10-Q 1 mdrx-10q_20150331.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-35547

 

ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

36-4392754

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

222 Merchandise Mart, Suite 2024

Chicago, IL 60654

(Address of principal executive offices)

(312) 506-1200

(Registrant's telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

As of April 30, 2015, there were 180,857,921 shares of the registrant's $0.01 par value common stock outstanding.

 

 

 

 


ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

FORM 10-Q

For the Fiscal Quarter Ended March 31, 2015

TABLE OF CONTENTS

 

 

 

 

 

2


PART I. FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements 

ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

(In thousands, except per share amounts)

 

2015

 

 

2014

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

88,480

 

 

$

53,173

 

Accounts receivable, net of allowance of $35,917 and $36,047 as of March 31, 2015 and

  December 31, 2014, respectively

 

 

325,237

 

 

 

331,625

 

Deferred taxes, net

 

 

35,651

 

 

 

35,615

 

Prepaid expenses and other current assets

 

 

108,020

 

 

 

102,398

 

Total current assets

 

 

557,388

 

 

 

522,811

 

Long-term marketable securities

 

 

0

 

 

 

1,305

 

Fixed assets, net

 

 

140,116

 

 

 

145,830

 

Software development costs, net

 

 

83,485

 

 

 

86,153

 

Intangible assets, net

 

 

387,047

 

 

 

403,362

 

Goodwill

 

 

1,200,290

 

 

 

1,200,746

 

Deferred taxes, net

 

 

708

 

 

 

708

 

Other assets

 

 

135,720

 

 

 

147,249

 

Total assets

 

$

2,504,754

 

 

$

2,508,164

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

82,656

 

 

$

70,824

 

Accrued expenses

 

 

63,267

 

 

 

78,967

 

Accrued compensation and benefits

 

 

39,846

 

 

 

51,062

 

Deferred revenue

 

 

322,111

 

 

 

293,022

 

Deferred taxes, net

 

 

21

 

 

 

21

 

Current maturities of long-term debt and capital lease obligations

 

 

30,286

 

 

 

27,504

 

Total current liabilities

 

 

538,187

 

 

 

521,400

 

Long-term debt

 

 

542,399

 

 

 

548,682

 

Deferred revenue

 

 

23,047

 

 

 

23,168

 

Deferred taxes, net

 

 

56,010

 

 

 

55,437

 

Other liabilities

 

 

67,024

 

 

 

75,257

 

Total liabilities

 

 

1,226,667

 

 

 

1,223,944

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock: $0.01 par value, 1,000 shares authorized,

     no shares issued and outstanding as of March 31, 2015 and December 31, 2014

 

 

0

 

 

 

0

 

Common stock: $0.01 par value, 349,000 shares authorized as of March 31, 2015 and

     December 31, 2014; 265,484 and 180,812 shares issued and outstanding as of

     March 31, 2015, respectively; 265,138 and 180,466 shares issued and outstanding as

     of December 31, 2014, respectively

 

 

2,655

 

 

 

2,651

 

Treasury stock: at cost, 84,672 as of March 31, 2015 and December 31, 2014

 

 

(278,036

)

 

 

(278,036

)

Additional paid-in capital

 

 

1,754,747

 

 

 

1,749,593

 

Accumulated deficit

 

 

(198,093

)

 

 

(188,009

)

Accumulated other comprehensive loss

 

 

(3,186

)

 

 

(1,979

)

Total stockholders’ equity

 

 

1,278,087

 

 

 

1,284,220

 

Total liabilities and stockholders’ equity

 

$

2,504,754

 

 

$

2,508,164

 

 

The accompanying notes are an integral part of these consolidated financial statements.

