business or do business with any client of
ours.
We
have elected to be exempt from certain corporate governance
requirements since we are a Controlled Company
within the meaning of the NYSE Rules and, as a result, our
stockholders do not have the protections afforded by these
corporate governance requirements for so long as our election
continues.
Together, our Principal Equityholders control more than 50% of
the voting power of our outstanding common stock. As a result,
we are a controlled company for the purposes of the
NYSE listing requirements and therefore we are eligible for, and
have elected to take advantage of, exemptions from certain NYSE
listing requirements that would otherwise require our board of
directors to have a majority of independent directors and our
compensation and nominating and corporate governance committees
to be comprised entirely of independent directors. Accordingly,
for so long as we remain a controlled company and
elect to opt out of these provisions, our stockholders do not
and will not have the same protection afforded to stockholders
of companies that are subject to all of the NYSE governance
requirements, and the ability of our independent directors to
influence our business policies and affairs may be reduced.
We are
required to pay an affiliate of our Principal Equityholders and
the EBS Equity Plan Members for certain tax benefits we may
claim, and the amounts we may pay could be
significant.
The EBS Units (along with a corresponding number of shares of
our Class B common stock) held by the H&F Continuing
LLC Members and EBS Equity Plan Members are exchangeable in the
future for cash or shares of our Class A common stock.
These future exchanges are likely to result in tax basis
adjustments to the assets of EBS Master, which adjustments would
also be allocated to us. Both the existing and the anticipated
basis adjustments are expected to reduce the amount of tax that
we would otherwise be required to pay in the future.
Additionally, we have entered into two tax receivable agreements
with an entity controlled by the Principal Equityholders (the
Tax Receivable Entity). One tax receivable agreement
generally provides for the payment by us to the Tax Receivable
Entity of 85% of the amount of cash savings, if any, in
U.S. federal, state and local income tax or franchise tax
that we actually realize as a result of (i) any
step-up in
tax basis in EBS Masters assets resulting from the
purchases by us and our subsidiaries of EBS Units prior to our
IPO; (ii) tax benefits related to imputed interest deemed
to be paid by us as a result of this tax receivable agreement;
and (iii) loss carryovers from prior periods (or portions
thereof).
The second of these tax receivable agreements generally provides
for the payment by us to the Tax Receivable Entity of 85% of the
amount of cash savings, if any, in U.S. federal, state and
local income tax or franchise tax that we actually realize as a
result of (i) any
step-up in
tax basis in EBS Masters assets resulting from
(a) exchanges by the H&F Continuing LLC Members of EBS
Units (along with the corresponding shares of our Class B
common stock) for cash or shares of our Class A common
stock or (b) payments under this tax receivable agreement
to the Tax Receivable Entity and (ii) tax benefits related
to imputed interest deemed to be paid by us as a result of this
tax receivable agreement.
We have also entered into a third tax receivable agreement with
the EBS Equity Plan Members which will generally provide for the
payment by us to the EBS Equity Plan Members of 85% of the
amount of the cash savings, if any, in U.S. federal, state
and local income tax or franchise tax that we actually realize
as a result of (i) any
step-up in
tax basis in EBS Masters assets resulting from
(a) the purchases by us and our subsidiaries of EBS Units
from the EBS Equity Plan Members using a portion of the proceeds
from our IPO, (b) the exchanges by the EBS Equity Plan
Members of EBS Units (along with the corresponding shares of our
Class B common stock) for cash or shares of our
Class A common stock or (c) payments under this tax
receivable agreement to the EBS Equity Plan Members and
(ii) tax benefits related to imputed interest deemed to be
paid by us as a result of this tax receivable agreement.
36
The actual increase in tax basis, as well as the amount and
timing of any payments under the tax receivable agreements, will
vary depending upon a number of factors, including the timing of
exchanges by the H&F Continuing LLC Members or the EBS
Equity Plan Members, as applicable, the price of our
Class A common stock at the time of the exchange, the
extent to which such exchanges are taxable, the amount and
timing of the taxable income we generate in the future and the
tax rate then applicable, our use of loss carryovers and the
portion of our payments under the tax receivable agreements
constituting imputed interest or amortizable basis.
The payments we will be required to make under the tax
receivable agreements could be substantial. We estimate that, as
a result of the amount of the increases in the tax basis of the
tangible and intangible assets of EBS Master and the loss
carryovers from prior periods (or portions thereof), assuming no
material changes in the relevant tax law and that we earn
sufficient taxable income to realize in full the potential tax
benefit described above, future payments under the tax
receivable agreements in respect of the purchases and the loss
carryovers will aggregate approximately $142 million and
range from approximately $5 million to $25 million per
year over the next 15 years. These amounts reflect only the
cash savings attributable to current tax attributes resulting
from the purchases and the loss carryovers. It is possible that
future transactions or events could increase or decrease the
actual tax benefits realized and the corresponding tax
receivable agreement payments from these tax attributes. Future
payments under the tax receivable agreements in respect of
subsequent acquisitions of EBS Units would be in addition to
these amounts.
In addition, although we are not aware of any issue that would
cause the Internal Revenue Service to challenge the tax basis
increases or other benefits arising under the tax receivable
agreements, the Tax Receivable Entity and the EBS Equity Plan
Members will not reimburse us for any payments previously made
if such basis increases or other benefits are subsequently
disallowed, except that excess payments made to the Tax
Receivable Entity or the EBS Equity Plan Members will be netted
against payments otherwise to be made, if any, after our
determination of such excess. As a result, in such
circumstances, we could make payments under the tax receivable
agreements that are greater than our actual cash tax savings and
may not be able to recoup those payments, which could adversely
affect our liquidity.
Finally, because we are a holding company with no operations of
our own, our ability to make payments under the tax receivable
agreements is substantially dependent on the ability of our
subsidiaries to make distributions to us. Our credit agreements
restrict the ability of our subsidiaries to make distributions
to us, which could affect our ability to make payments under the
tax receivable agreements. To the extent that we are unable to
make payments under the tax receivable agreements for any
reason, such payments will be deferred and will accrue interest
until paid, which could adversely affect our results of
operations and could also affect our liquidity in periods in
which such payments are made.
Rights to receive payments under the tax receivable agreements
may be terminated by the Tax Receivable Entity or the EBS Equity
Plan Members, as applicable, if as the result of an actual or
proposed change in law, the existence of the agreements would
cause recognition of ordinary income (instead of capital gain)
in connection with future exchanges of EBS Units for cash or
shares of our Class A common stock or would otherwise have
material adverse tax consequences to the Tax Receivable Entity,
its owners or the EBS Equity Plan Members. There are legislative
proposals pending in Congress that, if enacted in their present
form, may result in such ordinary income recognition. Further,
in the event of such a termination, the Tax Receivable Entity or
the EBS Equity Plan Members would have the right, subject to the
delivery of an appropriate tax opinion, to require us to
determine a lump sum amount in lieu of the payments otherwise
provided under the agreements. That lump sum amount would be
calculated by increasing the portion of the tax savings retained
by us to 30% (from 15%) and by calculating a present value for
the total amount that would otherwise be payable under the
agreements, using a discount rate equal to the lesser of LIBOR
plus 100 basis points and 6.5% per annum and assumptions as
to income tax rates and as to our ability to utilize the tax
benefits (including the assumption that we will have sufficient
taxable income). If the assumptions used in this calculation
turn out not to be true, we may pay more or less than the
specified percentage of our actual cash tax savings. This lump
sum amount may be paid in cash or by a subordinated note with a
seven-year maturity and an interest rate equal to the lesser of
LIBOR plus 200 basis points and 6% per annum. Any such
acceleration can occur only if the Tax Receivable Entity or any
EBS Equity Plan Member, as applicable, has terminated a
substantial portion of our obligations (or, in the case of an
EBS Equity Plan Member, such
37
Members share of our obligations) under the applicable tax
receivable agreement with respect to exchanges of units. The
ultimate impact of a decision to accelerate will depend on what
the ongoing payments would have been under the tax receivable
agreement absent acceleration, which will in turn depend on the
various factors mentioned above.
In addition, the tax receivable agreements provide that, upon
certain mergers, asset sales, or other forms of business
combination or certain other changes of control, our or our
successors obligations with respect to tax benefits would
be based on certain assumptions, including that we or our
successor would have sufficient taxable income to fully utilize
the deductions arising from the increased tax deductions and tax
basis and other benefits covered by the tax receivable
agreements. As a result, upon a change of control, we could be
required to make payments under the tax receivable agreements
that are greater than or less than the specified percentage of
our actual cash tax savings.
Risks
Related to Ownership of Our Class A Common Stock
The
market price of our Class A common stock may be volatile,
and your investment in our Class A common stock could suffer a
decline in value.
There has been significant volatility in the market price and
trading volume of equity securities, which is often unrelated or
disproportionate to the financial performance of the companies
issuing the securities. These broad market fluctuations may
negatively affect the market price of our Class A common
stock. The market price of our Class A common stock could
fluctuate significantly in response to various factors, some of
which are beyond our control. In addition to the factors
discussed in this Risk Factors section and elsewhere
in this Annual Report, these factors include:
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our actual or anticipated operating performance and growth and
the actual or anticipated operating performance and growth of
our competitors;
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the overall performance of the equity markets;
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actions of our historical equity investors, including sales of
common stock by our directors and executive officers;
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public response to press releases and other announcements by us
and our competitors, including announcements of acquisitions,
business developments and new products and services;
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changes to our senior management team;
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legal and regulatory changes;
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publication of research reports or news stories about us, our
competitors or our industry or positive or negative
recommendations or withdrawal of research coverage by securities
analysts; and
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general economic, industry and market conditions, and in
particular those conditions specific to the healthcare industry.
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In addition, the stock market in general, and the market for
technology-based companies in particular, has experienced
extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of
those companies. Securities class action litigation has often
been instituted against companies following periods of
volatility in the overall market and in the market price of
companies securities. Such litigation, if instituted
against us, could entail substantial costs, divert our
managements time and attention from operational matters
and harm our business, operating results and financial condition
and, as a result, may negatively affect the market price of our
Class A common stock.
We do
not intend to pay dividends in the foreseeable future, and,
because we are a holding company, we may be unable to pay
dividends.
For the foreseeable future, we intend to retain any earnings to
finance the development and expansion of our business, and we do
not anticipate paying any cash dividends on our Class A
common stock. Any future determination to pay dividends will be
at the discretion of our board of directors and will be
dependent on then-existing conditions, including our financial
condition and results of operations, capital requirements,
contractual restrictions, business prospects and other factors
that our board of directors considers relevant.
38
Furthermore, because we are a holding company, any dividend
payments would depend on the cash flow of our subsidiaries.
However, our credit agreements limit the amount of distributions
our subsidiaries (including EBS Master) can make to us and the
purposes for which distributions could be made. Accordingly, we
may not be able to pay dividends even if our board of directors
would otherwise deem it appropriate. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources in
Part II, Item 7. of this Annual Report.. For the
foregoing reasons, you will not be able to rely on dividends on
our Class A common stock to receive a return on your
investment.
Provisions
in our organizational documents may delay or prevent our
acquisition by a third party.
Our amended and restated certificate of incorporation and
by-laws contain several provisions that may make it more
difficult or expensive for a third party to acquire control of
us without the approval of our board of directors. These
provisions also may delay, prevent or deter a merger,
acquisition, tender offer, proxy contest or other transaction
that might otherwise result in our stockholders receiving a
premium over the market price for their Class A common
stock. The provisions include, among others:
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provisions relating to the number of directors on our board of
directors and the appointment of directors upon an increase in
the number of directors or vacancy on our board of directors;
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provisions requiring a
662/3%
stockholder vote for the amendment of certain provisions of our
certificate of incorporation, such as provisions relating to the
election of directors and the inability of stockholders to act
by written consent or call a special meeting, and for the
adoption, amendment and repeal of our by-laws;
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provisions barring stockholders from calling a special meeting
of stockholders or requiring one to be called;
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elimination of the right of our stockholders to act by written
consent; and
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provisions that set forth advance notice procedures for
stockholders nominations of directors and proposals for
consideration at meetings of stockholders.
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These provisions of our amended and restated certificate of
incorporation and by-laws could discourage potential takeover
attempts and reduce the price that investors might be willing to
pay for shares of our Class A common stock in the future
which could reduce the market price of our Class A common
stock.
We
have and will continue to incur additional costs as a result of
becoming a public company, and our management may be required to
devote substantial time and attention to new compliance
initiatives.
As a public company, we have and will continue to incur
significant levels of legal, accounting and other expenses that
we did not incur as a privately-owned corporation. The
Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) and
related rules of the SEC and the NYSE corporate governance
practices for public companies impose significant requirements
relating to disclosure controls and procedures and internal
control over financial reporting. Our management and other
personnel continue to devote a substantial amount of time and
attention to these compliance initiatives, and additional laws
may divert further management resources. Moreover, if we are not
able to comply with these requirements and with the requirements
of new compliance initiatives in a timely manner, the market
price of our Class A common stock could decline, and we
could be subject to sanctions or investigations by the SEC, the
Financial Industry Regulatory Authority (FINRA), the
NYSE or other regulatory authorities, which would require
additional financial and management resources.
Failure
to establish and maintain effective internal controls over
financial reporting could have an adverse effect on our
business, operating results and stock price.
Maintaining effective internal control over financial reporting
is necessary for us to produce reliable financial reports and is
important in helping to prevent financial fraud. To date, we
have not identified any material weaknesses related to our
internal control over financial reporting or disclosure controls
and procedures, although we have not conducted an audit of our
controls. If we are unable to maintain adequate internal
controls, our business and operating results could be harmed. We
are also in the process of evaluating how to document and test
our internal control procedures to satisfy the requirements of
Section 404 of Sarbanes-Oxley and the related rules of the
SEC, which require, among other things, our management to
39
assess annually the effectiveness of our internal control over
financial reporting and our independent registered public
accounting firm to issue a report on our internal control over
financial reporting beginning with our Annual Report on
Form 10-K
for the year ending December 31, 2010. During the course of
this documentation and testing, we may identify deficiencies
that we may be unable to remedy before the requisite deadline
for those reports. Our auditors have not conducted an audit of
our internal control over financial reporting. Any failure to
remediate material weaknesses noted by us or our independent
registered public accounting firm or to implement required new
or improved controls or difficulties encountered in their
implementation could cause us to fail to meet our reporting
obligations or result in material misstatements in our financial
statements. If our management or our independent registered
public accounting firm were to conclude in their reports that
our internal control over financial reporting was not effective,
investors could lose confidence in our reported financial
information, and the trading price of our Class A common
stock could drop significantly. Failure to comply with
Section 404 of Sarbanes-Oxley could potentially subject us
to sanctions or investigations by the SEC, the FINRA, the NYSE
or other regulatory authorities.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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Not applicable.
We do not own any real property. In late 2008, we expanded our
lease of office space at 3055 Lebanon Pike, Nashville, Tennessee
37214, which is due to expire in October 2018, from
approximately 55,000 square feet to approximately
164,000 square feet, and moved our corporate headquarters
and consolidated certain of our other Nashville-area operations
to this location.
One of our two primary data centers, containing approximately
31,000 square feet of data center and adjoining office
space, is located at our former corporate headquarters in
Nashville, Tennessee under a
sub-lease
agreement, which is due to expire in December 2010. In 2009, we
entered into lease agreements pursuant to which a new data
center and adjoining office space, comprising approximately
55,000 total square feet, will be constructed to our
specifications in Nashville, Tennessee and will replace our
existing Nashville data center upon its completion. The term on
our lease for the new data center will be 15 years from the
commencement date of the initial term, and we will have the
option to extend the lease by two five-year renewal terms. We
are currently scheduled to complete the migration to our new
data center during the first half of 2011 and are in discussions
with the landlord of our current Nashville data center to extend
a portion of our
sub-lease
agreement until such time as our migration to the new data
center is completed.
Our other primary data center, containing approximately
20,000 square feet of data center space, is located in
Memphis, Tennessee, and is subject to a lease agreement due to
expire in January 2017.
We also lease approximately 93,000 square feet of office
space at a facility located in Toledo, Ohio for our provider
patient statement operations and approximately
53,000 square feet of office space at a facility located in
Bridgeton, Missouri for payer distribution services.
We also lease a number of other data centers, operations,
business and sales offices in several states.
We believe that our facilities are generally adequate for
current and anticipated future use, although we may from time to
time lease or vacate additional facilities as our operations
require.
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ITEM 3.
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LEGAL
PROCEEDINGS
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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
managements opinion, the liabilities, if any, in excess of
amounts provided or covered by insurance, are not expected to
have a material adverse effect on our consolidated financial
position, results of operations or liquidity.
40
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our Class A common stock has been listed for trading on the
NYSE under the trading symbol EM since
August 12, 2009. Prior to that date, there was no
established public trading market for our Class A common
stock. The following table sets forth the high and low sales
prices of our Class A common stock, as reported by the
NYSE, for each of the periods listed.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
High
|
|
Low
|
|
Third Quarter (from August 12, 2009)
|
|
$
|
18.25
|
|
|
$
|
14.81
|
|
Fourth Quarter
|
|
$
|
16.25
|
|
|
$
|
14.27
|
|
On March 11, 2010, the last reported sale price for our
Class A common stock was $16.51 per share. No established
public trading market currently exists for our Class B
common stock. Shares of Class B common stock can be
exchanged with the Company for shares of Class A common
stock on a
one-for-one
basis.
Holders
As of March 11, 2010, there were 33 and 20 holders of
record of our Class A common stock and Class B common
stock, respectively. Because many shares of Class A common
stock are held by brokers and other institutions on behalf of
our stockholders, we are unable to estimate the total number of
beneficial stockholders represented by these record holders.
Dividends
We have not declared or paid any cash dividends on our
Class A common stock and Class B common stock since
our organization. For the foreseeable future, we intend to
retain any earnings to finance the development and expansion of
our business, and we do not anticipate paying any cash dividends
on our Class A common stock or Class B common stock.
Any future determination to pay dividends will be at the
discretion of our board of directors and will be dependent upon
then-existing conditions, including our financial condition and
results of operations, capital requirements, contractual
restrictions, including restrictions contained in our credit
agreements, business prospects and other factors that our board
of directors considers relevant.
41
Performance
Graph
The following graph compares the change in the cumulative total
return (including the reinvestment of dividends) on our
Class A common stock for the period from August 12,
2009, the date our shares of Class A common stock began
trading on the NYSE, to the change in the cumulative total
return on the stocks included in the Standard &
Poors 500 Stock Index and the NYSE Health Services Index
over the same period. The graph assumes an investment of $100
made in our Class A common stock at a price of $16.52 per
share, the closing sale price on August 12, 2009, our first
day of trading following our IPO (at $15.50 per share), and an
investment in each of the other indices on August 12, 2009.
We did not pay any dividends during the period reflected in the
graph.