3


ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

Three Months Ended March 31,

 

(In thousands, except per share amounts)

 

2015

 

 

2014

 

Revenue:

 

 

 

 

 

 

 

 

Software delivery, Support and Maintenance

 

 

227,559

 

 

 

227,390

 

Client services

 

 

106,993

 

 

 

112,895

 

Total revenue

 

 

334,552

 

 

 

340,285

 

Cost of revenue:

 

 

 

 

 

 

 

 

Software delivery, Support and Maintenance

 

 

76,687

 

 

 

75,203

 

Client services

 

 

107,159

 

 

 

105,865

 

Amortization of software development and acquisition-related assets

 

 

20,916

 

 

 

21,031

 

Total cost of revenue

 

 

204,762

 

 

 

202,099

 

Gross profit

 

 

129,790

 

 

 

138,186

 

Selling, general and administrative expenses

 

 

82,029

 

 

 

89,946

 

Research and development

 

 

46,727

 

 

 

52,305

 

Asset impairment charges

 

 

26

 

 

 

195

 

Amortization of intangible and acquisition-related assets

 

 

6,703

 

 

 

7,651

 

Loss from operations

 

 

(5,695

)

 

 

(11,911

)

Interest expense

 

 

(7,256

)

 

 

(7,233

)

Other income (expense), net

 

 

1,886

 

 

 

(32

)

Loss before income taxes

 

 

(11,065

)

 

 

(19,176

)

Income tax benefit (provision)

 

 

981

 

 

 

(1,566

)

Net loss

 

$

(10,084

)

 

$

(20,742

)

Loss per share - basic and diluted

 

$

(0.06

)

 

$

(0.12

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2015

 

 

2014

 

Net loss

 

$

(10,084

)

 

$

(20,742

)

Other comprehensive (loss) income, net of taxes:

 

 

 

 

 

 

 

 

Change in unrealized gains on marketable securities, net of tax

 

 

(139

)

 

 

2

 

Derivatives qualifying as hedges:

 

 

 

 

 

 

 

 

Unrealized loss on interest rate swap

 

 

0

 

 

 

(33

)

Reclassification adjustment for loss included in net loss

 

 

0

 

 

 

199

 

Tax effect

 

 

0

 

 

 

(66

)

Unrealized gain on interest rate swap, net of tax

 

 

0

 

 

 

100

 

Change in foreign currency translation adjustments

 

 

(1,068

)

 

 

(61

)

Total other comprehensive (loss) income

 

 

(1,207

)

 

 

41

 

Comprehensive loss

 

$

(11,291

)

 

$

(20,701

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

5


ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2015

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(10,084

)

 

$

(20,742

)

Adjustments to reconcile net loss to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

41,661

 

 

 

45,127

 

Stock-based compensation expense

 

 

9,120

 

 

 

10,070

 

Excess tax benefits from stock-based compensation

 

 

(2

)

 

 

(1,132

)

Deferred taxes

 

 

(949

)

 

 

4,398

 

Asset impairment charges

 

 

26

 

 

 

195

 

Other losses, net

 

 

965

 

 

 

1,463

 

Changes in operating assets and liabilities (net of businesses acquired):

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

5,244

 

 

 

(28,178

)

Prepaid expenses and other assets

 

 

(1,960

)

 

 

2,363

 

Accounts payable

 

 

11,817

 

 

 

(889

)

Accrued expenses

 

 

(15,365

)

 

 

(14,255

)

Accrued compensation and benefits

 

 

(11,136

)

 

 

(27,027

)

Deferred revenue

 

 

29,240

 

 

 

54,248

 

Other liabilities

 

 

(47

)

 

 

(4,353

)

Net cash provided by operating activities

 

 

58,530

 

 

 

21,288

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(6,115

)

 

 

(11,945

)

Capitalized software

 

 

(9,315

)

 

 

(9,144

)

Purchases of non-marketable securities, other investments and related intangible

   assets

 

 

(750

)

 

 

(5,968

)

Sales and maturities of marketable securities and other investments

 

 

1,305

 

 

 

19

 

Proceeds received from sale of fixed assets

 

 

7

 

 

 

55

 

Net cash used in investing activities

 

 

(14,868

)

 

 

(26,983

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

40

 

 

 

1,673

 

Excess tax benefits from stock-based compensation

 

 

2

 

 

 

1,132

 

Taxes paid related to net share settlement of equity awards

 

 

(2,207

)

 

 

(3,184

)

Payments of capital lease obligations

 

 

(68

)

 

 

(110

)

Credit facility payments

 

 

(20,625

)

 

 

(30,313

)

Credit facility borrowings

 

 

15,000

 

 

 

15,000

 

Net cash used in financing activities

 

 

(7,858

)

 

 

(15,802

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(497

)

 

 

123

 

Net increase (decrease) in cash and cash equivalents

 

 

35,307

 

 

 

(21,374

)

Cash and cash equivalents, beginning of period

 

 

53,173

 

 

 

62,954

 

Cash and cash equivalents, end of period

 

$

88,480

 

 

$

41,580

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

6


ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. Basis of Presentation and Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Allscripts Healthcare Solutions, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Each of the terms “we,” “us,” or “our” as used herein refers collectively to Allscripts Healthcare Solutions, Inc. and its wholly-owned subsidiaries, unless otherwise stated.

Reclassification

During the three months ended March 31, 2015, we adopted a revised presentation of revenue and the associated cost of revenue in our consolidated statement of operations, which we believe is better aligned with and representative of the amount and profitability of our overall software and services revenue streams, as well as with the way we manage our business, review our operating performance and market our products. In recent years, we have experienced a continued shift in customer preferences from up-front software license, and associated support and maintenance, agreements to hosted subscription-based agreements. Under our previous presentation, the revenue and cost of revenue of each of these types of agreements were reported under separate revenue categories. By combining these separate revenue categories, we believe that our revised presentation better reflects the overall trend in our software delivery, support and maintenance sales.

Under the revised presentation, revenue is reported based on two categories: (i) software delivery, support and maintenance, and (ii) client services. Previously, revenue was presented based on four categories: system sales, professional services, maintenance, and transaction processing and other. Software delivery, support and maintenance revenue consists of our previous system sales, maintenance and transaction processing and other revenue categories, excluding outsourcing and remote hosting managed IT services revenue previously included in transaction processing and other revenue. Client services revenue consists of our previous professional services category and outsourcing and remote hosting managed IT services revenue. The comparable 2014 quarterly period was revised for the new presentation. Total revenue and cost of revenue previously reported for the three months ended March 31, 2014 were not affected by this change in presentation.

Unaudited Interim Financial Information

The unaudited interim consolidated financial statements as of and for the three months ended March 31, 2015 have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These interim consolidated financial statements are unaudited and, in the opinion of our management, include all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the consolidated financial statements for the periods presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in accordance with the SEC's rules and regulations for interim reporting. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2014 (our “Form 10-K”).

Use of Estimates

The preparation of consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates.

Significant Accounting Policies

There have been no changes to our significant accounting policies from those disclosed in our Form 10-K.

7


Accounting Pronouncements Not yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (“ASU 2014-09”), to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five-step process to achieve this principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new standard permits the use of either the retrospective or cumulative effect transition methods. ASU 2014-09 is effective for us for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. On April 29, 2015, the FASB issued for public comment a proposal to defer the effective date of ASU 2014-09 by one year. Additionally, the proposal would permit companies to adopt the new revenue standard early, but not before the original effective date of December 15, 2016. We are currently in the process of evaluating this new guidance.

In April 2015, the FASB issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 changes the presentation of debt issuance costs by requiring that such costs be presented on the balance sheet as a direct deduction from the related debt liability, rather than as an asset. The new accounting guidance is to be applied retrospectively and will be effective for us beginning in the first quarter of fiscal year 2016. Early application is permitted. We are currently evaluating the impact of this accounting guidance, but do not expect it to have a material impact on our consolidated financial statements.

We do not believe that any other recently issued, but not yet effective accounting standards, if adopted, would have a material impact on our consolidated financial statements.

 

 

2. Fair Value Measurements

Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair values of assets and liabilities required to be measured at fair value are categorized based upon the level of judgment associated with the inputs used to measure their value in one of the following three categories:

Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. Our Level 1 investments include money market funds valued daily by the fund companies, and the valuation is based on the publicly reported net asset value of each fund. There were no outstanding money market funds investments as of March 31, 2015 and December 31, 2014.

Level 2: Inputs, other than quoted prices included in Level 1, are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. Our Level 2 non-derivative investments include marketable securities, which consist of mortgage and asset-backed bonds. We sold all of our marketable securities during the three months ended March 31, 2015. Prior to the sale, marketable securities were recorded at fair value determined using a market approach, based on prices and other relevant information generated by market transactions involving identical or comparable assets which are considered to be Level 2 inputs. Our Level 2 derivative financial instrument was an interest rate swap contract that expired in October 2014. Prior to expiration, the interest rate swap contract was valued based upon observable values for underlying interest rates and market determined risk premiums.