Comparison
of Five Month Cumulative Total Return
Among Emdeon Inc., The S&P 500 Index
And The NYSE Health Services Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/12/09
|
|
|
8/31/09
|
|
|
9/30/09
|
|
|
10/31/09
|
|
|
11/30/09
|
|
|
12/31/09
|
Emdeon Inc.
|
|
|
|
100.00
|
|
|
|
|
105.57
|
|
|
|
|
98.06
|
|
|
|
|
90.68
|
|
|
|
|
91.34
|
|
|
|
|
92.31
|
|
S&P 500
|
|
|
|
100.00
|
|
|
|
|
101.60
|
|
|
|
|
105.39
|
|
|
|
|
103.43
|
|
|
|
|
109.64
|
|
|
|
|
111.75
|
|
NYSE Health Services
|
|
|
|
100.00
|
|
|
|
|
101.81
|
|
|
|
|
100.16
|
|
|
|
|
98.28
|
|
|
|
|
105.30
|
|
|
|
|
112.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The comparisons shown in the graph above are based on historical
data and we caution that the stock price performance shown in
the graph above is not indicative of, and is not intended to
forecast, the potential future performance of our Class A
common stock. The information in this Performance
Graph section shall not be deemed to be soliciting
material or to be filed with the SEC, nor
shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent that we specifically
incorporate it by reference into such filing.
Use of
Proceeds From Registered Securities
On August 11, 2009, we commenced the IPO of our
Class A common stock, par value of $0.0001. Pursuant to our
Registration Statement on
Form S-1
(File
No. 333-153451),
as amended, that was declared effective on August 11, 2009
and our Registration Statement on
Form S-1MEF
(File
No. 333-161270)
(collectively, the Registration Statements), we
registered 27,255,000 shares of Class A common stock,
consisting of 10,725,000 shares of Class A common
stock on behalf of the Company and 16,530,000 shares of
Class A common stock on behalf of certain selling
stockholders. The entirety of the Class A common stock was
sold in the IPO at a price per share to the public of $15.50 for
an aggregate offering price of
42
$422.5 million. The IPO closed on August 17, 2009, and
net proceeds of the IPO to the Company were $144.9 million
(including approximately $3.1 million of offering expenses
paid in 2008), after underwriting discounts of approximately
$10.8 million and other fees and expenses of approximately
$10.5 million.
Following is a description of our use of the proceeds from the
IPO since September 30, 2009:
|
|
|
|
|
The Company used approximately $25.7 million of the
proceeds from the IPO to purchase FVTech in January 2010 and to
pay HLTH license fees in October 2009 pursuant to a data
sublicense agreement between the Company and HLTH.
|
|
|
|
From September 30, 2009 through January 2010, the Company
used approximately $0.7 million of the proceeds from the
IPO to fund expenses related to operating as a public company.
|
As of March 11, 2010, we have used an aggregate of
approximately $31.8 million of the total net proceeds from
the IPO of $144.9 million, leaving a balance of
$113.1 million. We anticipate that we will use the
remaining net proceeds from the IPO for working capital and
other general corporate purposes, including repayment of
indebtedness and future acquisitions. Prior to application of
such proceeds, we may hold the net proceeds in cash or invest
them in short-term securities or investments. There has been no
material change in the planned use of the IPO net proceeds from
that described in the Registration Statements.
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following table sets forth our selected historical
consolidated financial data for periods beginning on and after
November 16, 2006. For periods prior to November 16,
2006, the tables below present the selected historical
consolidated financial data of the group of wholly-owned
subsidiaries of HLTH that comprised its Emdeon Business Services
segment. For periods on and after November 16, 2006, the
selected consolidated financial data gives effect to the
reorganization transactions relating to our IPO as if they
occurred on November 16, 2006.
Our selected statement of operations data for the years ended
December 31, 2009, 2008 and 2007 and for the period from
November 16, 2006 through December 31, 2006 and the
selected balance sheet data as of December 31, 2009, 2008,
2007 and 2006 have been derived from our consolidated financial
statements that have been audited by our independent registered
public accounting firm.
The selected statement of operations data of Emdeon Business
Services for the period from January 1, 2006 through
November 15, 2006 and for the year ended December 31,
2005 and the selected balance sheet data as of December 31,
2005 have been derived from Emdeon Business Services
consolidated financial statements that have been audited by
Emdeon Business Services independent registered public
accounting firm.
43
The information set forth below should be read in conjunction
with Managements Discussion and Analysis of
Financial Condition and Results of Operations, and our
consolidated financial statements and related notes included
elsewhere in this Annual Report. Historical results of
operations are not necessarily indicative of results of
operations or financial condition in the future or to be
expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emdeon Inc.
|
|
|
|
Emdeon Business Services
|
|
|
|
(Successor)(1)(2)
|
|
|
|
(Predecessor)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 16,
|
|
|
|
January 1,
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
2006 thru
|
|
|
|
2006 thru
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
November 15,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
918,448
|
|
|
$
|
853,599
|
|
|
$
|
808,537
|
|
|
$
|
87,903
|
|
|
|
$
|
663,186
|
|
|
$
|
690,094
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
562,867
|
|
|
|
541,563
|
|
|
|
514,918
|
|
|
|
56,628
|
|
|
|
|
425,108
|
|
|
|
449,044
|
|
Development and engineering
|
|
|
33,928
|
|
|
|
28,625
|
|
|
|
28,198
|
|
|
|
2,782
|
|
|
|
|
21,782
|
|
|
|
22,734
|
|
Sales, marketing, general and administrative
|
|
|
113,701
|
|
|
|
91,212
|
|
|
|
94,475
|
|
|
|
12,762
|
|
|
|
|
80,352
|
|
|
|
89,042
|
|
Depreciation and amortization
|
|
|
105,321
|
|
|
|
97,864
|
|
|
|
62,811
|
|
|
|
7,127
|
|
|
|
|
30,440
|
|
|
|
32,273
|
|
Loss on abandonment of leased properties
|
|
|
1,675
|
|
|
|
3,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
817,492
|
|
|
|
762,345
|
|
|
|
700,402
|
|
|
|
79,299
|
|
|
|
|
557,682
|
|
|
|
593,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
100,956
|
|
|
|
91,254
|
|
|
|
108,135
|
|
|
|
8,604
|
|
|
|
|
105,504
|
|
|
|
97,001
|
|
Interest income
|
|
|
(75
|
)
|
|
|
(963
|
)
|
|
|
(1,567
|
)
|
|
|
(139
|
)
|
|
|
|
(67
|
)
|
|
|
(74
|
)
|
Interest expense
|
|
|
70,246
|
|
|
|
71,717
|
|
|
|
74,325
|
|
|
|
10,113
|
|
|
|
|
25
|
|
|
|
56
|
|
Other
|
|
|
(519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
31,304
|
|
|
|
20,500
|
|
|
|
35,377
|
|
|
|
(1,370
|
)
|
|
|
|
105,546
|
|
|
|
97,019
|
|
Income tax provision
|
|
|
17,301
|
|
|
|
8,567
|
|
|
|
18,101
|
|
|
|
1,014
|
|
|
|
|
42,004
|
|
|
|
31,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
14,003
|
|
|
|
11,933
|
|
|
|
17,276
|
|
|
|
(2,384
|
)
|
|
|
|
63,542
|
|
|
|
65,493
|
|
Net income attributable to noncontrolling interest
|
|
|
4,422
|
|
|
|
2,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to controlling interest
|
|
$
|
9,581
|
|
|
$
|
9,231
|
|
|
$
|
17,276
|
|
|
$
|
(2,384
|
)
|
|
|
$
|
63,542
|
|
|
$
|
65,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
0.33
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
0.17
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
computing earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
82,459,169
|
|
|
|
74,775,039
|
|
|
|
52,000,000
|
|
|
|
52,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
82,525,002
|
|
|
|
100,000,000
|
|
|
|
100,000,000
|
|
|
|
52,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emdeon
|
|
|
|
|
|
|
|
Business
|
|
|
|
|
Emdeon Inc.
|
|
|
Services
|
|
|
|
|
(Successor)(1)(2)
|
|
|
(Predecessor)(1)
|
|
|
|
|
At
|
|
At
|
|
At
|
|
At
|
|
|
At
|
|
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
2005
|
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
211,999
|
|
|
$
|
71,478
|
|
|
$
|
33,687
|
|
|
$
|
30,513
|
|
|
|
$
|
6,930
|
|
|
|
|
|
Total assets
|
|
|
2,230,426
|
|
|
|
2,000,279
|
|
|
|
1,357,229
|
|
|
|
1,372,853
|
|
|
|
|
1,245,128
|
|
|
|
|
|
Total
debt(3)
|
|
|
840,682
|
|
|
|
825,230
|
|
|
|
871,934
|
|
|
|
907,349
|
|
|
|
|
|
|
|
|
|
|
Tax receivable obligations to related parties
|
|
|
142,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
979,869
|
|
|
$
|
878,153
|
|
|
$
|
300,969
|
|
|
$
|
292,657
|
|
|
|
$
|
1,121,637
|
|
|
|
|
|
|
|
|
(1) |
|
Our financial results prior to November 16, 2006 represent
the financial results of the group of wholly-owned subsidiaries
of HLTH that comprised its Emdeon Business Services segment. On
November 16, |
44
|
|
|
|
|
2006, HLTH sold a 52% interest in EBS Master (which was formed
as a holding company for our business in connection with that
transaction) to an affiliate of General Atlantic. Accordingly,
the financial information presented reflects the results of
operations and financial condition of Emdeon Business Services
before the 2006 Transaction (Predecessor) and of us after the
2006 Transaction (Successor). |
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(2) |
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As a result of our history of business combinations, our
financial position and results of operations may not be
comparable for each of the periods presented. See
Business Organizational Structure and
Corporate History in Part I, Item 1. of this
Annual Report. |
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(3) |
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Our debt as of December 31, 2009 and 2008 is reflected net
of unamortized debt discount of approximately $53.3 and
$64.7 million, respectively, related to original loan fees
and purchase accounting adjustments to discount the debt to fair
value in conjunction with the 2008 Transaction. Total debt as of
December 31, 2009 includes an obligation of approximately
$37.6 million related to a data sublicense obligation. |
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ITEM 7.
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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You should read the following discussion in conjunction with
Selected Financial Data and our consolidated
financial statements and related notes included elsewhere in
this Annual Report. Some of the statements in the following
discussion are forward-looking statements. See
Forward-Looking Statements included elsewhere in
this Annual Report.
Overview
We are a leading provider of revenue and payment cycle
management solutions, connecting payers, providers and patients
in the U.S. healthcare system. Our product and service
offerings 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, clinical exchange capabilities, claims
management and adjudication, payment distribution, payment
posting and denial management and patient billing and payment
processing. Our customers are able to improve efficiency, reduce
costs, increase cash flow and more efficiently manage the
complex revenue and payment cycle process by using our
comprehensive suite of products and services.
We deliver our solutions and operate our business in three
business segments: (i) payer services, which provides
services to commercial insurance companies, third party
administrators and governmental payers; (ii) provider
services, which provides services to hospitals, physicians,
dentists and other healthcare providers, such as labs and home
healthcare providers; and (iii) pharmacy services, which
provides services to pharmacies, pharmacy benefit management
companies and other payers. Through our payer services segment,
we provide payment cycle solutions, both directly and through
our channel partners, that simplify the administration of
healthcare related to insurance eligibility and benefit
verification, claims filing and claims and payment distribution.
Through our provider services segment, we provide revenue cycle
management solutions, patient billing and payment services and
clinical exchange capabilities, both directly and through our
channel partners, that simplify providers revenue cycle,
reduce related costs and improve cash flow. Through our pharmacy
services segment, we provide solutions to pharmacies and
pharmacy benefit management companies and government agencies
related to prescription benefit claim filing, adjudication and
management, as well as electronic prescriptions.
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
statement, payment 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
statement and payment distribution services (which is then also
deducted as a cost of operations), when our customers transition
to electronic processing, our revenues and costs of operations
decrease as we will no longer incur or be required to charge for
postage. As another example, as our payer customers migrate to
MGAs with us, our
45
electronic transaction volume usually increases while the
rebates we pay and the per transaction rate we charge under
these agreements is typically reduced.
Part of our strategy also includes the development and
introduction of new products and services. Our new and updated
products and services are likely to require us to incur
development and engineering expenditures at levels similar to,
and possibly greater than, recent years expenditures in
order to successfully develop and achieve market acceptance of
such products and services. We also may acquire, or enter into
agreements with third parties to assist us in providing, new
products and services. For example, we offer, or plan to 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 products and
services may affect our results of operations and margins.
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
healthcare revenue and payment cycle. We believe our broad
customer footprint allows us to deploy acquired products and
services into our installed base, which, in turn, can help to
accelerate growth of our acquired businesses. We also believe
our management teams 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 in our growth.
We also expect to continue to be affected by pricing pressure in
our industry, 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 (i) providing additional value-added products and
services, (ii) increasing the volume of services we provide
and (iii) managing our costs. In addition, significant
changes in regulatory schemes, such as the new updated HIPAA
Version 5010 standard electronic transaction code set
requirements for ICD-10, ARRA and other federal healthcare
policy initiatives, and demographic trends affecting the
healthcare industry, such as population growth and aging, 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
U.S. population, if such increase is accompanied by an
increase in the U.S. population that has health benefits,
or the aging of the U.S. 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 costs of operations.
Our
Revenues and Expenses
We generate virtually all of our revenue by providing products
and services that automate and simplify business and
administrative functions for payers and providers, generally on
either a per transaction, per document, per communications basis
or, in some cases, on a monthly flat-fee basis. For certain
services, we may charge an implementation fee in conjunction
with related setup and connection to our network and other
systems. In addition, we receive software license fees and
software and hardware maintenance fees, primarily from payers
who license our systems for converting paper claims into
electronic ones and, occasionally, sell additional software and
hardware products to such payers.
Cost of operations consists primarily of costs related to
products and services we provide to customers and costs
associated with the operation and maintenance of our networks.
These costs include (i) postage and materials costs related
to our patient statement and billing and payment distribution
services, (ii) rebates paid to our channel partners and
(iii) data and telecommunications costs, all of which
generally vary with our revenues. Cost of operations also
includes (i) personnel costs associated with production,
network operations, customer support and other personnel,
(ii) facilities expenses and (iii) equipment
maintenance, which vary less directly with our revenue due to
the fixed or semi-fixed nature of these expenses.
The largest component of our cost of operations is currently
postage which is primarily incurred in our patient statements
and payment services businesses and which is also a component of
our revenue in those businesses. Our postage costs increase as
our patient statement and payment distribution volumes increase
and also when the U.S. Postal Service increases postal
rates. U.S. postage rate increases, while generally billed
as
46
pass-through costs to our customers, affect our cost of
operations as a percentage of revenue. In recent years, we have
offset the impact of postage rate increases through cost
reductions from efficiency measures, including data
communication expense reductions and production efficiencies.
Though we plan to continue our 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 rise if postage rate increases continue. Although
the U.S. Postal Service increased postal rates annually
from 2006 to 2009, such annual increases may not occur as
regularly in the future. For example, in November 2009, the
U.S. Postal Service announced that there would be no postal
rate increase for 2010.
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 MGAs we execute with payers, the
success of our direct sales efforts for provider revenue cycle
management products and services and the extent to which direct
connections to payers are developed by channel partners. In 2007
and 2008, our revenues and expenses were impacted by two
separate contracts with a channel partner that expired without
renewal. The effect of the expiration of these contracts was a
decrease in our transaction volumes and related revenues and
costs of operations. The effect on our operating income was
partially mitigated by the retention of a portion of the
transaction volumes through our MGA and other payer
relationships, as well as the reduction in rebates paid pursuant
to the expired channel partner contracts.
Our data communication expense consists of telecommunication and
transaction processing charges. Over the last several years, we
have been able to reduce our data communication expense due to
efficiency measures and contract pricing changes. Due to the
significance of these past reductions in recent years, further
reductions may have a lesser impact in future periods.
Our material costs relate primarily to our patient statement and
payment distribution 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 products and services. We
plan to invest more in this area in the future as we develop new
products and enhance existing products.
Sales, marketing, general and administrative expense (excluding
corporate expense described in the next paragraph) consists
primarily of personnel costs associated with our sales, account
management and marketing functions and management and
administrative services related to the operations of our
business segments.
Our corporate expense relates to personnel costs associated with
management, administrative, finance, human resources, legal,
marketing, public relations and other corporate service
functions, as well as professional services, costs incurred in
connection with acquisitions, certain facilities costs,
advertising and promotion, insurance and other expenses related
to our overall business operations. Since our IPO, we have
incurred costs and we expect to incur additional costs related
to operating as a public company, including additional
directors and officers liability insurance, outside
director compensation, additional personnel costs and
Sarbanes-Oxley and other compliance costs.
Our development and engineering expense, sales, marketing,
general and administrative expense and our corporate expense,
while related to our current operations, are also affected and
influenced by our future plans (including the development of new
products and services), business strategies and enhancement and
maintenance of our infrastructure.
Recent
Developments
In January 2010, we acquired FVTech, a provider of outsourced
services specializing in electronic data conversion and
information management solutions, for consideration of
$20.0 million in cash at closing, and additional contingent
payments of $0 to $40 million in cash based upon the
financial performance of the acquired business for the two and
three year periods following the closing. This acquisition will
allow us to electronically process virtually all patient and
third party healthcare payments regardless of the format in
which the payments are submitted.
On March 16, 2010, we entered into a definitive agreement
to acquire Healthcare Technology Management Services, Inc., a
management consulting company focused primarily on the
healthcare payer market, for
47
consideration of $11.0 million at closing, to be paid
$8.5 million in cash and $2.5 million in our
Class A common stock, and additional contingent payments of
$0 to $14.0 million in cash based upon the financial
performance of the acquired business for the three year period
following the closing. This acquisition will allow us to assist
payers in evaluating their existing information technology
strategies, systems and technologies in order to help our
customers implement effective solutions.
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. In addition, we disposed of our office supplies
and print services business in 2009 because it no longer fit
within our overall strategy. Because of these acquisitions and
the divestiture, our results of operations may not be directly
comparable among periods. The following summarizes our
acquisitions and divestiture transactions from 2007 through
December 31, 2009 and affected segments:
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Date
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Acquisition
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Description
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Affected Segment
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December 2007
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IXT Solutions
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Paper and electronic patient billing and payment solutions
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Provider
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September 2008
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Patient statements business of GE Healthcare
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Paper patient billing and payment solutions
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Provider
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June 2009
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The Sentinel Group
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Fraud and abuse management services
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Payer
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July 2009
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eRx Network, L.L.C.