Level 3: Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Our Level 3 financial instruments include derivative financial instruments comprising the 1.25% Call Option (as defined in Note 8, “Derivative Financial Instruments”) asset and the embedded cash conversion option liability. Refer to Note 6, “Debt,” and Note 8, “Derivative Financial Instruments,” for further information regarding our derivative financial instruments. These derivatives are not actively traded and are valued based on an option pricing model that uses observable and unobservable market data for inputs. Significant market data inputs used to determine the fair value as of March 31, 2015 and December 31, 2014 included our common stock price, time to maturity of the derivative instruments, the risk-free interest rate, and the implied volatility of our common stock. The 1.25% Call Option asset and the embedded cash conversion option liability were designed with the intent that changes in their fair values would substantially offset, with limited net impact to our earnings. Therefore, we believe the sensitivity of changes in the unobservable inputs to the option pricing model for these instruments is substantially mitigated.

8


The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of the respective balance sheet dates:

 

 

Balance Sheet

 

March 31, 2015

 

 

December 31, 2014

 

(In thousands)

 

Classifications

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Marketable

   securities

 

Long-term marketable

   securities

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1,305

 

 

 

0

 

 

 

1,305

 

1.25% Call

   Option

 

Other assets

 

 

0

 

 

 

0

 

 

 

49,882

 

 

 

49,882

 

 

 

0

 

 

 

0

 

 

 

57,091

 

 

 

57,091

 

Cash conversion

   option

 

Other liabilities

 

 

0

 

 

 

0

 

 

 

(50,605

)

 

 

(50,605

)

 

 

0

 

 

 

0

 

 

 

(57,839

)

 

 

(57,839

)

Total

 

 

 

$

0

 

 

$

0

 

 

$

(723

)

 

$

(723

)

 

$

0

 

 

$

1,305

 

 

$

(748

)

 

$

557

 

During 2014, we acquired certain non-marketable equity securities of four third parties and entered into new, or amended existing, commercial agreements with each of those third parties to license and distribute their products and services, for a total consideration of approximately $21.1 million. The equity investments and the commercial agreements were valued at approximately $19.2 million and $1.9 million, respectively. Three of the equity investments acquired during 2014 are accounted for under the cost method, and one of the equity investments is accounted for under the equity method. The carrying values of the cost method investments and the equity method investment were approximately $17.8 million and $1.0 million, respectively, as of both March 31, 2015 and December 31, 2014. These carrying values are included in other assets and the carrying value of the above-referenced commercial agreements is included in intangible assets, net, in the accompanying consolidated balance sheets as of March 31, 2015 and December 31, 2014. It is not practicable to estimate the fair value of our equity investments primarily because of their illiquidity and restricted marketability. The factors we considered in trying to determine fair value include, but are not limited to, available financial information, the issuer’s ability to meet its current obligations and the issuer’s subsequent or planned raises of capital. We did not acquire any other non-marketable securities during the three months ended March 31, 2015.

Our long-term financial liabilities include amounts outstanding under our senior secured credit facility, with carrying values that approximate fair value since the interest rates approximate current market rates. In addition, the carrying amount of our 1.25% Cash Convertible Senior Notes (the “1.25% Notes”) approximates fair value as of March 31, 2015, since the effective interest rate on the 1.25% Notes approximates current market rates. See Note 6, “Debt,” for further information regarding our long-term financial liabilities.

 

 

3. Stockholders' Equity

Stock-based Awards

We measure stock-based compensation expense at the grant date based on the fair value of the award. We recognize the expense for service-based share awards over the appropriate service period on a straight-line basis, net of estimated forfeitures. We recognize the expense for performance-based and market-based share awards over the vesting period under the accelerated attribution method, net of estimated forfeitures. In addition, we recognize stock-based compensation cost for awards with performance conditions if and when we conclude that it is probable that the performance conditions will be achieved.

The fair value of service-based restricted stock units and restricted stock awards is measured at their underlying closing share price on the date of grant. The fair value of market-based restricted stock units is measured using the Monte Carlo pricing model. No stock options were granted during the three months ended March 31, 2015 and 2014.

Stock-based compensation expense recognized during the three months ended March 31, 2015 and 2014 is included in our consolidated statements of operations as shown in the below table. No stock-based compensation costs were capitalized during the three months ended March 31, 2015 and 2014.