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Electronic pharmacy healthcare solutions
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Pharmacy
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October 2009
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Data Rights
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Acquired certain additional rights to specified uses of data
from HLTH/WebMD Corp
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N/A
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Effective Date
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Divestiture
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Description
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Affected Segment
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October 2009
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Control-o-Fax
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Office supplies and print services
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Provider
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Efficiency
Measures
We evaluate and implement efficiency measures and other cost
savings initiatives on an ongoing basis to improve our financial
and operating performance through cost savings, productivity
improvements and other process improvements. Since late 2006, we
have increased these activities and have initiated numerous
measures to streamline our operations through innovation,
integration and consolidation. For instance, we are
consolidating our data centers, consolidating our networks and
outsourcing certain information technology and operations
functions. The implementation of these measures often involve
upfront costs related to severance, professional fees,
contractor costs
and/or
capital expenditures, with the cost savings or other
improvements not realized until the measures are successfully
completed.
48
Purchase
Accounting
In connection with the 2008 Transaction, purchase accounting
adjustments were reflected in our financial statements. These
adjustments included the following items and their impact:
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Recognition of the fair value of our identifiable intangible
assets. The increased value of these intangibles
resulted in incremental amortization expense of
$35.9 million in 2008 related to the 2008 Transaction.
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Reduction to fair value of our deferred revenue related to
outstanding products and services to be provided subsequent to
the 2008 Transaction. In connection with the 2008
Transaction, we reduced our deferred revenue by
$5.6 million. This adjustment, in effect, reduced the
revenue and income from operations that would otherwise have
been recognized by $5.3 million in 2008 and
$0.7 million in 2009.
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Reduction in the carrying value of our long-term debt to fair
value in connection with the 2008 Transaction. In
connection with the 2008 Transaction, 48% of our long-term debt
was adjusted to fair value, a debt discount of approximately
$66.4 million was recorded and approximately
$8.2 million of the debt discount existing prior to the
2008 Transaction was written off. Amortization of the debt
discount and the write-off of the previous debt discount
resulted in incremental interest expense of approximately
$7.4 million in 2008 over 2007. Also, as a result of the
2008 Transaction, our interest rate swap no longer met the
criteria for hedge accounting and thus the value of the interest
rate swap at that date is being amortized over its term to
interest expense. This amortization resulted in incremental
interest expense of approximately $9.7 million in 2008 over
2007. As a result of no longer meeting the criteria for hedge
accounting, the change in fair value of our interest rate swap
from the date of the 2008 Transaction to its redesignation date
as a hedge on September 30, 2008 was reflected within
interest expense, which reduced interest expense by
approximately $12.7 million during 2008.
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Income
Taxes
Our statutory federal and state income tax rate ranges from 39%
to 40%. Several factors, such as the book/tax basis difference
for accounting of our investment in EBS Master and valuation
allowance changes, however, can affect the Companys
effective tax rate for particular periods. Among these factors
are the following items:
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Changes in our book and tax basis in EBS Master
Certain items, including certain equity-based compensation,
other comprehensive income and income of a corporate
consolidated subsidiary of EBS Master, affect our book basis in
EBS Master without similarly affecting our tax basis in EBS
Master. The difference in the book and tax basis of our
investment in EBS Master increased our income tax provision by
approximately $10.5 million for 2009.
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Valuation allowance changes During 2009, we
concluded, based primarily on our taxable income during the
period and the expected accretive impact of our recent
acquisitions on future taxable income, that we would generate
sufficient future taxable income to utilize certain of our
federal net operating losses, the benefit of which we had not
previously recognized. As a result, income tax expense for 2009
is net of a benefit of approximately $11.8 million related
to these net operating losses that had been the subject of a
valuation allowance in the comparable prior year periods. The
benefit was partially offset by an increase in state income tax
valuation allowance related to a consolidated subsidiary of
approximately $5.8 million.
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Changes in apportioned state income tax rate
Changes in our operations also may cause our apportioned
state income tax rate to change from period to period. Such rate
changes may require adjustment to our existing deferred income
tax assets and liabilities that have been recorded primarily as
a result of our investment in EBS Master, as well as the 2006
Transaction and 2008 Transaction. A change in our estimated
state income tax rate resulted in additional deferred income
taxes of approximately $2.2 million during 2009.
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49
Stock-Based
and Equity-Based Compensation Expense
Prior to the IPO, certain employees and directors of EBS Master
participated in one of two equity-based compensation
plans the Amended and Restated EBS Executive Equity
Incentive Plan (the EBS Equity Plan) and the Amended
and Restated EBS Incentive Plan (the EBS Phantom
Plan). In connection with the IPO, outstanding awards
under the EBS Phantom Plan were converted into awards under the
2009 Equity Incentive Plan adopted by the Companys
stockholders in July 2009 (the 2009 Plan) and
outstanding awards under the EBS Equity Plan were converted into
EBS Units that are governed by individual agreements with
certain directors and members of executive management, as well
as awards under the 2009 Plan. The EBS Equity Plan consisted of
a class of non-voting EBS Master equity units called Grant
Units. The Grant Units represented profits interests in
EBS Master and appreciated with increases in value of EBS
Master. The EBS Phantom Plan was designed to allow individual
employees to participate economically in the future growth and
value creation at EBS LLC. Each participant received a specified
number of units in the EBS Phantom Plan called Phantom
Units. These Phantom Units appreciated with increases in
value of EBS Master. These Phantom Units did not give employees
an ownership interest in the Company and had no voting rights.
We incurred stock-based and equity-based compensation expense of
$25.4 million, $4.1 million, and $6.6 million
during 2009, 2008 and 2007, respectively. Comparability among
the respective periods has been impacted by the following
factors:
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Change in the estimated fair value of liability
awards. All equity-based awards granted under the
EBS Equity Plan and EBS Phantom Plan prior to the second quarter
of 2009 were classified as liabilities due to certain repurchase
features. As liabilities, we were required to adjust the
equity-based awards to fair value at the end of each quarter.
The fair value of these liabilities generally fluctuated with
the value of the underlying EBS Units.
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Modification of equity-based awards. In June
2009, we modified the repurchase features of all Grant Units
previously granted under the EBS Equity Plan. Following this
modification, all Grant Units were reclassified as equity
awards. Immediately prior to this reclassification, we adjusted
the value of these Grant Units to their fair value and
recognized equity-based compensation expense from this change in
estimate of approximately $4.6 million during 2009.
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Conversion in connection with our IPO. In
connection with the IPO and reorganization transactions, the
Phantom Units were converted into shares of our Class A
common stock, restricted Class A common stock units and
options to purchase shares of our Class A common stock
under the 2009 Plan. As a result of the IPO and this conversion,
we recognized equity-based compensation expense from this change
in estimate of approximately $9.2 million during 2009.
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Grant of options. On the IPO date, we also
granted options to purchase shares of our Class A common
stock to certain of our employees under the 2009 Plan.
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Critical
Accounting Policies
We prepare our consolidated financial statements in accordance
with accounting principles generally accepted in the United
States. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue,
expense and related disclosures. We base our estimates and
assumptions on the best information available to us at the time
the estimates and assumptions are made, on historical experience
and on various other factors that we believe to be reasonable
under the circumstances. We evaluate our estimates and
assumptions on an ongoing basis. Our actual results may differ
from these estimates under different assumptions or conditions.
We believe the following critical accounting policies address
those that are most important to the portrayal of our financial
condition and results of operations and require
managements most difficult, subjective and complex
judgments.
Revenue
Recognition
We generate virtually all of our revenue by providing products
and services that automate and simplify business and
administrative functions for payers and providers, generally on
either a per transaction, per document, per communication basis
or, in some cases, on a monthly flat-fee basis. For certain
services, we
50
may charge an implementation fee in conjunction with related
setup and connection to our network and other systems. In
addition, we receive software license fees and software and
hardware maintenance fees from payers who license our systems
for converting paper claims into electronic claims and,
occasionally, sell additional software and hardware products to
such payers.
Revenue for transaction services, payment services and patient
statements are recognized as the services are provided. Postage
fees related to our payment services and patient statement
volumes are recorded on a gross basis. Implementation and
software license and software maintenance fees are amortized to
revenue on a straight-line basis over the contract period, which
generally varies from one to three years. Software and hardware
sales are recognized once all elements are delivered and
customer acceptance is received.
Cash receipts or billings in advance of revenue recognition are
recorded as deferred revenues on our consolidated balance sheets.
We exclude sales and use tax from revenue in our consolidated
statements of operations.
Business
Combinations
We allocate the consideration transferred (i.e. purchase price)
in a business combination to the acquired business
identifiable assets, liabilities, and noncontrolling interests
at their acquisition date fair value. The excess of the
consideration transferred over the amount allocated to the
identifiable assets and liabilities and noncontrolling interest,
if any, is recorded as goodwill. Any excess of the fair value of
the identifiable assets acquired and liabilities assumed over
the consideration transferred, if any, is generally recognized
within earnings as of the acquisition date.
The fair value of the assets, liabilities and noncontrolling
interests is estimated based on one or a combination of income,
costs, or market approaches as determined based on the nature of
the asset or liability and the level of inputs available to us
(i.e. quotes prices in an active market, other observable inputs
or unobservable inputs). To the extent that our initial
accounting for a business combination is incomplete at the end
of a reporting period, provisional amounts are reported for
those items which are incomplete. We retroactively adjusts such
provisional amounts as of the acquisition date once new
information is received about facts and circumstances that
existed as of the acquisition date.
Goodwill
and Intangible Assets
Goodwill and intangible assets from our acquisitions are
accounted for using the acquisition method of accounting.
Intangible assets with definite lives are amortized on a
straight-line basis over the estimated useful lives of the
related assets generally as follows:
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Customer relationships
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9 to 20 years
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Trade names
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20 years
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Data sublicense agreement
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8 years
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Non-compete agreements
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1 to 5 years
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We review the carrying value of goodwill annually and whenever
indicators of impairment are present. With respect to goodwill,
we determine whether potential impairment losses are present by
comparing the carrying value of our reporting units to the fair
value of our reporting units. If the fair value of the reporting
unit is less than the carrying value of the reporting unit, then
a hypothetical purchase price allocation is used to determine
the amount of goodwill impairment.
We have identified our payer, provider, and pharmacy operating
segments as our reporting units. We estimate the fair value of
our reporting units using a methodology that considers both
income and market approaches. Specifically, we develop an
initial estimate of the fair value of each reporting unit as the
present value of the expected future cash flows to be generated
by the reporting unit. We then validate this initial amount by
comparison to a value determined based on transaction multiples
among guideline publicly traded companies.
Each approach requires the use of certain assumptions. The
income approach requires management to exercise judgment in
making assumptions regarding the reporting units future
income stream, a discount rate and a constant rate of growth
after the initial five year forecast period utilized. These
assumptions are subject
51
to change based on business and economic conditions and could
materially affect the indicated values of our reporting units.
For example, a 100 basis point change in our selected
discount rate would result in a change in the indicated value of
our payer, provider and pharmacy reporting units of
approximately $100.6 million, $105.5 million and
$71.5 million, respectively, which would have required
additional impairment analysis for our payer segment.
The market approach requires management to exercise judgment in
its selection of the guideline companies as well in its
selection of the most relevant transaction multiple. Guideline
companies selected are comparable to us in terms of product or
service offerings, markets,
and/or
customers, among other characteristics. We considered two
transaction multiples (i) the ratio of market
value of invested capital to earnings before interest and taxes
(MVIC/EBIT) and (ii) the ratio of market value of invested
capital to earnings before interest, taxes, depreciation, and
amortization (MVIC/EBITDA).
Our method of assessing the fair value of our reporting units
and our method of selecting the key assumptions did not change
from 2008 to 2009. However, a slight decline in the market
returns on equity and the borrowing costs at the date of our
evaluation resulted in an average 40 basis point decrease
in the discount rate from the comparable prior year evaluation.
Income
Taxes
We record deferred income taxes for the tax effect of
differences between book and tax bases of our assets and
liabilities.
Deferred income taxes reflect the available net operating losses
and the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Realization of the future tax benefits related to deferred tax
assets is dependent on many factors, including our past earnings
history, expected future earnings, the character and
jurisdiction of such earnings, unsettled circumstances that, if
unfavorably resolved would adversely affect utilization of our
deferred tax assets, carryback and carryforward periods, and tax
strategies that could potentially enhance the likelihood of
realization of a deferred tax asset.
The Company recognizes tax benefits for uncertain tax positions
at the point that the Company concludes that the tax position,
based solely on its technical merits, is more likely than not to
be sustained upon examination. The benefit, if any, is measured
as the largest amount of benefit, determined on a cumulative
probability basis that is more likely than not to be realized
upon ultimate settlement. Tax positions failing to qualify for
initial recognition are recognized in the first subsequent
interim period that they meet the more likely than not standard,
are resolved through negotiation or litigation with the taxing
authority, or on expiration of the statute of limitations.
Equity-Based
Compensation
Compensation expense related to the Companys equity-based
awards is recognized on a straight-line basis over the requisite
service period. The fair value of the equity awards is
determined by use of a Black-Scholes model and assumptions as to
expected term, expected volatility, expected dividends and the
risk free rate. Our equity-based awards historically were
classified as liabilities due to certain repurchase features. We
remeasured the fair value of these awards at each reporting
date. Liability awards are included in other long-term
liabilities in the consolidated balance sheet.
The Company modified the repurchase features of certain of these
equity-based awards in June 2009 and all such repurchase
features were removed in connection with the IPO in August 2009.
Following this modification and IPO, all such awards are
classified within equity in the consolidated balance sheet.
Tax
Receivable Agreements
In connection with the IPO, we entered into tax receivable
agreements which obligate us to make payments to certain parties
affiliated with General Atlantic, H&F and former EBS Equity
Plan Members generally equal to 85% of the applicable cash
savings that we realize as a result of tax attributes arising
from the 2006 Transaction, the 2008 Transaction, and the former
Grant Unit holders exchange of EBS Units for cash or
shares of Class A common stock. We will retain the benefit
of the remaining 15% of these tax savings.
52
Future exchanges of EBS Units for cash or shares of Class A
common stock related to the affiliates of General Atlantic,
H&F and the former EBS Equity Plan Members who are parties
to the tax receivable agreements are expected to result in an
additional tax receivable obligation for the Company with a
corresponding offset to our additional paid in capital account.
Subsequent adjustments of the tax receivable obligations due to
certain events (e.g. realization of net operating losses, tax
rate changes or the timing of cash settlement obligations) are
expected to result in a corresponding adjustment of our net
income. For example, if our corporate tax rate were to increase
by 100 basis points, our obligation under these tax
receivable agreements would increase and our pre-tax income
would be reduced by approximately $4.1 million.
Results
of Operations
The following table summarizes our consolidated results of
operations for the year ended December 31, 2009, the year
ended December 31, 2008 and the year ended
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
Revenue(1)
|
|
|
Amount
|
|
|
Revenue(1)
|
|
|
Amount
|
|
|
Revenue(1)
|
|
|
Revenues(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payer Services
|
|
$
|
397,492
|
|
|
|
43.3
|
%
|
|
$
|
372,159
|
|
|
|
43.6
|
%
|
|
$
|
366,675
|
|
|
|
45.4
|
%
|
Provider Services
|
|
|
462,513
|
|
|
|
50.4
|
|
|
|
444,845
|
|
|
|
52.1
|
|
|
|
408,439
|
|
|
|
50.5
|
|
Pharmacy Services
|
|
|
60,843
|
|
|
|
6.6
|
|
|
|
39,067
|
|
|
|
4.6
|
|
|
|
36,937
|
|
|
|
4.6
|
|
Eliminations
|
|
|
(2,400
|
)
|
|
|
(0.3
|
)
|
|
|
(2,472
|
)
|
|
|
(0.3
|
)
|
|
|
(3,514
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
918,448
|
|
|
|
100.0
|
|
|
|
853,599
|
|
|
|
100.0
|
|
|
|
808,537
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payer Services
|
|
|
253,473
|
|
|
|
63.8
|
|
|
|
242,950
|
|
|
|
65.3
|
|
|
|
241,755
|
|
|
|
65.9
|
|
Provider Services
|
|
|
294,700
|
|
|
|
63.7
|
|
|
|
292,844
|
|
|
|
65.8
|
|
|
|
268,529
|
|
|
|
65.7
|
|
Pharmacy Services
|
|
|
16,668
|
|
|
|
27.4
|
|
|
|
7,612
|
|
|
|
19.5
|
|
|
|
7,094
|
|
|
|
19.2
|
|
Eliminations
|
|
|
(1,974
|
)
|
|
|
|
|
|
|
(1,843
|
)
|
|
|
|
|
|
|
(2,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of operations
|
|
|
562,867
|
|
|
|
61.3
|
|
|
|
541,563
|
|
|
|
63.4
|
|
|
|
514,918
|
|
|
|
63.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development and engineering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payer Services
|
|
|
12,677
|
|
|
|
3.2
|
|
|
|
10,472
|
|
|
|
2.8
|
|
|
|
11,157
|
|
|
|
3.0
|
|
Provider Services
|
|
|
15,294
|
|
|
|
3.3
|
|
|
|
14,015
|
|
|
|
3.2
|
|
|
|
12,869
|
|
|
|
3.2
|
|
Pharmacy Services
|
|
|
5,957
|
|
|
|
9.8
|
|
|
|
4,138
|
|
|
|
10.6
|
|
|
|
4,172
|
|
|
|
11.3
|
|
Eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total development and engineering
|
|
|
33,928
|
|
|
|
3.7
|
|
|
|
28,625
|
|
|
|
3.4
|
|
|
|
28,198
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, marketing, general and admin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payer Services
|
|
|
25,803
|
|
|
|
6.5
|
|
|
|
23,286
|
|
|
|
6.3
|
|
|
|
22,386
|
|
|
|
6.1
|
|
Provider Services
|
|
|
31,978
|
|
|
|
6.9
|
|
|
|
30,475
|
|
|
|
6.9
|
|
|
|
31,329
|
|
|
|
7.7
|
|
Pharmacy Services
|
|
|
8,047
|
|
|
|
13.2
|
|
|
|
3,864
|
|
|
|
9.9
|
|
|
|
3,561
|
|
|
|
9.6
|
|
Eliminations
|
|
|
(426
|
)
|
|
|
|
|
|
|
(624
|
)
|
|
|
|
|
|
|
(1,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales, marketing, general and admin excluding corporate
|
|
|
65,402
|
|
|
|
7.1
|
|
|
|
57,001
|
|
|
|
6.7
|
|
|
|
56,224
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from segment operations
|
|
|
256,251
|
|
|
|
27.9
|
|
|
|
226,410
|
|
|
|
26.5
|
|
|
|
209,197
|
|
|
|
25.9
|
|
Corporate expense
|
|
|
49,974
|
|
|
|
5.4
|
|
|
|
37,292
|
|
|
|
4.4
|
|
|
|
38,251
|
|
|
|
4.7
|
|
Depreciation and amortization
|
|
|
105,321
|
|
|
|
11.5
|
|
|
|
97,864
|
|
|
|
11.5
|
|
|
|
62,811
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
100,956
|
|
|
|
11.0
|
|
|
|
91,254
|
|
|
|
10.7
|
|
|
|
108,135
|
|
|
|
13.4
|
|
Interest income
|
|
|
(75
|
)
|
|
|
(0.0
|
)
|
|
|
(963
|
)
|
|
|
(0.1
|
)
|
|
|
(1,567
|
)
|
|
|
(0.2
|
)
|
Interest expense
|
|
|
70,246
|
|
|
|
7.6
|
|
|
|
71,717
|
|
|
|
8.4
|
|
|
|
74,325
|
|
|
|
9.2
|
|
Other income
|
|
|
(519
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
31,304
|
|
|
|
3.4
|
|
|
|
20,500
|
|
|
|
2.4
|
|
|
|
35,377
|
|
|
|
4.4
|
|
Income tax provision
|
|
|
17,301
|
|
|
|
1.9
|
|
|
|
8,567
|
|
|
|
1.0
|
|
|
|
18,101
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
14,003
|
|
|
|
1.5
|
%
|
|
|
11,933
|
|
|
|
1.4
|
%
|
|
|
17,276
|
|
|
|
2.1
|
%
|
Net income attributable to noncontrolling interest
|
|
|
4,422
|
|
|
|
|
|
|
|
2,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Emdeon Inc.
|
|
$
|
9,581
|
|
|
|
|
|
|
$
|
9,231
|
|
|
|
|
|
|
$
|
17,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All references to percentage of revenues for expense components
refer to the percentage of revenues for such segment. |
|
(2) |
|
See
Note 24-Segment
Reporting to our consolidated financial statements for
further detail of our revenues within each reportable segment. |
53
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Revenues
Our total revenues were $918.4 million for 2009 as compared
to $853.6 million for 2008, an increase of approximately
$64.8 million, or 7.6%.