 

 

Three Months Ended March 31,

 

(In thousands)

 

2015

 

 

2014

 

Cost of revenue:

 

 

 

 

 

 

 

 

Software delivery, Support and Maintenance

 

$

1,096

 

 

$

380

 

Client services

 

 

1,408

 

 

 

958

 

Total cost of revenue

 

 

2,504

 

 

 

1,338

 

Selling, general and administrative expenses

 

 

5,011

 

 

 

6,178

 

Research and development

 

 

2,003

 

 

 

2,554

 

Total stock-based compensation expense

 

$

9,518

 

 

$

10,070

 

We granted stock-based awards as follows:

9


 

 

Three Months Ended March 31, 2015

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

 

Grant Date

 

(In thousands, except per share amounts)

 

Shares

 

 

Fair Value

 

Service-based restricted stock units

 

 

1,943

 

 

$

11.75

 

Performance-based restricted stock units with a service condition

 

 

292

 

 

$

12.17

 

Market-based restricted stock units with a service condition

 

 

497

 

 

$

12.53

 

 

 

 

2,732

 

 

$

11.94

 

During the three months ended March 31, 2015 and the year ended December 31, 2014, approximately 0.3 million and 1.7 million shares of stock, respectively, were issued in connection with the exercise of options and the release of restrictions on stock awards. 

Net Share-settlements

Beginning in 2011, upon vesting, restricted stock units and awards are generally net share-settled to cover the required withholding tax and the remaining amount is converted into an equivalent number of shares of common stock. The majority of restricted stock units and awards that vested in 2015 and 2014 were net-share settled such that we withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. Total payments for the employees' minimum statutory tax obligations to the taxing authorities are reflected as a financing activity within the accompanying consolidated statements of cash flows. The total shares withheld for the three months ended March 31, 2015 and 2014 were 179 thousand and 174 thousand, respectively, and were based on the value of the restricted stock units and awards on their vesting date as determined by our closing stock price. These net-share settlements had the effect of share repurchases by us as they reduced the number of shares that would have otherwise been issued as a result of the vesting.

Issuance of Warrants

In June 2013, we agreed to issue a warrant to a commercial partner as part of an overall commercial relationship pursuant to which the warrant holder has the right to purchase 1.5 million shares of our common stock at a strike price of $12.94 per share. The warrant vests in four equal annual installments of 375 thousand shares (beginning in June 2014) and expires in June 2020. Our issuance of the warrant was a private placement exempt from registration pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended. This warrant is not actively traded and was valued based on an option pricing model that uses observable and unobservable market data for inputs. The warrant was valued at approximately $10.2 million and is being amortized into earnings over the four year vesting period. The amortization of the warrant value is included in stock-based compensation expense in the accompanying consolidated statements of cash flows.

 

 

 

4. Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average shares of common stock outstanding. For purposes of calculating diluted earnings per share, the denominator includes both the weighted average shares of common stock outstanding and dilutive common stock equivalents. Dilutive common stock equivalents consist of stock options, restricted stock unit awards and warrants calculated under the treasury stock method.

10


The calculations of earnings (loss) per share are as follows:

 

 

Three Months Ended March 31,

 

(In thousands, except per share amounts)

 

2015

 

 

2014

 

Basic Loss per Common Share:

 

 

 

 

 

 

 

 

Net loss

 

$

(10,084

)

 

$

(20,742

)

Net loss available to common stockholders

 

$

(10,084

)

 

$

(20,742

)

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

180,581

 

 

 

179,033

 

 

 

 

 

 

 

 

 

 

Basic Loss per Common Share

 

$

(0.06

)

 

$

(0.12

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Loss per Common Share:

 

 

 

 

 

 

 

 

Net loss

 

$

(10,084

)

 

$

(20,742

)

Net loss available to common stockholders

 

$

(10,084

)

 

$

(20,742

)

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

180,581

 

 

 

179,033

 

Dilutive effect of stock options, restricted stock unit awards and warrants

 

 

0

 

 

 

0

 

Weighted-average common shares outstanding assuming dilution

 

 

180,581

 

 

 

179,033

 

 

 

 

 

 

 

 

 

 

Diluted Loss per Common Share

 

$

(0.06

)

 

$

(0.12

)

As a result of our net loss available to common stockholders for the three months ended March 31, 2015 and 2014, we used basic weighted-average common shares outstanding in the calculation of diluted loss per share for each of these periods, since the inclusion of any stock equivalents would be anti-dilutive.

The following stock options, restricted stock unit awards and warrants are not included in the computation of diluted (loss) earnings per share as the effect of including such stock options, restricted stock unit awards and warrants in the computation would be anti-dilutive:

 

 

Three Months Ended March 31,

 

(In thousands)

 

2015

 

 

2014

 

Shares subject to anti-dilutive stock options, restricted stock unit awards and warrants excluded from calculation

 

 

25,144

 

 

 

21,721

 

 

 

5. Goodwill and Intangible Assets

Goodwill and intangible assets consist of the following:

 

 

March 31, 2015

 

 

December 31, 2014

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Intangible

 

 

Carrying

 

 

Accumulated

 

 

Intangible

 

(In thousands)

 

Amount

 

 

Amortization

 

 

Assets, Net

 

 

Amount

 

 

Amortization

 

 

Assets, Net

 

Intangibles subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proprietary technology

 

$

450,856

 

 

$

(276,572

)

 

$

174,284

 

 

$

451,087

 

 

$

(267,547

)

 

$

183,540

 

Customer contracts and relationships

 

 

550,008

 

 

 

(389,245

)

 

 

160,763

 

 

 

550,287

 

 

 

(382,465

)

 

 

167,822

 

Total

 

$

1,000,864

 

 

$

(665,817

)

 

$

335,047

 

 

$

1,001,374

 

 

$

(650,012

)

 

$

351,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles not subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Registered trademarks

 

 

 

 

 

 

 

 

 

$

52,000

 

 

 

 

 

 

 

 

 

 

$

52,000

 

Goodwill

 

 

 

 

 

 

 

 

 

 

1,200,290

 

 

 

 

 

 

 

 

 

 

 

1,200,746

 

Total

 

 

 

 

 

 

 

 

 

$

1,252,290

 

 

 

 

 

 

 

 

 

 

$

1,252,746

 

11


We revised our reportable segments effective January 1, 2015. Our revised reportable segments are (i) Clinical and Financial Solutions and (ii) Population Health. Refer to Note 10, “Business Segments” for additional information.

As a result of the revision of our reportable segments, we assessed our revised reporting units and allocated goodwill previously assigned to our former Outsourcing and Remote Hosting reporting units to our other reporting units. The allocated goodwill balances could be attributed to specific services associated with products purchased as part of businesses we previously acquired and, therefore, were allocated to the reporting units where such products are currently managed and sold. The resulting allocation of goodwill to our revised reportable segments is shown below.

We performed our annual goodwill impairment test as of October 1, 2014, our annual testing date, and again as of January 1, 2015 in conjunction with the revision of our reportable segments and related allocation of goodwill to our revised reporting units. The fair value of each reporting unit substantially exceeded its carrying value and no indicators of impairment were identified as a result of both tests.

Changes in the carrying amounts of goodwill by reportable segment for the three months ended March 31, 2015 were as follows:

 

 

Clinical and

 

 

Population

 

 

 

 

 

(In thousands)

 

Financial Solutions

 

 

Health

 

 

Total

 

Balance as of December 31, 2014

 

$

774,512

 

 

$

426,234

 

 

$

1,200,746

 

Foreign exchange translation

 

 

(456

)

 

 

0

 

 

 

(456

)

Balance as of March 31, 2015

 

$

774,056

 

 

$

426,234

 

 

$

1,200,290

 

There were no accumulated impairment losses associated with our goodwill as of March 31, 2015 or December 31, 2014.

 

 

6. Debt

Debt outstanding, excluding capital leases, consisted of the following:

 

 

March 31, 2015

 

 

December 31, 2014

 

 

 

Principal

 

 

Unamortized

 

 

Net Carrying

 

 

Principal

 

 

Unamortized

 

 

Net Carrying

 

(In thousands)

 

Balance

 

 

Discount

 

 

Amount

 

 

Balance

 

 

Discount

 

 

Amount

 

1.25% Cash Convertible Senior Notes

 

$

345,000

 

 

$

64,623

 

 

$

280,377

 

 

$

345,000

 

 

$

67,276

 

 

$

277,724

 

Senior Secured Credit Facility (long-

   term portion)