Our payer services segment revenue is summarized by product line
in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
$ Change
|
|
|
Claims management
|
|
$
|
184,605
|
|
|
$
|
179,930
|
|
|
$
|
4,675
|
|
Payment services
|
|
|
211,985
|
|
|
|
191,874
|
|
|
|
20,111
|
|
Intersegment revenue
|
|
|
902
|
|
|
|
355
|
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
397,492
|
|
|
$
|
372,159
|
|
|
$
|
25,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims management revenues for 2009 increased by approximately
$4.7 million, or 2.6%, from 2008 primarily due to an
increase in the volume of electronic claims processed during the
current year period, as well as payment integrity solutions
revenue generated following our acquisition of The Sentinel
Group in June 2009. The increase was partially offset by the
impact of market pricing pressures on our average transaction
rates. Payment services revenues for 2009 increased by
approximately $20.1 million, or 10.5%. This increase was
primarily driven by new sales and implementations, as well as
the impact of the U.S. postage rate increases effective in
May 2009 and May 2008.
Our provider services segment revenue is summarized by product
line in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
$ Change
|
|
|
Patient statements
|
|
$
|
274,390
|
|
|
$
|
266,233
|
|
|
$
|
8,157
|
|
Revenue cycle management
|
|
|
155,112
|
|
|
|
144,904
|
|
|
|
10,208
|
|
Dental
|
|
|
31,513
|
|
|
|
31,591
|
|
|
|
(78
|
)
|
Intersegment revenue
|
|
|
1,498
|
|
|
|
2,117
|
|
|
|
(619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
462,513
|
|
|
$
|
444,845
|
|
|
$
|
17,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient statement revenues for 2009 increased approximately
$8.2 million, or 3.1%, primarily due to the acquisition of
the patient statement business of GE Healthcare Information
Technology (the GE Patient Statement Acquisition) in
September 2008 and the impact of the U.S. postage rate
increases effective in May 2009 and May 2008. These increases
were partially offset by customer attrition and the sale of our
office supplies and print services business in October 2009.
Revenue cycle management revenues for 2009 increased
approximately $10.2 million, or 7.0%, primarily from new
sales and implementations, partially offset by attrition in
legacy products. Dental revenues for 2009 decreased
approximately $0.1 million, or 0.2%, primarily due to
pricing pressures in the dental market, which offset the impact
of new sales and implementations.
Our pharmacy services segment revenues were $60.8 million
for the 2009 as compared to $39.1 million for 2008, an
increase of approximately $21.8 million, or 55.7%. This
increase was primarily due to our acquisition of eRx (the
eRx Acquisition) in July 2009, as well as new sales
and implementations.
Cost
of Operations
Our total cost of operations was $562.9 million for 2009 as
compared to $541.6 million for 2008, an increase of
approximately $21.3 million, or 3.9%.
Our cost of operations for our payer services segment was
approximately $253.5 million for 2009 as compared to
$243.0 million for 2008, an increase of approximately
$10.5 million, or 4.3%. As a percentage of
54
revenue, our payer services costs of operations decreased to
63.8% for 2009 as compared to 65.3% for 2008. Cost of operations
for our payer services segment includes approximately
$3.5 million and $0.6 million of equity-based
compensation for 2009 and 2008, respectively. Excluding this
equity-based compensation, payer services cost of operations
were $250.0 million for 2009 as compared to
$242.3 million for 2008, an increase of approximately
$7.6 million, or 3.1%. The increase is primarily due to
revenue growth in payment services, including increased postage
costs resulting from the U.S. postage rate increases
effective in May 2008 and May 2009, which was partially offset
by reduced data communication expenses from improved utilization
of our existing data communication capabilities. Excluding the
equity-based compensation, as a percentage of revenue, our payer
services costs of operations decreased to 62.9% for 2009 as
compared to 65.1% for 2008. This decrease was primarily due to
reduced data communication expenses, production efficiencies in
our payment services business and operating leverage associated
primarily with our electronic claims management solutions.
Our cost of operations for our provider services segment was
$294.7 million for 2009 as compared to $292.8 million
for 2008, an increase of approximately $1.9 million, or
0.6%. As a percentage of revenue, our provider services segment
costs of operations decreased to 63.7% for 2009 as compared to
65.8% for 2008. Costs of operations for our provider services
segment includes approximately $2.6 million and
$0.1 million related to equity-based compensation for 2009
and 2008, respectively. Excluding this equity-based
compensation, provider services costs of operations were
$292.1 million for 2009 as compared to $292.7 million
for 2008, a decrease of approximately $0.6 million, or
0.2%. The decrease is primarily due to reduced data
communication expenses from improved utilization of our existing
data communication capabilities and changes in revenue mix
between our patient statements solutions, which generally have
higher cost of operations, and revenue cycle management
solutions, which generally have lower cost of operations.
Excluding the equity-based compensation, as a percentage of
revenue, our provider services costs of operations decreased to
63.2% for 2009 as compared to 65.8% for 2008. This decrease was
primarily due to reduced data communication expenses, efficiency
measures related to facility consolidations in our patient
statement operations, changes in revenue mix and operating
leverage associated primarily with our revenue cycle management
solutions.
Our cost of operations for our pharmacy services segment was
$16.7 million for 2009 as compared to $7.6 million for
2008, an increase of $9.1 million, or 119.0%. This increase
is primarily related to the inclusion of the revenues and
associated costs of the eRx business following the eRx
Acquisition in July 2009.
Development
and Engineering Expense
Our total development and engineering expense was
$33.9 million for 2009 as compared to $28.6 million
for 2008, an increase of approximately $5.3 million, or
18.5%. Development and engineering expense includes
approximately $1.6 million and $0.1 million related to
equity-based compensation for 2009 and 2008, respectively.
Excluding this equity-based compensation, development and
engineering expense was $32.3 million for 2009 as compared
to $28.6 million for 2008, an increase of approximately
$3.8 million, or 13.2%. This increase is primarily related
to increased product development activity in our payer and
provider services segments and the inclusion of the product
development infrastructure associated with the eRx Acquisition
in July 2009.
Sales,
Marketing, General and Administrative Expense (Excluding
Corporate Expense)
Our total sales, marketing, general and administrative expense
(excluding corporate expense) was $65.4 million for 2009 as
compared to $57.0 million for 2008, an increase of
approximately $8.4 million, or 14.7%.
Our sales, marketing, general and administrative expense for our
payer services segment was $25.8 million for 2009 as
compared to $23.3 million for 2008, an increase of
approximately $2.5 million, or 10.8%. Sales, marketing,
general and administrative expense for our payer services
segment includes approximately $4.0 million and
$0.8 million related to equity-based compensation for 2009
and 2008, respectively. Excluding this equity-based
compensation, payer services costs of operations were
$21.8 million for 2009 as compared to $22.5 million
for 2008, a decrease of approximately $0.7 million, or 3%.
This decrease was primarily due to the absence in 2009 of
severance costs and compensation related to 2008 efficiency
measures.
55
Our sales, marketing, general and administrative expense for our
provider services segment was $32.0 million for 2009 as
compared to $30.5 million for 2008, an increase of
approximately $1.5 million, or 4.9%. Sales, marketing,
general and administrative expense for our provider services
segment includes approximately $3.7 million and
$0.5 million related to equity-based compensation for 2009
and 2008, respectively. Excluding this equity-based
compensation, provider services sales, marketing, general and
administrative expense was $28.3 million for 2009 as
compared to $30.0 million for 2008, a decrease of
approximately $1.7 million, or 5.6%. This decrease was
primarily due to 2008 efficiency measures which reduced
compensation costs, as well as our utilization of internal
personnel to develop product enhancements for which eligible
costs were capitalized in 2009. This decrease was partially
offset by a moderate increase in bad debt expense related to our
revenue cycle management business.
Our sales, marketing, general and administrative expense for our
pharmacy services segment was approximately $8.0 million
for 2009 as compared to $3.9 million for 2008, an increase
of approximately $4.2 million, or 108.3%. Sales, marketing,
general and administrative expense for our pharmacy services
segment includes approximately $0.5 million and
$0.0 million related to equity-based compensation for 2009
and 2008, respectively. Excluding this equity-based
compensation, pharmacy services sales, marketing, general and
administrative expense was $7.5 million for 2009 as
compared to $3.8 million for 2008, an increase of
approximately $3.7 million, or 95.9%. This increase is
primarily related to the inclusion of the infrastructure
associated with the eRx Acquisition in July 2009.
Corporate
Expense
Our corporate expense was $50.0 million for 2009 as
compared to $37.3 million for 2008, an increase of
approximately $12.7 million, or 34.0%. Corporate expense
includes approximately $9.1 million and $2.0 million
related to equity-based compensation for 2009 and 2008,
respectively. Excluding this equity-based compensation,
corporate expense was $40.9 million for 2009 as compared to
$35.3 million for 2008, an increase of approximately
$5.5 million, or 15.7%. The increase in the current year
period was primarily due to (i) incremental costs
associated with the infrastructure required to operate as a
public company, such as increased directors and officers
insurance costs, increased compliance costs and additional
finance, legal and other personnel costs, (ii) expenses
associated with the IPO and (iii) increased costs of
additional corporate functions, including business development
and public relations, not present for the entire year of 2008.
Depreciation
and Amortization Expense
Our depreciation and amortization expense was
$105.3 million for 2009 as compared to $97.9 million
for 2008, an increase of approximately $7.5 million, or
7.6%. This increase was primarily due to depreciation of
property and equipment placed in service in 2009, additional
depreciation and amortization expense related to purchase
accounting adjustments associated with the 2008 Transaction, the
eRx Acquisition and GE Patient Statement Acquisition in February
2008, July 2009 and September 2008, respectively, as well as
amortization related to our acquisition from HLTH of certain
additional rights to specified uses of our data in October 2009.
Interest
Income
Our interest income was $0.1 million for 2009 as compared
to $1.0 million for 2008, a decrease of approximately
$0.9 million. While our interest-bearing cash and cash
equivalent balances have increased since 2008, this increase was
more than offset by the effect of a reduction in the market
interest rates available to us during 2009.
Interest
Expense
Our interest expense was $70.2 million for 2009 as compared
to $71.7 million for 2008, a decrease of approximately
$1.5 million, or 2.1%. This decrease is primarily due to a
scheduled decrease in the notional amount of our interest rate
swap of approximately $171.7 million that occurred on
December 31, 2008, offset by a difference in the periods
for which our interest rate swap was designated as a hedge for
accounting purposes. The decrease in the notional amount of our
interest rate swap agreement caused interest expense to decline
because the fixed rate we paid during 2009 under the interest
rate swap exceeded the interest rate on our term loans. As a
result, less of our debt was subject to the higher fixed rate of
our interest rate swap
56
agreement during 2009 as compared to the prior year. Our
notional amount further decreased by an additional
$123.6 million on December 31, 2009.
Our discontinuation of hedge accounting treatment in 2008
required us to adjust our interest rate swap to fair market
value with the change reflected in interest expense. As a result
of the fair value adjustment, we reduced interest expense by
approximately $12.7 million during 2008. No similar
adjustment was reflected in 2009 as we redesignated our interest
rate swap agreement as a hedge of our interest rate risk in
September 2008.
Income
Taxes
Our income tax expense was $17.3 million for 2009 as
compared to $8.6 million for 2008, an increase of
approximately $8.7 million, or 101.9%. The effective income
tax rates for 2009 and 2008 were 55.3% and 41.8%, respectively.
Differences between the federal statutory rate and these
effective income tax rates principally relate to the change in
our book basis versus tax basis in our investment in EBS Master,
changes in our valuation allowances, the effect of income
allocated to noncontrolling interest, state income tax rate
changes and the impact of other permanent differences relating
to pre-tax income.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Revenues
Our total revenues were $853.6 million in 2008 as compared
to $808.5 million in 2007, an increase of approximately
$45.1 million, or 5.6%. This increase in revenue was net of
an approximately $4.7 million revenue reduction in 2008
from purchase accounting adjustments associated with the 2008
Transaction.
Our payer services segment revenue is summarized by product line
in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Claims management
|
|
$
|
179,930
|
|
|
$
|
192,318
|
|
|
$
|
(12,388
|
)
|
Payment services
|
|
|
191,874
|
|
|
|
173,677
|
|
|
|
18,197
|
|
Intersegment revenue
|
|
|
355
|
|
|
|
680
|
|
|
|
(325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
372,159
|
|
|
$
|
366,675
|
|
|
$
|
5,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims management revenues for 2008 declined by approximately
$12.4 million, or 6.4%, from 2007. This decrease was
primarily driven by (i) reduced average transaction rates
from market pricing pressures and the execution of additional
MGAs, (ii) a decline in electronic batch claims transaction
volumes primarily related to the expiration of two contracts
with a channel partner and conversion of a MGA to a standard
payer arrangement and (iii) a purchase accounting
adjustment reducing revenue by approximately $1.4 million
recorded in connection with the 2008 Transaction. This decrease
in revenue was partially offset by higher volumes in other
transaction categories. Payment services revenues for 2008
increased by approximately $18.2 million, or 10.5%. This
increase was primarily driven by new sales and implementations,
as well as the impact of U.S. postage rate increases
effective in May 2008 and May 2007.
Our provider services segment revenue is summarized by product
line in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Patient statements
|
|
$
|
266,233
|
|
|
$
|
240,074
|
|
|
$
|
26,159
|
|
Revenue cycle management
|
|
|
144,904
|
|
|
|
136,679
|
|
|
|
8,225
|
|
Dental
|
|
|
31,591
|
|
|
|
28,852
|
|
|
|
2,739
|
|
Intersegment revenue
|
|
|
2,117
|
|
|
|
2,834
|
|
|
|
(717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
444,845
|
|
|
$
|
408,439
|
|
|
$
|
36,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient statement revenues for 2008 increased approximately
$26.2 million, or 10.9%, due to (i) the acquisition of
IXT Solutions in December 2007 and the GE Patient Statement
Acquisition in September 2008 and (ii) the impact of
U.S. postage rate increases effective in May 2008 and May
2007, offset by customer attrition. Revenue cycle management
revenues for 2008 increased approximately $8.2 million, or
6.0%, from new sales and implementations, net of a purchase
accounting adjustment reducing revenue by approximately
57
$3.3 million recorded in connection with the 2008
Transaction and attrition in legacy products. Dental revenues
for 2008 increased approximately $2.7 million, or 9.5%, due
to new sales and implementations.
Our pharmacy services segment revenues were $39.1 million
in 2008 as compared to $36.9 million in 2007, an increase
of approximately $2.1 million, or 5.8%. This increase was
attributable to new sales and implementations.
Cost
of Operations
Our total cost of operations was $541.6 million in 2008 as
compared to $514.9 million in 2007, an increase of
approximately $26.6 million, or 5.2%.
Our cost of operations for our payer services segment was
$243.0 million in 2008 as compared to $241.8 million
in 2007, an increase of approximately $1.2 million, or
0.5%. As a percentage of revenue, our payer services costs of
operations decreased to 65.3% in 2008 as compared to 65.9% in
2007. The increase in payer services costs of operations was
primarily attributable to higher material and postage costs
resulting from higher payment services volumes and
U.S. postage rate increases in May 2008 and May 2007. The
increase in our payer services costs of operations was partially
offset by reduced rebates paid to channel partners primarily
related to the expiration of two contracts with a channel
partner. The decrease in our payer services costs of operations
as a percentage of revenue was largely attributable to increased
utilization of outsourced services.
Our cost of operations for our provider services segment was
$292.8 million in 2008 as compared to $268.5 million
in 2007, an increase of $24.3 million, or 9.1%. As a
percentage of revenue, our provider services segment costs of
operations increased to 65.8% in 2008 as compared to 65.7% in
2007. The increase in provider services costs of operations is
primarily attributable to (i) the acquisition of IXT
Solutions in December 2007, (ii) the GE Patient Statement
Acquisition in September 2008 and (iii) U.S. postage
rate increases in May 2008 and May 2007, partially offset by
reduced data communication expense.
Our cost of operations for our pharmacy services segment was
$7.6 million in 2008 as compared to $7.1 million in
2007, an increase of $0.6 million, or 7.3%, which was
generally attributable to the growth in pharmacy revenue.
Development
and Engineering Expense
Our total development and engineering expense was
$28.6 million in 2008 as compared to $28.2 million in
2007, an increase of approximately $0.4 million, or 1.5%.
The increase was primarily attributable to increased costs of
efficiency measures and product development activity in 2008.
Sales,
Marketing, General and Administrative Expense (Excluding
Corporate Expense)
Our total sales, marketing, general and administrative expense
(excluding corporate expense) was $57.0 million in 2008 as
compared to $56.2 million in 2007, an increase of
approximately $0.8 million or 1.4%.
Our sales, marketing, general and administrative expense for our
payer services segment was $23.3 million in 2008 as
compared to $22.4 million in 2007, an increase of
approximately $0.9 million, or 4.0%. This increase was
primarily attributable to higher commissions from increased 2008
sales, severance costs incurred related to 2008 efficiency
measures and increased bad debt expense, partially offset by our
utilization of internal personnel in product development
initiatives for which eligible costs were capitalized.
Our sales, marketing, general and administrative expense for our
provider services segment was $30.5 million in 2008 as
compared to $31.3 million in 2007, a decrease of
approximately $0.9 million, or 2.7%. This decrease was
primarily attributable to a reduction in personnel costs from
our efficiency measures in early 2008, and the absence of equity
compensation expense in 2008 associated with HLTH stock
compensation plans, partially offset by increased bad debt
expense.
Our sales, marketing, general and administrative expense for our
pharmacy services segment was $3.9 million in 2008 as
compared to $3.6 million in 2007, an increase of
approximately $0.3 million, or 8.5%, reflecting general
consistent levels of activity for both periods.
58
Corporate
Expense
Our corporate expense was $37.3 million in 2008 as compared
to $38.3 million in 2007, a decrease of approximately
$1.0 million, or 2.5%. This decrease was primarily
attributable to lower transition service fees for services
provided by HLTH to us after our separation from HLTH and the
absence in 2008 of stock-based compensation expense associated
with HLTHs stock compensation plans. The decrease in
corporate expense was partially offset by charges and costs
associated with the relocation of our corporate headquarters and
the related abandonment of our prior headquarters facility in
December 2008, as well as certain increased personnel and other
costs in 2008 associated with our continued transition to a
stand-alone company following the 2006 Transaction.
Depreciation
and Amortization Expense
Our depreciation and amortization expense was $97.9 million
in 2008 as compared to $62.8 million in 2007, an increase
of approximately $35.1 million, or 55.8%. This increase is
primarily attributable to additional depreciation and
amortization expense related to purchase accounting adjustments
associated with the 2008 Transaction, as well as depreciation of
property and equipment placed in service in 2008.
Interest
Income
Our interest income was $1.0 million in 2008 as compared to
$1.6 million in 2007, a decrease of approximately
$0.6 million, or 38.5%. While our interest-bearing cash and
cash equivalent balances increased in 2008 as compared to 2007,
this increase was more than offset by the effect of a reduction
in market interest rates available to us during 2008.
Interest
Expense
Our interest expense was $71.7 million in 2008 as compared
to $74.3 million in 2007, a decrease of approximately
$2.6 million, or 3.5%. This decrease is primarily
attributable to a reduction of interest expense of approximately
$12.7 million related to changes in the fair value of our
interest rate swap agreement from February 8, 2008 (the
date of the 2008 Transaction) to September 30, 2008 (the
date our swap was re-designated as an accounting hedge) and
lower variable interest rates under our credit agreements.
Partially offsetting the change in fair market value of our
interest rate swap was interest expense from the amortization of
the debt discount, which resulted from adjusting 48% of our debt
to its fair value, and from the amortization of the value of the
interest rate swap at the time hedge accounting was
discontinued, both of which resulted from the 2008 Transaction.
Income
Taxes
Our income tax expense was $8.6 million in 2008 as compared
to $18.1 million in 2007, which resulted in an effective
income tax rate of 41.8% and 51.2%, respectively. The
differences between the federal statutory rate and these
effective income tax rates principally relate to the change in
our book basis versus tax basis in our investment in EBS Master,
state income taxes, an increase in our valuation allowances and
other permanent differences.
Liquidity
and Capital Resources
General
We are a holding company with no material business operations.
Our principal asset, other than cash proceeds from the IPO, is
the equity interests we own in EBS Master. We conduct all of our
business operations through the direct and indirect subsidiaries
of EBS Master. Accordingly, our only material sources of cash
are the IPO proceeds and dividends or other distributions or
payments that are derived from earnings and cash flow generated
by the subsidiaries of EBS Master.
We have financed our operations primarily through cash provided
by operating activities, private sales of EBS Units to the
Principal Equityholders and borrowings under our credit
agreements. On August 17, 2009, we closed the IPO and
received net proceeds (including offering related expenses of
approximately $3.1 million paid during 2008) of
approximately $144.9 million after underwriting discounts
of approximately $10.8 million and other fees and expenses
of approximately $10.5 million. We believe that our
existing cash on hand, the
59
net remaining proceeds from our IPO, cash generated from
operating activities and available borrowings under our
revolving credit agreement ($44.2 million as of
December 31, 2009) will be sufficient to service our
existing debt and tax receivable obligations, finance internal
growth, fund capital expenditures and fund small to mid-size
acquisitions.
As of December 31, 2009, we had cash and cash equivalents
of $212.0 million as compared to $71.5 million as of
December 31, 2008 and $33.7 million as of
December 31, 2007. In January 2010, we paid approximately
$20.0 million from our available cash in connection with
our acquisition of FVTech.
Our cash balances in the future may be reduced if we expend our
cash on capital expenditures, future acquisitions or elect to
make optional prepayments under our credit agreements. In
addition, if as a result of the current conditions in the credit
markets, any of the lenders participating in our revolving
credit agreement become insolvent, it may make it more difficult
for us to borrow under our revolving credit agreement, which
could adversely affect our liquidity. Credit market instability
also may make it more difficult for us to obtain additional
financing or refinance our existing credit facilities in the
future on acceptable terms. If we are unable to obtain such
additional financing when needed or are unable to refinance our
credit facilities, our financial condition could be adversely
affected.
Cash
Flows
Operating
Activities
Cash provided by operations for 2009 was $162.8 million as
compared to $83.3 million for 2008. This $79.4 million
increase is related primarily to business growth, reduced
interest payments and year end timing of collections and
disbursements.
Cash provided by operations for 2008 was $83.3 million as
compared to $98.0 million for 2007. This $14.7 million
decrease is related primarily to the timing of year end
disbursements, partially offset by business growth.
Cash generated by operating activities can be significantly
affected by our non-cash working capital assets and liabilities,
which may vary based upon the timing of cash receipts that
fluctuate by day of week
and/or month
and be impacted by related cash management decisions. For
example, the timing of our payment of accounts payable at
December 31, 2008 reduced such payables to approximately
$0.8 million as compared to approximately
$10.0 million at December 31, 2007 and
$9.9 million at December 31, 2009.
Investing
Activities
Cash used in investing activities for 2009 was
$123.2 million as compared to $355.3 million for 2008.
Excluding payments related to (i) the 2008 Transaction
totaling $306.3 million and (ii) acquisitions totaling
approximately $76.3 million and $21.1 million for 2009
and 2008, respectively, cash used in investing activities was
$47.0 million for 2009 as compared to $28.0 million
for 2008. The remaining increase in cash used in investing
activities for 2009 is primarily attributable to increased
capital expenditures, which increased as compared to the prior
year due to the timing and extent of efficiency measures and
product development projects.
Cash used in investing activities for 2008 was
$355.3 million as compared to $50.2 million for 2007.
Excluding payments related to (i) the 2008 Transaction and
2006 Transaction totaling $306.3 million and
$10.9 million in 2008 and 2007, respectively, and payments
related to (ii) acquisitions totaling $21.1 million
and $11.1 million for 2008 and 2007, respectively, cash
used in investing activities was related to capital expenditures
of $28.0 million for 2008 as compared to $28.2 million
for 2007.
Financing
Activities
Cash provided by financing activities for 2009 was
$101.0 million as compared to $309.7 million for 2008.
Excluding items related to the 2008 Transaction of
$307.6 million in 2008 and proceeds from the IPO of our
Class A common stock of $148.0 million (excluding
$3.1 million of offering related expenses paid in
2008) in 2009, cash used in financing activities was
$47.0 million for 2009 as compared to cash provided by
financing activities of $2.1 million for 2008. The
remaining change in cash used in financing activities for 2009
was primarily attributable to (i) repurchases of
$7.0 million of our Class A common stock and EBS Units
60
in connection with the IPO and (ii) scheduled and optional
payments of $39.4 million on our revolver and long-term debt
agreements.
Cash provided by financing activities for 2008 was
$309.7 million as compared to cash used of
$44.7 million for 2007. Excluding items related to the 2008
Transaction of $307.6 million in 2008, cash provided by
financing activities was $2.1 million during 2008. This
$46.8 million change in cash used by financing activities
during 2008 as compared to 2007 was primarily attributable to
the absence in 2008 of optional debt prepayments on our first
lien credit facility as compared to $30.0 million of
prepayments made in 2007, and the 2007 repayment to HLTH of a
$10.0 million cash advance made in connection with the 2006
Transaction.
Credit
Facilities
In November 2006, our subsidiary, EBS LLC, entered into the
first lien credit agreement, which we refer to as the
First Lien Credit Agreement, and the second lien
credit agreement, which we refer to as the Second Lien
Credit Agreement. Together, we refer to the First Lien
Credit Agreement and the Second Lien Credit Agreement as the
Credit Agreements. The First Lien Credit Agreement
provided us $805.0 million of total available financing,
consisting of a secured $755.0 million term loan facility
and a secured $50.0 million revolving credit facility. The
revolving credit facility provides for the issuance of standby
letters of credit, in an aggregate face amount at any time not
in excess of $12.0 million. The issuance of standby letters
of credit reduces the available capacity under our revolving
credit facility. In addition, under the terms of the First Lien
Credit Agreement, we can borrow up to an additional
$200.0 million in incremental term loans and increase the
available capacity under the revolving credit facility by
$25.0 million, provided that the aggregate amount of such
increases may not exceed $200.0 million. There were no
borrowings on our revolving credit facility as of
December 31, 2009.
In July 2009, the credit agreements were amended to, among other
things, provide EBS LLC with the right to fund certain tax
obligations, as well as accounting, legal, and other costs of
the Company (subject to an annual limit of $5,000 of these other
costs). In connection with this amendment, the Company paid fees
of $359 to the lenders of which the unamortized portion is
classified as a reduction of the carrying value of the credit
agreements. Additionally, the Company incurred $512 of fees paid
to third parties in connection with this amendment that were
expensed in the year ended December 31, 2009.
Borrowings outstanding under the First Lien Credit Agreement
amounted to $686.4 million as of December 31, 2009,
and currently bear interest, at our option, at either an
adjusted LIBOR rate plus 2.00% or the lenders alternate
base rate plus 1.00%, or a combination of the two. Not including
optional prepayments, we are generally required to make
quarterly principal payments of approximately $1.8 million
on the term loan facilities of the First Lien Credit Agreement
through 2013.
We are required to pay a commitment fee of 0.5% per annum,
provided that our total leverage ratio is greater than or equal
to 4.0:1, and otherwise 0.375% per annum on the undrawn portion
of the revolving credit facility. We are permitted to prepay the
revolving credit facility or the term loan under the First Lien
Credit Agreement at any time. We are required to prepay amounts
outstanding under the First Lien Credit Agreement with proceeds
we receive from asset sales that generate proceeds in excess of
$1.0 million if not reinvested (as defined in the Credit
Agreements), from an incurrence of debt not specifically
permitted to be incurred under the First Lien Credit Agreement
and with any excess cash flow (as defined in the First Lien
Credit Agreement) we generate in any fiscal year. We do not
anticipate being required to make an excess cash flow payment
under the First Lien Credit Agreement for 2009.
Our Second Lien Credit Agreement is a term loan facility with an
aggregate principal amount of $170.0 million, which was the
amount outstanding as of December 31, 2009. Borrowings
outstanding under the Second Lien Credit Agreement currently
bear interest, at our option, at either an adjusted LIBOR rate
plus 5.00% or the lenders alternate base rate plus 4.00%,
or a combination of the two. We are required to make quarterly
interest payments. Although we are permitted to prepay the loans
under our Second Lien Credit Agreement at any time, the terms of
our First Lien Credit Agreement restrict our ability to make
such
61
prepayments to the amount of previous years retained
excess cash flow as defined under the Credit Agreements and only
if our total leverage ratio is 4.0:1 or better.
The revolving portion of the First Lien Credit Agreement matures
in November 2012 and the term loan matures in November 2013. The
Second Lien Credit Agreement matures in May 2014. We anticipate
refinancing our Credit Agreements prior to or as of their
maturity dates. Given the state of the current credit
environment resulting from, among other things, a general
weakening of the economy, we cannot be certain that we will be
successful in our refinancing efforts on acceptable terms, which
could have an adverse effect on our liquidity.
The obligations of EBS LLC under the Credit Agreements are
unconditionally guaranteed by EBS Master and all of its
subsidiaries and are secured by liens on substantially all of
EBS Masters assets, including the stock of its
subsidiaries.
As of December 31, 2009, total borrowings outstanding under
the Credit Agreements amounted to $856.4 million (before
unamortized debt discount of $53.3 million primarily
related to the adjustment of our long-term debt to fair value in
connection with the 2008 Transaction). Under the revolving
portion of our First Lien Credit Agreement, net of
$5.8 million of outstanding but undrawn letters of credit
issued, we had $44.2 million in available borrowing
capacity as of December 31, 2009. In connection with the
2008 Transaction, our long-term debt was adjusted to fair value,
which resulted in the recording of a debt discount of
$66.4 million.
During the year ended December 31, 2009, the weighted
average cash interest rate of our borrowings under our Credit
Agreements was approximately 5.7%. Approximately
$480.5 million of our weighted average debt outstanding
during the year was subject to a fixed interest rate of 4.94%
under our interest rate swap agreement.
Covenants
The Credit Agreements require us to satisfy specified financial
covenants, including a minimum interest coverage ratio and a
maximum total leverage ratio, as set forth in the Credit
Agreements. The minimum interest coverage ratio permitted was
2.40:1.00 at December 31, 2009 and increases at varying
intervals over time until October 1, 2011, at which time it
is fixed at 3.50:1.00. At December 31, 2009, our interest
coverage ratio as defined under the Credit Agreements was
4.92:1.00. The maximum total leverage ratio permitted was
4.50:1.00 at December 31, 2009 and declines at varying
intervals over time until October 1, 2011, at which time it
is fixed at 3.00:1.00. At December 31, 2009, our total
leverage ratio was 3.37:1.00 which, under the terms of the
Credit Agreement, reflected only $35.0 million of the cash
on our balance sheet at December 31, 2009 as a reduction of
our net debt.
The Credit Agreements also limit us with respect to amounts we
may spend on capital expenditures. As defined in the Credit
Agreements, capital expenditures exclude certain items such as
the expenditures made with the retained portion of excess cash
flow, replacement of property and equipment, additions funded
with equity offering proceeds and additions funded with proceeds
of asset sales. The limitation varies based on certain base
expenditure levels included in the Credit Agreements and the
amount of unused capital expenditures from the previous calendar
year, if any, as well as allowable amounts transferred from
future year expenditure limits. Under the Credit Agreements, for
the year ended December 31, 2009, our capital expenditures
were limited to $67.0 million which includes a carryover of
unused capital expenditures from 2008, as well as allowable
transfers from 2010. For the years ended December 31, 2010
and 2011, our capital expenditures are limited annually to
$40.0 million and $41.0 million, respectively,
excluding any carryovers from previous years and allowable
transfers from future years. For years ending after
December 31, 2011, our capital expenditures are limited to
$42.0 million annually, excluding any carryovers from
previous years and allowable transfers from future years. In
addition to our normal level of capital expenditures, we
currently expect to incur up to $20.0 to $25.0 million in
2010 to replace our primary data center in Nashville, Tennessee
and approximately $12.0 to $15.0 million for equipment
upgrades in our patient statements business.
The Credit Agreements contain negative covenants that may
restrict the operation of our business, including our ability to
incur additional debt, create liens, make investments, engage in
asset sales, enter into transactions with affiliates, enter into
sale-leaseback transactions and enter into hedging arrangements.
In
62
addition, our Credit Agreements restrict the ability of EBS
Master and its subsidiaries to make dividends or other
distributions to us, issue equity interests, repurchase equity
interests or certain indebtedness or enter into mergers or
consolidations.
As of December 31, 2009, we were in compliance with all of
the financial and other covenants under the Credit Agreements.
The Credit Agreements do not contain provisions that would
accelerate the maturity date of the loans under the Credit
Agreement upon a downgrade in our credit rating. However, a
downgrade in our credit rating could adversely affect our
ability to obtain other capital sources in the future and could
increase our cost of borrowings.
Events of default under the Credit Agreements include
non-payment of principal, interest, fees or other amounts when
due; violation of certain covenants; failure of any
representation or warranty to be true in all material respects
when made or deemed made; cross-default and cross-acceleration
to indebtedness with an aggregate principal amount in excess of
$20.0 million; certain ERISA events; dissolution,
insolvency and bankruptcy events; and actual or asserted
invalidity of the guarantees or security documents. In addition,
a Change of Control (as such term is defined in the
Credit Agreements) is an event of default under the Credit
Agreements. Some of these events of default allow for grace
periods and materiality qualifiers.
Commitments
and Contingencies
The following table presents certain minimum payments due under
contractual obligations with minimum firm commitments as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments by Period
|
|
|
|
Total
|
|
|
2010
|
|
|
2011-2012
|
|
|
2013-2014
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Long-term debt obligations
|
|
$
|
893,956
|
|
|
$
|
9,972
|
|
|
$
|
21,958
|
|
|
$
|
845,692
|
|
|
$
|
16,334
|
|
Expected interest(a)
|
|
|
111,564
|
|
|
|
27,189
|
|
|
|
53,125
|
|
|
|
29,035
|
|
|
|
2,215
|
|
Interest rate swap agreement(b)
|
|
|
21,337
|
|
|
|
15,054
|
|
|
|
6,283
|
|
|
|
|
|
|
|
|
|
Tax receivable agreement obligations to related parties(c)
|
|
|
142,044
|
|
|
|
|
|
|
|
11,612
|
|
|
|
34,256
|
|
|
|
96,176
|
|
Operating lease obligations(d)
|
|
|
56,275
|
|
|
|
6,707
|
|
|
|
12,617
|
|
|
|
10,473
|
|
|
|
26,478
|
|
Purchase obligations(e)
|
|
|
15,137
|
|
|
|
5,940
|
|
|
|
9,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
1,240,313
|
|
|
$
|
64,862
|
|
|
$
|
114,792
|
|
|
$
|
919,456
|
|
|
$
|
141,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Expected interest consists of both interest payable under our
Credit Agreements and imputed interest payable under our data
sublicense agreement. Interest related to our Credit Agreements
is based on our interest rates in effect as of December 31,
2009 and assumes that we make no optional or mandatory
prepayments of principal prior to the maturity of the Credit
Agreements. Because the interest rates under our Credit
Agreements are variable, actual payments may differ. |
|
(b) |
|
Under our interest rate swap agreement, we receive a three month
LIBOR rate and pay a fixed rate of 4.944% on a specified
notional amount. The above payments represent the present value
of the net amounts we expect to pay in the respective periods
based upon the three-month LIBOR yield curve in effect at
December 31, 2009. |
|
(c) |
|
Represents amounts due based on facts and circumstances existing
as of December 31, 2009. The timing and/or amount of
aggregate payments due may vary based on a number of factors,
including the amount and timing of the taxable income the
Company generates in the future and the tax rate then
applicable, the use of loss carryovers and the portion of
payments under the tax receivable agreements constituting
imputed interest or amortizable basis. |
63
|
|
|
(d) |
|
Represents amounts due under existing operating leases related
to our offices and other facilities. |
|
(e) |
|
Represents contractual commitments under certain
telecommunication and other supply contracts. Where our purchase
commitments are cumulative over a period of time (i.e., no
specified annual commitment), the table above assumes such
commitments will be fulfilled on a ratable basis over the
commitment period. |
See the notes to our consolidated financial statements contained
elsewhere in this Annual Report for additional information
related to our operating leases and other commitments.