 

 

263,275

 

 

 

1,253

 

 

 

262,022

 

 

 

272,410

 

 

 

1,452

 

 

 

270,958

 

Senior Secured Credit Facility (current

   portion)

 

 

30,937

 

 

 

853

 

 

 

30,084

 

 

 

28,125

 

 

 

886

 

 

 

27,239

 

Total debt

 

$

639,212

 

 

$

66,729

 

 

$

572,483

 

 

$

645,535

 

 

$

69,614

 

 

$

575,921

 

Interest expense consisted of the following:

 

 

Three Months Ended March 31,

 

(In thousands)

 

2015

 

 

2014

 

Interest expense

 

$

3,861

 

 

$

3,957

 

Amortization of discounts

 

 

2,885

 

 

 

2,766

 

Amortization of debt issuance costs

 

 

510

 

 

 

510

 

Total interest expense

 

$

7,256

 

 

$

7,233

 

Interest expense related to the 1.25% Notes was comprised of the following:

 

 

Three Months Ended March 31,

 

(In thousands)

 

2015

 

 

2014

 

Coupon interest at 1.25%

 

$

1,078

 

 

$

1,078

 

Amortization of original issuance discount

 

 

2,653

 

 

 

2,515

 

Amortization of debt issuance costs

 

 

295

 

 

 

295

 

Total interest expense related to the 1.25% Notes

 

$

4,026

 

 

$

3,888

 

12


There have been no significant changes in our senior secured credit facility agreement from those disclosed in our Form 10-K. As of March 31, 2015, the if-converted value of the 1.25% Notes did not exceed the 1.25% Notes’ principal amount.

As of March 31, 2015, $196.9 million under a term loan, $97.3 million under a revolving credit facility, and $0.9 million in letters of credit were outstanding under our senior secured credit facility. Borrowings under the revolving credit facility as of such date consisted of $82.5 million denominated in US Dollars and $14.8 million, or the equivalent of 10.0 million British Pounds Sterling, denominated in a foreign currency. As of March 31, 2015, the interest rate on the US Dollars-denominated borrowings under our senior secured credit facility was LIBOR plus 2.75%, which totaled 2.93%, and the interest rate on the British Pound Sterling-denominated borrowings was 3.00%. We were in compliance with all covenants under our senior secured credit facility agreement as of March 31, 2015. Unamortized deferred debt issuance costs totaled $9.0 million and are included within other assets on our consolidated balance sheet as of March 31, 2015.

As of March 31, 2015, we had $326.4 million available, net of outstanding letters of credit, under our revolving credit facility. There can be no assurance that we will be able to draw on the full available balance of our revolving credit facility if the financial institutions that have extended such credit commitments become unwilling or unable to fund such borrowings.

The following table summarizes our future payment obligations under the 1.25% Notes and the senior secured credit facility as of March 31, 2015:

 

 

 

 

 

 

Remainder of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Total

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

1.25% Cash Convertible Senior

   Notes (1)

 

$

345,000

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

345,000

 

Senior Secured Term Loan

 

 

196,875

 

 

 

22,500

 

 

 

39,375

 

 

 

50,625

 

 

 

84,375

 

 

 

0

 

 

 

0

 

Senior Secured Revolving Facility

 

 

97,337

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

97,337

 

 

 

0

 

 

 

0

 

Total debt

 

$

639,212

 

 

$

22,500

 

 

$

39,375

 

 

$

50,625

 

 

$

181,712

 

 

$

0

 

 

$

345,000

 

 (1) Assumes no cash conversions of the 1.25% Notes prior to their maturity on July 1, 2020.

 

 

7. Income Taxes

We account for income taxes under FASB Accounting Standards Codification 740, Income Taxes (“ASC 740”). We calculate the quarterly tax provision consistent with the guidance provided by ASC 740-270, whereby we forecast the estimated annual effective tax rate and then apply that rate to the year-to-date pre-tax book (loss) income. The effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective rate, including factors such as the valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions, or changes in or the interpretation of tax laws in jurisdictions where the Company conducts business.  There is no tax benefit recognized on certain of the net operating losses incurred due to insufficient evidence supporting the Company’s ability to use these losses in the future. The effective tax rates were as follows:

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2015

 

 

2014

 

Loss before income taxes

 