Off-Balance
Sheet Arrangements
As of December 31, 2009, we had no off-balance sheet
arrangements or obligations, other than those related to the
letters of credit and surety bonds of an insignificant amount.
Recent
Accounting Pronouncements
On January 1, 2009, the Company adopted the Financial
Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Business Combinations
Topic. This topic expands the definition of a business and a
business combination and generally requires the acquiring entity
to recognize all of the assets and liabilities of the acquired
business, regardless of the percentage ownership acquired, at
their fair values. This topic also requires that contingent
consideration and certain acquired contingencies be recorded at
fair value on the acquisition date and that acquisition costs
generally be expensed as incurred. The Company recorded
approximately $1,127 of acquisition expenses in the year ended
December 31, 2009 that, absent the adoption of this topic,
would have been capitalized. These costs are included in the
accompanying consolidated statement of operations within sales,
marketing, general and administrative expenses. As a result, net
income for the year ended December 31, 2009 was reduced by
approximately $667 ($0.01 per diluted Class A common share).
On January 1, 2009, the Company adopted the provisions of
the FASB ASC Fair Value Measurements and Disclosures Topic that
relate to nonfinancial assets and liabilities that are not
required or permitted to be measured at fair value on a
recurring basis. Examples of such circumstances include fair
value measurements associated with the initial recognition of
assets and liabilities in a business combination and
measurements of impairment following a goodwill impairment test
or an impairment of a long-lived asset other than goodwill. The
adoption of this topic had no material impact on the
Companys consolidated financial statements for the year
ended December 31, 2009.
On January 1, 2009, the Company adopted the FASB ASC
Consolidation Topic as it relates to noncontrolling interests in
consolidated financial statements. This topic clarifies that a
noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in
the consolidated financial statements. Additionally, the topic
changes the way the consolidated income statement is presented
by requiring consolidated net income to be reported at amounts
that include the amounts attributable to both the parent and the
noncontrolling interest. The presentation and disclosure
requirements of the topic have been given retroactive effect for
all periods presented.
On January 1, 2009, the Company adopted additional
disclosure provisions of the FASB ASC Derivatives and Hedging
Topic. The additional provisions amended and expanded the
disclosure requirements for derivative instruments and hedging
activities with the intent to provide users of financial
statements with an enhanced understanding of how and why an
entity uses derivative instruments; how derivative instruments
and related hedged items are accounted for; and how derivative
instruments and related hedged items affect an entitys
financial position, financial performance and cash flows. The
topic requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments
and disclosures about credit-risk-related contingent features in
derivative agreements. The required disclosures are presented
within Note 11 to the consolidated financial statements.
On April 1, 2009, the Company adopted provisions of the
FASB ASC Fair Value Measurements and Disclosures Topic (formerly
outlined in FASB Staff Position
157-4,
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly). Provisions
of this topic provide additional guidance for estimating fair
value when the
64
volume and level of activity for the asset or liability have
significantly decreased and re-emphasize that a fair value
measurement is an exit price concept as defined in the topic.
Assets and liabilities measured under Level 1 inputs are
excluded from the scope of these provisions. The adoption of
these provisions had no material impact on the consolidated
financial statements for the year ended December 31, 2009.
On April 1, 2009, the Company adopted the FASB ASC
Subsequent Events Topic. This topic establishes general
standards of accounting for and disclosure of events that occur
after a companys balance sheet date but before financial
statements of the company are issued or are available to be
issued. In particular, this topic sets forth: (i) the
period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial
statements, (ii) the circumstances under which an entity
should recognize events or transactions occurring after the
balance sheet date in its financial statements and
(iii) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date. Additionally, the topic requires companies to disclose the
date through which subsequent events have been evaluated as well
as the date the financial statements were issued or were
available to be issued. In February 2010, the FASB issued
Accounting Standards Update
No. 2010-09,
an update to FASB ASC Subsequent Events Topic, which removed the
requirement, effective immediately, to disclose the date through
which subsequent events had been evaluated. The adoption of the
topic and subsequent update had no material impact on the
Companys consolidated financial statements for the year
ended December 31, 2009. The disclosures required by this
topic are presented within Note 27 to the consolidated
financial statements.
On October 1, 2009, the Company adopted FASB Accounting
Standards Update
2009-05, an
update to FASB ASC Fair Value Measurements and Disclosures
Topic. This update clarifies the valuation techniques to be used
by an entity to measure the fair value of a liability in
circumstances in which a quoted price in an active market for
the identical liability is not available. The update further
clarifies that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of the liability. The
adoption of this update had no material impact on the
consolidated financial statements for the year ended
December 31, 2009.
In October 2009, the FASB issued Accounting Standards Update
No. 2009-13,
an update to FASB ASC Revenue Recognition Topic, which amends
existing accounting standards for revenue recognition for
multiple-element arrangements. To the extent a deliverable
within a multiple-element arrangement is not accounted for
pursuant to other accounting standards, the update establishes a
selling price hierarchy that allows for the use of an estimated
selling price to determine the allocation of arrangement
consideration to a deliverable in a multiple element arrangement
where neither vendor-specific objective evidence nor third-party
evidence is available for that deliverable. The update is to be
applied prospectively for revenue arrangements entered into or
materially modified after January 1, 2011 in the case of
the Company. Early adoption is permitted. If the Company were to
adopt the update prior to the first quarter of 2011, the Company
must apply the update retrospectively to the beginning of the
fiscal year of adoption or to all periods presented. The Company
is currently evaluating the impact, if any that the pending
adoption of the update will have on the Companys
consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update
No. 2010-02,
an update to FASB ASC Consolidation Topic, which clarifies the
scope of the FASB ASC Consolidation Topic and expands the
disclosures required in the event of the deconsolidation of a
subsidiary or derecognition of a group of assets within the
scope of the topic. Businesses, transfers of businesses to an
equity method investee and exchanges of businesses for a
noncontrolling interest in an entity are each included within
the topic. The update is to be applied retrospectively to the
first period that an entity adopts the FASB ASC Consolidation
Topic as it relates to noncontrolling interest (January 1,
2009 in the case of the Company). The adoption of this update
had no material impact on the consolidated financial statements
for the year ended December 31, 2009.
In January 2010, the FASB issued Accounting Standards Update
No. 2010-06,
an update to FASB ASC Fair Value Measurements and Disclosures
Topic, which both clarifies and expands required fair value
disclosures. Specifically, the update clarifies that companies
must provide fair value measurement disclosures for each class
of assets and liabilities and expands the requirements to
include disclosure of amounts and reasons for transfers among
different levels within the fair value hierarchy and information
within a
65
reconciliation about purchases, sales, issuances and settlements
on a gross basis. The clarifications and additional disclosures
related to transfers among different levels of the fair value
hierarchy become effective in periods beginning after
December 15, 2009 (January 1, 2010 in the case of the
Company). The remaining provisions become effective in the
fiscal period beginning after December 31, 2010
(January 1, 2011 in the case of the Company). The Company
is currently evaluating the impact, if any, that the pending
adoption of the update will have on the Companys
disclosures in its consolidated financial statements.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We have interest rate risk primarily related to borrowings under
the Credit Agreements. Term loan borrowings under the First Lien
Credit Agreement bear interest, at our option, at either an
adjusted LIBOR rate plus 2.00% or the lenders alternate
base rate plus 1.00%, or a combination of the two, and
borrowings under the Second Lien Credit Agreement bear interest,
at our option, at either an adjusted LIBOR rate plus 5.00% or
the lenders alternate base rate plus 4.00%, or a
combination of the two. As of December 31, 2009, we had
outstanding borrowings (before unamortized debt discount of
$53.3 million) of $686.4 million under the First Lien
Credit Agreement and $170.0 million under the Second Lien
Credit Agreement.
We manage our interest rate risk through the use of an interest
rate swap agreement. Effective December 31, 2006, we
entered into an interest rate swap to exchange three month LIBOR
rates for fixed interest rates, resulting in the payment of an
all-in fixed rate of 4.944% on an initial notional amount of
$786.3 million which amortizes on a quarterly basis until
maturity at December 30, 2011. At December 31, 2009,
the notional amount of the interest rate swap was
$355.2 million. As a result, as of December 31, 2009,
$501.2 million of our total borrowings were effectively
subject to a variable interest rate.
A change in interest rates on variable rate debt impacts our
pre-tax earnings and cash flows. Since its redesignation on
September 30, 2008, our interest rate swap qualifies for
hedge accounting as a cash flow hedge. Therefore, future changes
in market fluctuations related to the effective portion of this
cash flow hedge do not impact our pre-tax earnings until the
accrued interest is recognized on the derivative and the
associated hedged debt. Based on our outstanding debt as of
December 31, 2009 and assuming that our mix of debt
instruments, interest rate swap and other variables remain the
same, the annualized effect of a one percentage point change in
variable interest rates would have a pre-tax impact on our
earnings and cash flows of approximately $5.0 million.
In the future, in order to manage our interest rate risk, we may
enter into additional interest rate swaps, modify our existing
interest rate swap or make changes that may impact our ability
to treat our interest rate swap as a cash flow hedge. However,
we do not intend or expect to enter into derivative or interest
rate transactions for trading or speculative purposes.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Information with respect to this Item is contained in our
consolidated financial statements beginning on
Page F-1
of this Annual Report.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A(T).
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
Under the supervision and with the participation of our Chief
Executive Officer (CEO) and Chief Financial Officer
(CFO), management has evaluated the effectiveness of
the design and operation of our disclosure controls and
procedures (as defined in
Rules 13a-15(e)
or 15d-15(e)
of the Exchange Act) as of December 31, 2009. Based upon
that evaluation, our CEO and CFO concluded that, as of
December 31, 2009, our disclosure controls and procedures
were effective in causing material information relating to us
(including our consolidated subsidiaries) to be recorded,
processed, summarized and reported by management on a timely
basis and to ensure the quality and timeliness of our public
disclosures with SEC disclosure obligations.
66
Our management, including our CEO and CFO, does not expect that
our disclosure controls and procedures will prevent all errors
and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control
issues and instances of fraud, if any, with the Company have
been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error and mistake.
Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by
management override of controls.
The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in
achieving its stated goals under all potential future
conditions; over time, a control may become inadequate because
of changes in conditions or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements
due to error or fraud may occur and may not be detected.
Managements
Annual Report on Internal Control Over Financial
Reporting
This Annual Report does not include a report of
managements assessment regarding internal control over
financial reporting or an attestation report of the
Companys independent registered public accounting firm due
to a transition period established by rules of the SEC for newly
public companies.
Changes
in Internal Control Over Financial Reporting
There has been no change to our internal control over financial
reporting during the quarter ended December 31, 2009 that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this Item will be presented in our
definitive proxy statement for the 2010 Annual Meeting of
Stockholders anticipated to be held on May 27, 2010 (the
Proxy Statement) and is incorporated by reference
herein.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this Item will be presented in the
Companys Proxy Statement and is incorporated by reference
herein.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by this Item will be presented in the
Companys Proxy Statement and is incorporated by reference
herein.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required by this Item will be presented in the
Companys Proxy Statement and is incorporated by reference
herein.
67
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required by this Item will be presented in the
Companys Proxy Statement and is incorporated by reference
herein.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) List of Documents Filed.
1. Financial Statements
All financial statements are set forth under
Item 8 Financial Statements and
Supplementary Data of this Annual Report.
2. Financial Statement Schedules
All financial statement schedules required to be filed are set
forth under Item 8 Financial Statements
and Supplementary Data of this Annual Report.
3. Exhibits
The list of exhibits filed as part of this Annual Report is
submitted in the Exhibit Index and is incorporated herein
by reference.
(b) Exhibits.
The list of exhibits filed as part of this Annual Report is
submitted in the Exhibit Index and is incorporated herein
by reference.
(c) None.
68
Index to
Consolidated Financial Statements
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
S-1
|
|
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Emdeon Inc.
We have audited the accompanying consolidated balance sheets of
Emdeon Inc. (the Company) as of December 31, 2009 and 2008,
and the related consolidated statements of operations, equity,
and cash flows for each of the three years in the period ended
December 31, 2009. Our audits also included the financial
statement schedule listed in the index at Item 15 (a)(2).
These financial statements and schedule are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Emdeon Inc. at December 31, 2009 and
2008, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.
As discussed in Note 2 to the consolidated financial
statements, the Company adopted the Business Combination Topic
of the Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) effective
January 1, 2009.
As discussed in Note 2 to the consolidated financial
statements, the Company adopted the Consolidation Topic of the
FASB ASC, as it relates to noncontrolling interest, effective
January 1, 2009.
Nashville, Tennessee
March 18, 2010
F-2
Emdeon
Inc.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
211,999
|
|
|
$
|
71,478
|
|
Accounts receivable, net of allowance for doubtful accounts of
$4,433 and $4,576 at December 31, 2009 and 2008,
respectively
|
|
|
151,022
|
|
|
|
144,149
|
|
Deferred income tax assets
|
|
|
4,924
|
|
|
|
2,285
|
|
Prepaid expenses and other current assets
|
|
|
16,632
|
|
|
|
21,137
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
384,577
|
|
|
|
239,049
|
|
Property and equipment, net
|
|
|
152,091
|
|
|
|
136,038
|
|
Goodwill
|
|
|
703,027
|
|
|
|
646,851
|
|
Intangible assets, net
|
|
|
989,280
|
|
|
|
971,001
|
|
Other assets, net
|
|
|
1,451
|
|
|
|
7,340
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,230,426
|
|
|
$
|
2,000,279
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,910
|
|
|
$
|
805
|
|
Accrued expenses
|
|
|
72,493
|
|
|
|
79,513
|
|
Deferred revenues
|
|
|
12,153
|
|
|
|
12,056
|
|
Current portion of long-term debt
|
|
|
9,972
|
|
|
|
17,244
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
104,528
|
|
|
|
109,618
|
|
Long-term debt, excluding current portion
|
|
|
830,710
|
|
|
|
807,986
|
|
Deferred income tax liabilities
|
|
|
145,914
|
|
|
|
159,811
|
|
Tax receivable agreement obligations to related parties
|
|
|
142,044
|
|
|
|
|
|
Other long-term liabilities
|
|
|
27,361
|
|
|
|
44,711
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Preferred stock (par value, $0.00001), 25,000,000 shares
authorized and 0 shares issued and outstanding
|
|
|
|
|
|
|
|
|
Class A common stock (par value, $0.00001),
400,000,000 shares authorized and 90,423,941 and
77,413,610 shares outstanding at December 31, 2009 and
2008, respectively
|
|
|
1
|
|
|
|
1
|
|
Class B common stock, exchangeable (par value, $0.00001),
52,000,000 shares authorized and 24,752,955 and
22,586,390 shares outstanding at December 31, 2009 and
2008, respectively
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
730,941
|
|
|
|
670,702
|
|
Accumulated other comprehensive loss
|
|
|
(11,198
|
)
|
|
|
(23,195
|
)
|
Retained earnings
|
|
|
33,704
|
|
|
|
24,123
|
|
|
|
|
|
|
|
|
|
|
Emdeon Inc. equity
|
|
|
753,448
|
|
|
|
671,631
|
|
Noncontrolling interest
|
|
|
226,421
|
|
|
|
206,522
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
979,869
|
|
|
|
878,153
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
2,230,426
|
|
|
$
|
2,000,279
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
Emdeon
Inc.
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Revenue
|
|
$
|
918,448
|
|
|
$
|
853,599
|
|
|
$
|
808,537
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations (exclusive of depreciation and amortization
below)
|
|
|
562,867
|
|
|
|
541,563
|
|
|
|
514,918
|
|
Development and engineering
|
|
|
33,928
|
|
|
|
28,625
|
|
|
|
28,198
|
|
Sales, marketing, general and administrative
|
|
|
113,701
|
|
|
|
91,212
|
|
|
|
94,475
|
|
Depreciation and amortization
|
|
|
105,321
|
|
|
|
97,864
|
|
|
|
62,811
|
|
Loss on abandonment of leased properties
|
|
|
1,675
|
|
|
|
3,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
100,956
|
|
|
|
91,254
|
|
|
|
108,135
|
|
Interest income
|
|
|
(75
|
)
|
|
|
(963
|
)
|
|
|
(1,567
|
)
|
Interest expense
|
|
|
70,246
|
|
|
|
71,717
|
|
|
|
74,325
|
|
Other income
|
|
|
(519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
31,304
|
|
|
|
20,500
|
|
|
|
35,377
|
|
Income tax provision
|
|
|
17,301
|
|
|
|
8,567
|
|
|
|
18,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
14,003
|
|
|
|
11,933
|
|
|
|
17,276
|
|
Net income attributable to noncontrolling interest
|
|
|
4,422
|
|
|
|
2,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Emdeon Inc.
|
|
$
|
9,581
|
|
|
$
|
9,231
|
|
|
$
|
17,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Class A common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
82,459,169
|
|
|
|
74,775,039
|
|
|
|
52,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
82,525,002
|
|
|
|
100,000,000
|
|
|
|
100,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
Emdeon
Inc.
Consolidated
Statements of Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Non-
|
|
|
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Controlling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Interest
|
|
|
Equity
|
|
|
|
(In thousands, except share amounts)
|
|
|
Balance at January 1, 2007
|
|
|
52,000,000
|
|
|
$
|
1
|
|
|
|
48,000,000
|
|
|
$
|
|
|
|
$
|
295,055
|
|
|
$
|
(2,384
|
)
|
|
$
|
(15
|
)
|
|
$
|
|
|
|
$
|
292,657
|
|
Contribution from HLTH Corporation for non-cash transfer
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,107
|
|
Contribution from HLTH Corporation for retention bonuses paid on
behalf of the Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,388
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,276
|
|
|
|
|
|
|
|
|
|
|
|
17,276
|
|
Change in the fair value of interest rate swap, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,468
|
)
|
|
|
|
|
|
|
(14,468
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
52,000,000
|
|
|
|
1
|
|
|
|
48,000,000
|
|
|
|
|
|
|
|
300,550
|
|
|
|
14,892
|
|
|
|
(14,474
|
)
|
|
|
|
|
|
|
300,969
|
|
Capital contribution from affiliates of General Atlantic LLC and
Hellman & Friedman LLC for the purchase of HLTH
Corporations 48% interest in EBS Master LLC on
February 8, 2008
|
|
|
25,413,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
578,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
578,409
|
|
Establish noncontrolling interest on February 8, 2008
|
|
|
|
|
|
|
|
|
|
|
22,586,390
|
|
|
|
|
|
|
|
(210,585
|
)
|
|
|
|
|
|
|
5,435
|
|
|
|
205,150
|
|
|
|
|
|
Eliminate HLTH Corporations 48% minority interest on
February 8, 2008
|
|
|
|
|
|
|
|
|
|
|
(48,000,000
|
)
|
|
|
|
|
|
|
1,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,345
|
|
Capital contribution from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,300
|
|
Distribution to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(317
|
)
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,231
|
|
|
|
|
|
|
|
2,702
|
|
|
|
11,933
|
|
Change in the fair value of interest rate swap, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,705
|
)
|
|
|
(3,240
|
)
|
|
|
(23,945
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
(13
|
)
|
|
|
(56
|
)
|
Other comprehensive income amortization, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,592
|
|
|
|
1,923
|
|
|
|
8,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
77,413,610
|
|
|
|
1
|
|
|
|
22,586,390
|
|
|
|
|
|
|
|
670,702
|
|
|
|
24,123
|
|
|
|
(23,195
|
)
|
|
|
206,522
|
|
|
|
878,153
|
|
Capital contribution from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203
|
|
Distribution to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434
|
)
|
Reclassification of liability awards to equity awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,548
|
|
|
|
|
|
|
|
|
|
|
|
6,183
|
|
|
|
26,731
|
|
Equity based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,784
|
|
|
|
|
|
|
|
|
|
|
|
1,531
|
|
|
|
7,315
|
|
Purchase of eRx Network L.L.C.
|
|
|
|
|
|
|
|
|
|
|
1,850,000
|
|
|
|
|
|
|
|
3,504
|
|
|
|
|
|
|
|
318
|
|
|
|
19,707
|
|
|
|
23,529
|
|
Issuance of units of EBS Master to members of management, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
2,537,325
|
|
|
|
|
|
|
|
(11,899
|
)
|
|
|
|
|
|
|
394
|
|
|
|
18,246
|
|
|
|
6,741
|
|
Issuance of Class A common stock to employees and
directors, net of taxes
|
|
|
349,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,372
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
(851
|
)
|
|
|
503
|
|
Conversion of EBS Master units held by eRx to shares of
Class A common stock, net of taxes
|
|
|
1,850,000
|
|
|
|
|
|
|
|
(1,850,000
|
)
|
|
|
|
|
|
|
21,968
|
|
|
|
|
|
|
|
(376
|
)
|
|
|
(17,443
|
)
|
|
|
4,149
|
|
Issuance of Class A shares in connection with initial
public offering
|
|
|
10,725,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144,915
|
|
Issuance of Units of EBS Master to Emdeon Inc., net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,706
|
|
|
|
|
|
|
|
(448
|
)
|
|
|
(21,025
|
)
|
|
|
(7,767
|
)
|
Repurchase of Class A shares (to satisfy tax withholding
obligation)
|
|
|
(102,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,780
|
)
|
|
|
|
|
|
|
4
|
|
|
|
190
|
|
|
|
(1,586
|
)
|
Repurchase of units of EBS Master issued to members of
management, net of taxes
|
|
|
|
|
|
|
|
|
|
|
(370,760
|
)
|
|
|
|
|
|
|
(1,107
|
)
|
|
|
|
|
|
|
(74
|
)
|
|
|
(3,500
|
)
|
|
|
(4,681
|
)
|
Contribution of data sublicense intangible to EBS Master
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,872
|
)
|
|
|
|
|
|
|
|
|
|
|
9,312
|
|
|
|
3,440
|
|
Tax receivable agreement with related parties, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131,433
|
)
|
Issuance of Class A common stock upon vesting of Restricted
Stock Units
|
|
|
188,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
764
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
(368
|
)
|
|
|
390
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,581
|
|
|
|
|
|
|
|
4,422
|
|
|
|
14,003
|
|
Changes in the fair value of interest rate swap, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,755
|
|
|
|
1,933
|
|
|
|
8,688
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
8
|
|
|
|
25
|
|
Other comprehensive income amortization, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,431
|
|
|
|
1,554
|
|
|
|
6,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
90,423,941
|
|
|
$
|
1
|
|
|
|
24,752,955
|
|
|
$
|
|
|
|
$
|
730,941
|
|
|
$
|
33,704
|
|
|
$
|
(11,198
|
)
|
|
$
|
226,421
|
|
|
$
|
979,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
Emdeon
Inc.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,003
|
|
|
$
|
11,933
|
|
|
$
|
17,276
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
105,321
|
|
|
|
97,864
|
|
|
|
62,811
|
|
Equity compensation expense
|
|
|
25,415
|
|
|
|
4,145
|
|
|
|
6,593
|
|
Deferred income tax expense (benefit)
|
|
|
(1,248
|
)
|
|
|
(4,140
|
)
|
|
|
13,846
|
|
Amortization of debt discount and issuance costs
|
|
|
11,947
|
|
|
|
9,954
|
|
|
|
2,390
|
|
Amortization of discontinued cash flow hedge from other
comprehensive loss
|
|
|
7,970
|
|
|
|
9,745
|
|
|
|
|
|
Change in fair value of interest rate swap (not subject to hedge
accounting)
|
|
|
|
|
|
|
(12,714
|
)
|
|
|
|
|
Loss on abandonment of leased properties
|
|
|
1,675
|
|
|
|
3,081
|
|
|
|
|
|
Loss on disposal of fixed assets
|
|
|
17
|
|
|
|
177
|
|
|
|
11
|
|
Other
|
|
|
(519
|
)
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,571
|
)
|
|
|
(19,409
|
)
|
|
|
354
|
|
Prepaid expenses and other
|
|
|
4,945
|
|
|
|
(12,049
|
)
|
|
|
(3,114
|
)
|
Accounts payable
|
|
|
4,731
|
|
|
|
(9,159
|
)
|
|
|
6,047
|
|
Accrued expenses and other liabilities
|
|
|
(9,329
|
)
|
|
|
3,119
|
|
|
|
(645
|
)
|
Due to HLTH Corporation
|
|
|
|
|
|
|
(797
|
)
|
|
|
(9,226
|
)
|
Deferred revenues
|
|
|
95
|
|
|
|
1,585
|
|
|
|
1,696
|
|
Tax receivable agreement obligations to related parties
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
162,751
|
|
|
|
83,335
|
|
|
|
98,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(48,292
|
)
|
|
|
(27,971
|
)
|
|
|
(28,179
|
)
|
Payments for acquisitions, net of cash acquired
|
|
|
(76,250
|
)
|
|
|
(21,061
|
)
|
|
|
(11,074
|
)
|
Purchase of Emdeon Business Services, net of cash acquired
|
|
|
|
|
|
|
(306,260
|
)
|
|
|
(10,949
|
)
|
Proceeds from sale of office supplies business
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(123,242
|
)
|
|
|
(355,292
|
)
|
|
|
(50,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of cash advance from HLTH Corporation
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
Proceeds from initial public offering
|
|
|
147,964
|
|
|
|
|
|
|
|
|
|
Repurchase of Class A common stock
|
|
|
(1,586
|
)
|
|
|
|
|
|
|
|
|
Repurchase of Units of EBS Master LLC
|
|
|
(5,373
|
)
|
|
|
|
|
|
|
|
|
Debt principal and sublicense obligation payments
|
|
|
(29,203
|
)
|
|
|
(7,550
|
)
|
|
|
(37,551
|
)
|
Payment of debt issuance costs
|
|
|
(359
|
)
|
|
|
|
|
|
|
(500
|
)
|
Proceeds from revolver
|
|
|
|
|
|
|
10,000
|
|
|
|
10,000
|
|
Payments on revolver
|
|
|
(10,200
|
)
|
|
|
|
|
|
|
(10,000
|
)
|
Capital contributions from stockholders
|
|
|
203
|
|
|
|
307,615
|
|
|
|
3,388
|
|
Distribution to stockholders
|
|
|
(434
|
)
|
|
|
(317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
101,012
|
|
|
|
309,748
|
|
|
|
(44,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
140,521
|
|
|
|
37,791
|
|
|
|
3,174
|
|
Cash and cash equivalents at beginning of period
|
|
|
71,478
|
|
|
|
33,687
|
|
|
|
30,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
211,999
|
|
|
$
|
71,478
|
|
|
$
|
33,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
49,649
|
|
|
$
|
64,752
|
|
|
$
|
72,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes
|
|
$
|
21,087
|
|
|
$
|
14,924
|
|
|
$
|
2,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Execution of tax receivable agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid in capital
|
|
$
|
141,745
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax receivable agreement obligation to related parties
|
|
$
|
141,745
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of certain data rights:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
37,606
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
3,078
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
34,528
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
Emdeon
Inc.
Notes to
Consolidated Financial Statements
(In
Thousands, Except Per Share, Unit and Per Unit
Amounts)
|
|
1.
|
Nature of
Business and Organization
|
Nature
of Business
Emdeon Inc. (the Company) is a provider of revenue
and payment cycle management solutions, connecting payers,
providers and patients of the U.S. healthcare system. The
Companys 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, clinical exchange capabilities, claims
management and adjudication, payment distribution, payment
posting and denial management, and patient billing and payment
processing.
Organization
Prior to November 2006, the group of companies that comprised
Emdeon Business Services (EBS) were owned by HLTH
Corporation (HLTH). EBS Master LLC (EBS
Master) was formed by HLTH to act as a holding company for
EBS. EBS Master, through its 100% owned subsidiary, Emdeon
Business Services LLC (EBS LLC), owns EBS.
In September 2006, EBS Acquisition LLC (EBS
Acquisition) was formed as a Delaware limited liability
company by affiliates of General Atlantic LLC (General
Atlantic). On November 16, 2006, pursuant to the
terms of an Amended and Restated Agreement and Plan of Merger,
dated as of November 15, 2006, among HLTH and certain of
its subsidiaries (including EBS Master) and EBS Acquisition and
two of its subsidiaries, a subsidiary of EBS Acquisition merged
into a subsidiary of HLTH. As a result of the merger, EBS
Acquisition acquired a 52% interest in EBS Master, and HLTH
received approximately $1.2 billion in cash and retained a
48% interest in EBS Master. The transactions through which EBS
Acquisition acquired a 52% interest in EBS Master are referred
to herein as the 2006 Transaction. The 2006
Transaction was financed with $925,000 in bank debt and an
equity investment of approximately $320,000 by EBS Acquisition.
As the 2006 Transaction was deemed to be a highly leveraged
transaction, the 2006 Transaction was accounted for in
accordance with Emerging Issues Task Force (EITF)
Issue
No. 88-16,
Basis in Leveraged Buyout Transactions, and 52% of the
net assets of EBS Master were stepped up to fair market value.
On February 8, 2008, HLTH sold its 48% noncontrolling
interest in EBS Master to affiliates of General Atlantic and
Hellman & Friedman LLC (H&F) for
$575,000 in cash (the 2008 Transaction). As a
result, following the 2008 Transaction, EBS Master was owned
65.77% by affiliates of General Atlantic (including EBS
Acquisition) and 34.23% by affiliates of H&F. See
Note 4 for further information related to the 2008
Transaction.
In September 2008, EBS Acquisition was converted into a Delaware
corporation and its name was changed to Emdeon Inc.
Reorganization
On August 5, 2009 the Company completed a restructuring
(collectively, the reorganization transactions) in
anticipation of completing an initial public offering.
Prior to the reorganization transactions, the Company owned a
52% interest in EBS Master and affiliates of General Atlantic
and H&F owned the remaining 48% interest in EBS Master. The
Company did not engage in any business or other activities
except in connection with its investment in EBS Master and the
reorganization transactions, and had nominal assets other than
its interest in EBS Master. In the reorganization transactions,
the Company became the sole managing member of EBS Master and
acquired additional interests in EBS Master.
Prior to the reorganization transactions, the Company was
authorized to issue a single class of common stock. In
connection with the reorganization transactions, the Company
amended and restated its certificate of
F-7
Emdeon
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(In
Thousands, Except Per Share, Unit and Per Unit
Amounts)
incorporation and is currently authorized to issue two classes
of common stock: Class A common stock and Class B
common stock.
As part of the reorganization transactions:
|
|
|
|
|
The Company amended and restated its certificate of
incorporation and reclassified its outstanding common stock into
an aggregate of 56,000,000 shares of its Class A
common stock;
|
|
|
|
The Company redeemed 4,000,000 shares of Class A
common stock from its existing stockholders in exchange for the
rights by its existing stockholders to receive payments under a
tax receivable agreement;
|
|
|
|
Another member of EBS Master, EBS Acquisition II, LLC (EBS
Acquisition II), an affiliate of General Atlantic, was
merged with a newly-formed subsidiary of the Company with the
newly formed subsidiary being the surviving entity in the
merger; EBS Acquisition IIs members, all of whom are
investment funds organized and controlled by General Atlantic,
received an aggregate of 13,773,913 shares of Class A
common stock and the Company acquired, indirectly, an additional
13.52% interest in EBS Master;
|
|
|
|
Another member of EBS Master, H&F Harrington AIV I,
L.P. (H&F Harrington), an entity whose partners
consist of investment funds organized and controlled by
H&F, dissolved and distributed 1.06% of its interests in
EBS Master to Hellman & Friedman Investors VI, L.P.,
its general partner (H&F GP), and 98.94% to
H&F Harrington, Inc.; H&F Harrington, Inc. then merged
with a newly-formed subsidiary of the Company with the newly
formed subsidiary being the surviving entity in the merger;
H&F Harrington, Inc.s sole stockholder, H&F
Harrington AIV II, L.P. (H&F AIV), an
investment fund organized and controlled by H&F, received
an aggregate of 11,639,697 shares of Class A common
stock and the Company acquired, indirectly, an additional 11.43%
interest in EBS Master; and
|
|
|
|
Affiliates of H&F (or their successors) (the H&F
Continuing LLC Members) continue to hold an aggregate of
22,586,390 units in EBS Master (EBS Units) and
were issued an aggregate of 22,586,390 shares of
Class B common stock.
|
The Company accounted for the reorganization transactions using
a carryover basis as the reorganization transactions are
identical ownership exchanges among entities under common
control. The economic interest that the affiliates of General
Atlantic and H&F held in EBS Master before the
reorganization transactions did not change as a result of the
reorganization transactions.
The reorganization was accounted for similar to a transaction
between entities under common control. As EBS Acquisition II,
H&F Harrington, and the H&F Continuing LLC Members did
not purchase their interests in EBS Master until the 2008
Transaction, this reorganization did not materially impact the
Companys financial statements through December 31,
2007.
This reorganization and the changes to the capital structure are
reflected in all successor periods presented.
Effective August 11, 2009, the Company priced its initial
public offering of Class A common stock (the
IPO) as more fully described in Note 15 to the
consolidated financial statements.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The accompanying consolidated financial statements have been
prepared in conformity with U.S. generally accepted
accounting principles and include all subsidiaries and entities
that are controlled by the Company. The results of operations
for companies acquired are included in the consolidated
financial statements from the effective date of acquisition. All
intercompany accounts and transactions have been eliminated in
the consolidated financial statements.
F-8
Emdeon
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(In
Thousands, Except Per Share, Unit and Per Unit
Amounts)
Reclassifications
Certain reclassifications have been made to the prior year
financial statements to conform with the current year
presentation.
Noncontrolling
Interest
Noncontrolling interest represents the noncontrolling
stockholders proportionate share of equity and net income
of EBS Master.
The noncontrolling interest in the Company related to
HLTHs 48% ownership from the 2006 Transaction was in a net
deficit position as of December 31, 2007. As a result, net
income (loss) and other comprehensive income was not allocated
to the noncontrolling interest holders during the year ended
December 31, 2007.
Accounting
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. The Company bases its estimates on
historical experience, current business factors, and various
other assumptions that the Company believes are necessary to
consider in order to form a basis for making judgments about the
carrying values of assets and liabilities, the recorded amounts
of revenue and expenses, and disclosure of contingent assets and
liabilities. The Company is subject to uncertainties such as the
impact of future events, economic, environmental and political
factors and changes in the Companys business environment;
therefore, actual results could differ from these estimates.
Accordingly, the accounting estimates used in the preparation of
the Companys financial statements will change as new
events occur, as more experience is acquired, as additional
information is obtained and as the Companys operating
environment changes. Changes in estimates are made when
circumstances warrant. Such changes in estimates and refinements
in estimation methodologies are reflected in the reported
results of operations; and if material, the effects of changes
in estimates are disclosed in the notes to the consolidated
financial statements. Estimates and assumptions by management
affect: the allowance for doubtful accounts; the fair value
assigned to assets acquired and liabilities assumed in business
combinations; the carrying value of long-lived assets (including
goodwill and intangible assets); the amortization period of
long-lived assets (excluding goodwill); the carrying value,
capitalization and amortization of software development costs;
the provision and benefit for income taxes and related deferred
tax accounts; certain accrued expenses; revenue recognition;
contingencies; and the value attributed to equity-based awards.
Business
Combinations
The Company allocates the consideration transferred (i.e.
purchase price) in a business combination to the acquired
business identifiable assets, liabilities, and
noncontrolling interests at their acquisition date fair value.
The excess of the consideration transferred over the amount
allocated to the identifiable assets and liabilities and
noncontrolling interest, if any, is recorded as goodwill. Any
excess of the fair value of the identifiable assets acquired and
liabilities assumed over the consideration transferred, if any,
is generally recognized within earnings as of the acquisition
date.
The fair value of the assets, liabilities and noncontrolling
interests is estimated based on one or a combination of income,
costs, or market approaches as determined based on the nature of
the asset or liability and the level of inputs available to the
Company (i.e. quotes prices in an active market, other
observable inputs or unobservable inputs). To the extent that
the Companys initial accounting for a business combination
is incomplete at the end of a reporting period, provisional
amounts are reported for those items which are incomplete. The
Company retroactively adjusts such provisional amounts as of the
acquisition date once new information is received about facts
and circumstances that existed as of the acquisition date.
F-9
Emdeon
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(In
Thousands, Except Per Share, Unit and Per Unit
Amounts)
Cash
and Cash Equivalents
The Company considers all highly liquid investments with an
original maturity from the date of purchase of three months or
less to be cash equivalents.
Allowance
for Doubtful Accounts
The allowance for doubtful accounts reflects the Companys
best estimate of losses inherent in the Companys
receivables portfolio determined on the basis of historical
experience, specific allowances for known troubled accounts and
other currently available evidence.
Inventory
Inventory is stated at the lower of cost or market value using
the
first-in,
first-out basis and consists of unprocessed rolled paper, paper
sheet stock, envelopes and inserts. Market value is based on
current replacement cost.
Software
Development Costs
Software development costs that are incurred in the preliminary
project stage are expensed as incurred. Once certain criteria
have been met, direct costs incurred in developing or obtaining
computer software are capitalized. Training and data conversion
costs are expensed as incurred. Capitalized software costs are
included in property and equipment within the accompanying
consolidated balance sheets and are amortized over a three-year
period.
Property
and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets.
The useful lives are generally as follows:
|
|
|
Computer equipment
|
|
3 to 5 years
|
Office equipment, furniture and fixtures
|
|
3 to 7 years
|
Software
|
|
3 years
|
Technology
|
|
6 to 7 years
|
Leasehold improvements
|
|
Shorter of useful life or lease term
|
Expenditures for maintenance, repair and renewals of minor items
are expensed as incurred. Expenditures for maintenance, repair,
and renewals that extend the useful life of an asset are
capitalized.
Goodwill
and Intangible Assets
Goodwill and intangible assets resulting from the Companys
acquisitions are accounted for using the acquisition method of
accounting. Intangible assets with definite lives are amortized
on a straight-line basis over the estimated useful lives of the
related assets generally as follows:
|
|
|
Customer relationships
|
|
9 to 20 years
|
Trade names
|
|
20 years
|
Data sublicense agreement
|
|
8 years
|
Non-compete agreements
|
|
1 to 5 years
|
In connection with the 2008 Transaction, the Company reassessed
the useful life assigned to the trade names intangible asset.
This review indicated that the expected life for the trade names
intangible asset was substantially longer than the useful life
that had been previously used for amortization purposes in the
Companys financial statements. As a result, the Company
revised the estimated useful life of the trade names intangible
asset, effective February 8, 2008, from 7 to 20 years.
The effect of this change in estimate was to
F-10
Emdeon
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(In
Thousands, Except Per Share, Unit and Per Unit
Amounts)
reduce amortization expense and increase pre-tax income for the
year ended December 31, 2008 by approximately $8,766.
The Company reviews the carrying value of goodwill annually and
whenever indicators of impairment are present. With respect to
goodwill, the Company determines whether potential impairment
losses are present by comparing the carrying value of its
reporting units to the fair value of its reporting units. If the
fair value of the reporting unit is less than the carrying value
of the reporting unit, then a hypothetical purchase price
allocation is used to determine the amount of goodwill
impairment. The Company has recognized no impairment in
conjunction with its annual goodwill impairment analysis.
Long-Lived
Assets
Long-lived assets used in operations are reviewed for impairment
whenever events or changes in circumstances indicate that
carrying amounts may not be recoverable. For long-lived assets
to be held and used, the Company recognizes an impairment loss
only if its carrying amount is not recoverable through its
undiscounted cash flows and measures the impairment loss based
on the difference between the carrying amount and fair value.
Long-lived assets held for sale are reported at the lower of
cost or fair value less costs to sell.
Other
Assets
Other assets consist primarily of debt issuance costs and, for
2008, deferred costs associated with the IPO. Debt issuance
costs are amortized using the effective interest method over the
term of the debt. The amortization is included in interest
expense in the accompanying consolidated statements of
operations. Certain costs associated with the IPO were deferred
until the IPO was completed. Upon completion of the IPO, such
costs were reclassified and presented as a reduction of the IPO
proceeds.
Derivatives
Derivative financial instruments are used to manage the
Companys interest rate exposure. The Company does not
enter into financial instruments for speculative purposes.
Derivative financial instruments are accounted for and measured
at fair value and recorded on the balance sheet. For derivative
instruments that are designated and qualify as a cash flow
hedge, the effective portion of the gain or loss on the
derivative instrument is reported as a component of other
comprehensive income and reclassified into earnings in the same
line item associated with the forecasted transaction in the same
period or periods during which the hedged transaction affects
earnings (for example, in interest expense when the
hedged transactions are interest cash flows associated with
floating-rate debt). The remaining gain or loss on the
derivative instrument in excess of the cumulative change in the
present value of future cash flows of the hedged item, if any,
is recognized in interest expense in current earnings during the
period of change.
Equity-Based
Compensation
Compensation expense related to the Companys equity-based
awards is recognized on a straight-line basis over the requisite
service period. The fair value of the equity awards is
determined by use of a Black-Scholes model and assumptions as to
expected term, expected volatility, expected dividends and the
risk free rate.
The Companys equity-based awards historically were
classified as liabilities due to certain repurchase features.
The Company remeasured the fair value of these awards at each
reporting date. Liability awards were included in other
long-term liabilities in the accompanying consolidated balance
sheets.
The Company modified the repurchase features of certain of these
equity-based awards in June 2009 and all such repurchase
features were removed in connection with the IPO in August 2009.
Following this
F-11
Emdeon
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(In
Thousands, Except Per Share, Unit and Per Unit
Amounts)
modification and the IPO, all such awards are classified within
equity in the accompanying consolidated balance sheet.
Revenue
Recognition
The Company generates virtually all of its revenue by providing
products and services that automate and simplify business and
administrative functions for payers and providers, generally on
either a per transaction, per document or per communications
basis or, in some cases, on a monthly flat fee basis. For
certain services, the Company may charge an implementation fee
in conjunction with related setup and connection to its network
and other systems. In addition, the Company receives software
license fees and software and hardware maintenance fees from
payers who utilize the Companys systems for converting
paper claims into electronic claims and, occasionally, sell
additional software and hardware products to such payers.
Revenue for transaction services, payment services and patient
statements are recognized as the services are provided. Postage
fees related to the Companys payment services and patient
statement volumes are recorded on a gross basis. Implementation
fees, software license fees and software maintenance fees are
amortized to revenue on a straight line basis over the contract
period, which generally varies from one to three years. Software
and hardware product sales are recognized once all elements are
delivered and customer acceptance is received.
Cash receipts or billings in advance of revenue recognition are
recorded as deferred revenues in the accompanying consolidated
balance sheets.
The Company excludes sales and use tax from revenue in the
accompanying consolidated statements of operations.
Income
Taxes
The Company records deferred income taxes for the tax effect of
differences between book and tax bases of its assets and
liabilities.
Deferred income taxes reflect the available net operating losses
and the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Realization of the future tax benefits related to deferred tax
assets is dependent on many factors, including the
Companys past earnings history, expected future earnings,
the character and jurisdiction of such earnings, unsettled
circumstances that, if unfavorably resolved, would adversely
affect utilization of its deferred tax assets, carryback and
carryforward periods, and tax strategies that could potentially
enhance the likelihood of realization of a deferred tax asset.
The Company recognizes tax benefits for uncertain tax positions
at the point that the Company concludes that the tax position,
based solely on its technical merits, is more likely than not to
be sustained upon examination. The benefit, if any, is measured
as the largest amount of benefit, determined on a cumulative
probability basis that is more likely than not to be realized
upon ultimate settlement. Tax positions failing to qualify for
initial recognition are recognized in the first subsequent
interim period that they meet the more likely than not standard,
are resolved through negotiation or litigation with the taxing
authority, or on expiration of the statute of limitations.
Net
Income Per Share of Class A Common Stock
Basic net income per share is computed using the
weighted-average number of Class A common shares
outstanding during the period. Diluted net income per share is
computed using the weighted average number of Class A
common shares and, if dilutive, potential Class A common
shares outstanding during the period.
The computation of the diluted net income per share of
Class A common stock assumes the exchange (to the extent
dilutive) of the units of EBS Master (and corresponding shares
of Class B common stock) held by
F-12
Emdeon
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(In
Thousands, Except Per Share, Unit and Per Unit
Amounts)
the H&F Continuing LLC Members for shares of Class A
common stock. Similarly, for periods following the
reorganization transactions, the computation of the diluted net
income per share of Class A common stock also assumes the
exchange (to the extent dilutive) of the vested units of EBS
Master (and corresponding shares of Class B common stock)
held by senior management for shares of Class A common
stock.
Following the reorganization transactions, potential
Class A common shares consist of the incremental
Class A common shares issuable upon the exchange or vesting
of units of EBS Master (and corresponding shares of Class B
common stock) and restricted stock units, respectively. The
dilutive effect of restricted stock units are reflected in
diluted earnings per share by application of the treasury stock
method. Vested units of EBS Master are reflected in diluted
earnings per share by application of the if-converted method.
Unvested units of EBS Master are reflected in the numerator of
the consolidated diluted earnings per share calculation based
upon the Companys proportionate interest in EBS Master as
determined by a separate EBS Master diluted net income per share
calculation.
As the Class B common stock has no economic interest (only
voting interest), no earnings are allocated to this class of
common stock for purposes of computing earnings per share.
Recent
Accounting Pronouncements
On January 1, 2009, the Company adopted the Financial
Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Business Combinations
Topic. This topic expands the definition of a business and a
business combination and generally requires the acquiring entity
to recognize all of the assets and liabilities of the acquired
business, regardless of the percentage ownership acquired, at
their fair values. This topic also requires that contingent
consideration and certain acquired contingencies be recorded at
fair value on the acquisition date and that acquisition costs
generally be expensed as incurred. The Company recorded
approximately $1,127 of acquisition expenses in the year ended
December 31, 2009 that, absent the adoption of this topic,
would have been capitalized. These costs are included in the
accompanying consolidated statement of operations within sales,
marketing, general and administrative expenses. As a result, net
income for the year ended December 31, 2009 was reduced by
approximately $667 ($0.01 per diluted Class A common share).
On January 1, 2009, the Company adopted the provisions of
the FASB ASC Fair Value Measurements and Disclosures Topic that
relate to nonfinancial assets and liabilities that are not
required or permitted to be measured at fair value on a
recurring basis. Examples of such circumstances include fair
value measurements associated with the initial recognition of
assets and liabilities in a business combination and
measurements of impairment following a goodwill impairment test
or an impairment of a long-lived asset other than goodwill. The
adoption of this topic had no material impact on the
Companys consolidated financial statements for the year
ended December 31, 2009.
On January 1, 2009, the Company adopted the FASB ASC
Consolidation Topic as it relates to noncontrolling interests in
consolidated financial statements. This topic clarifies that a
noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in
the consolidated financial statements. Additionally, the topic
changes the way the consolidated income statement is presented
by requiring consolidated net income to be reported at amounts
that include the amounts attributable to both the parent and the
noncontrolling interest. The presentation and disclosure
requirements of the topic have been given retroactive effect for
all periods presented.
On January 1, 2009, the Company adopted additional
disclosure provisions of the FASB ASC Derivatives and Hedging
Topic. The additional provisions amended and expanded the
disclosure requirements for derivative instruments and hedging
activities with the intent to provide users of financial
statements with an enhanced understanding of how and why an
entity uses derivative instruments; how derivative instruments
and related hedged items are accounted for; and how derivative
instruments and related hedged items affect an entitys
financial position, financial performance and cash flows. The
topic requires qualitative disclosures
F-13
Emdeon
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(In
Thousands, Except Per Share, Unit and Per Unit
Amounts)
about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of gains and
losses on derivative instruments and disclosures about
credit-risk-related contingent features in derivative
agreements. The required disclosures are presented within
Note 11 to the consolidated financial statements.
On April 1, 2009, the Company adopted provisions of the
FASB ASC Fair Value Measurements and Disclosures Topic (formerly
outlined in FASB Staff Position
157-4,
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly). Provisions
of this topic provide additional guidance for estimating fair
value when the volume and level of activity for the asset or
liability have significantly decreased and re-emphasize that a
fair value measurement is an exit price concept as defined in
the topic. Assets and liabilities measured under Level 1
inputs are excluded from the scope of these provisions. The
adoption of these provisions had no material impact on the
consolidated financial statements for the year ended
December 31, 2009.
On April 1, 2009, the Company adopted the FASB ASC
Subsequent Events Topic. This topic establishes general
standards of accounting for and disclosure of events that occur
after a companys balance sheet date but before financial
statements of the company are issued or are available to be
issued. In particular, this topic sets forth: (i) the
period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial
statements, (ii) the circumstances under which an entity
should recognize events or transactions occurring after the
balance sheet date in its financial statements and
(iii) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date. Additionally, the topic requires companies to disclose the
date through which subsequent events have been evaluated as well
as the date the financial statements were issued or were
available to be issued. In February 2010, the FASB issued
Accounting Standards Update
No. 2010-09,
an update to FASB ASC Subsequent Events Topic, which removed the
requirement, effective immediately, to disclose the date through
which subsequent events had been evaluated. The adoption of the
topic and subsequent update had no material impact on the
Companys consolidated financial statements for the year
ended December 31, 2009. The disclosures required by this
topic are presented within Note 27 to the consolidated
financial statements.
On October 1, 2009, the Company adopted FASB Accounting
Standards Update
2009-05, an
update to FASB ASC Fair Value Measurements and Disclosures
Topic. This update clarifies the valuation techniques to be used
by an entity to measure the fair value of a liability in
circumstances in which a quoted price in an active market for
the identical liability is not available. The update further
clarifies that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of the liability. The
adoption of this update had no material impact on the
consolidated financial statements for the year ended
December 31, 2009.
In October 2009, the FASB issued Accounting Standards Update
No. 2009-13,
an update to FASB ASC Revenue Recognition Topic, which amends
existing accounting standards for revenue recognition for
multiple-element arrangements. To the extent a deliverable
within a multiple-element arrangement is not accounted for
pursuant to other accounting standards, the update establishes a
selling price hierarchy that allows for the use of an estimated
selling price to determine the allocation of arrangement
consideration to a deliverable in a multiple element arrangement
where neither vendor-specific objective evidence nor third-party
evidence is available for that deliverable. The update is to be
applied prospectively for revenue arrangements entered into or
materially modified after January 1, 2011 in the case of
the Company. Early adoption is permitted. If the Company were to
adopt the update prior to the first quarter of 2011, the Company
must apply the update retrospectively to the beginning of the
fiscal year of adoption or to all periods presented. The Company
is currently evaluating the impact, if any, that the pending
adoption of the update will have on the Companys
consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update
No. 2010-02,
an update to FASB ASC Consolidation Topic, which clarifies the
scope of the FASB ASC Consolidation Topic and expands the
disclosures required in the event of the deconsolidation of a
subsidiary or derecognition of a group of assets
F-14
Emdeon
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(In
Thousands, Except Per Share, Unit and Per Unit
Amounts)
within the scope of the topic. Businesses, transfers of
businesses to an equity method investee and exchanges of
businesses for a noncontrolling interest in an entity are each
included within the topic. The update is to be applied
retrospectively to the first period that an entity adopts the
FASB ASC Consolidation Topic as it relates to noncontrolling
interest (January 1, 2009 in the case of the Company). The
adoption of this update had no material impact on the
consolidated financial statements for the year ended
December 31, 2009.
In January 2010, the FASB issued Accounting Standards Update
No. 2010-06,
an update to FASB ASC Fair Value Measurements and Disclosures
Topic, which both clarifies and expands required fair value
disclosures. Specifically, the update clarifies that companies
must provide fair value measurement disclosures for each class
of assets and liabilities and expands the requirements to
include disclosure of amounts and reasons for transfers among
different levels within the fair value hierarchy and information
within a reconciliation about purchases, sales, issuances and
settlements on a gross basis. The clarifications and additional
disclosures related to transfers among different levels of the
fair value hierarchy become effective in periods beginning after
December 15, 2009 (January 1, 2010 in the case of the
Company). The remaining provisions become effective in the
fiscal period beginning after December 31, 2010
(January 1, 2011 in the case of the Company). The Company
is currently evaluating the impact, if any, that the pending
adoption of the update will have on the Companys
disclosures in its consolidated financial statements.
|
|
3.
|
Concentration
of Credit Risk
|
The Companys 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 Companys 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 U.S. or government agency
obligations, or repurchase agreements secured by such securities.
2007
Acquisition
Patient
Statement Acquisition
On December 18, 2007, the Company acquired IXT Solutions, a
privately held patient billing and payment solutions company.
The Company paid $10,688 in cash at closing, incurred
transaction-related costs of $165, and agreed to pay up to an
additional $5,250 in cash if specified revenue and migration
targets were achieved. An estimated earnout liability of $4,500
was accrued based on the terms of the purchase agreement of
which $3,500 was paid in 2008 and $1,000 was paid in 2009. The
results of operations of IXT Solutions are included in the
consolidated financial statements of the Company from
December 18, 2007 forward.
The total purchase price was $15,353, including the transaction
costs of $165 and the earnout liability of $4,500, and was
allocated as follows:
|
|
|
|
|
Current assets
|
|
$
|
2,528
|
|
Property and equipment
|
|
|
3,190
|
|
Identifiable intangible assets:
|
|
|
|
|
Customer contracts
|
|
|
9,690
|
|
Non-compete agreements
|
|
|
600
|
|
Goodwill
|
|
|
7,121
|
|
Current liabilities
|
|
|
(2,185
|
)
|
Deferred tax liability and other long- term liabilities
|
|
|
(5,591
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
15,353
|
|
|
|
|
|
|
None of the goodwill attributable to this acquisition is
deductible for tax purposes.
F-15
Emdeon
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(In
Thousands, Except Per Share, Unit and Per Unit
Amounts)
2008
Acquisitions
2008
Transaction
Related to the 2008 Transaction, affiliates of General Atlantic
and H&F were deemed to be a collaborative group under EITF
Topic
No. D-97,
Push Down Accounting, and the 48% step up in the basis of
the net assets of EBS Master recorded at the General Atlantic
and H&F acquirer level was pushed down to the
Companys financial statements in accordance with Staff
Accounting Bulletin No. 54, Application of
Pushdown Basis of Accounting in Financial Statements
of Subsidiaries Acquired by Purchase, and replaced the
historical basis held by HLTH.
Transaction costs of $3,409 were incurred in the 2008
Transaction. The 2008 Transaction purchase price of $578,409 was
allocated as follows:
|
|
|
|
|
Current assets
|
|
$
|
88,074
|
|
Property and equipment
|
|
|
60,705
|
|
Other assets
|
|
|
266
|
|
Identifiable intangible assets:
|
|
|
|
|
Customer contracts
|
|
|
571,732
|
|
Tradename
|
|
|
81,888
|
|
Non-compete agreements
|
|
|
6,869
|
|
Goodwill
|
|
|
298,592
|
|
Current liabilities
|
|
|
(46,690
|
)
|
Long term debt
|
|
|
(356,587
|
)
|
Deferred tax liability
|
|
|
(113,213
|
)
|
Long term liabilities
|
|
|
(13,227
|
)
|
|
|
|
|
|
Total transaction price
|
|
$
|
578,409
|
|
Cash paid by H&F Continuing LLC Member
|
|
|
(272,149
|
)
|
|
|
|
|
|
Cash paid by Emdeon Inc. & subsidiaries
|
|
$
|
306,260
|
|
|
|
|
|
|
All of the goodwill attributable to the 2008 Transaction is
deductible for tax purposes.
Patient
Statement Acquisition
On September 26, 2008, the Company acquired the assets
comprising the patient