$

(11,065

)

 

$

(19,176

)

Income tax benefit (provision)

 

$

981

 

 

$

(1,566

)

Effective tax rate

 

 

8.9

%

 

 

(8.2

%)

Our effective tax rate for the three months ended March 31, 2015 is higher compared with the prior year comparable period. The income tax benefit (provision) for the three months ended March 31, 2015 does not include any tax benefit for year to date losses based on our estimate of the overall annual results of operation for 2015, whereas the income tax benefit (provision) for the three months ended March 31, 2014 includes a $10 million valuation allowance against federal and foreign net operating loss carryforwards. As of the date of this Form 10-Q, the research and development credit had not been reinstated for 2015 and future years and, therefore, no estimate for this credit has been included in our effective tax rate for 2015.

In evaluating our ability to recover our deferred tax assets within the jurisdictions from which they arise, we consider all available evidence, including scheduled reversals of deferred tax liabilities, tax-planning strategies, and results of recent operations. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss). No additional valuation allowance was recorded during the three months ended March 31, 2015 related to deferred tax assets associated with net operating loss carryforwards.

13


Our unrecognized income tax benefits were $15.3 million as of both March 31, 2015 and December 31, 2014, respectively. If any portion of our unrecognized tax benefits is recognized, it could impact our effective tax rate. The tax reserves are reviewed periodically and adjusted in light of changing facts and circumstances, such as progress of tax audits, lapse of applicable statutes of limitations, and changes in tax law.

 

 

8. Derivative Financial Instruments

1.25% Call Option

In June 2013, concurrent with the issuance of the 1.25% Notes, we entered into privately negotiated hedge transactions with certain of the initial purchasers of the 1.25% Notes (collectively, the “1.25% Call Option”). Assuming full performance by the counterparties, the 1.25% Call Option is intended to offset cash payments in excess of the principal amount due upon any conversion of the 1.25% Notes.

The 1.25% Call Option, which is indexed to our common stock, is a derivative asset that requires mark-to-market accounting treatment due to the cash settlement features until the 1.25% Call Option settles or expires. The 1.25% Call Option is measured and reported at fair value on a recurring basis, within Level 3 of the fair value hierarchy. For further discussion of the inputs used to determine the fair value of the 1.25% Call Option, refer to Note 2, “Fair Value Measurements.” The fair value of the 1.25% Call Option as of March 31, 2015 and December 31, 2014 was approximately $49.9 million and $57.1 million, respectively.

The 1.25% Call Option does not qualify for hedge accounting treatment. Therefore, the change in fair value of these instruments is recognized immediately in our consolidated statements of operations in other income (expense), net. For the three months ended March 31, 2015 and 2014, the change in the fair value of the 1.25% Call Option resulted in a loss of approximately $7.2 million and a gain of approximately $29.9 million, respectively. Because the terms of the 1.25% Call Option are substantially similar to those of the 1.25% Notes embedded cash conversion option, discussed below, we expect the net effect of those two derivative instruments on our earnings to be minimal.

1.25% Notes Embedded Cash Conversion Option

The embedded cash conversion option within the 1.25% Notes is required to be separated from the 1.25% Notes and accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of operations in other income (expense), net until the cash conversion option settles or expires. The initial fair value liability of the embedded cash conversion option was $82.8 million, which simultaneously reduced the carrying value of the 1.25% Notes (effectively an original issuance discount). The embedded cash conversion option is measured and reported at fair value on a recurring basis, within Level 3 of the fair value hierarchy. For further discussion of the inputs used to determine the fair value of the embedded cash conversion option, refer to Note 2, “Fair Value Measurements.” The fair value of the embedded cash conversion option as of March 31, 2015 and December 31, 2014 was approximately $50.6 million and $57.8 million, respectively. For the three months ended March 31, 2015 and 2014, the change in the fair value of the embedded cash conversion option resulted in a gain of approximately $7.2 million and a loss of approximately $30.0 million, respectively. The gain and loss from the change in the fair value of the embedded cash conversion option for the three months ended March 31, 2015 and 2014, respectively, were slightly higher than the loss and gain recognized on the 1.25% Call Option over the same periods.

14


Interest Rate Swap Agreement

We previously had entered into an interest rate swap agreement with an effective date of October 29, 2010, which expired on October 31, 2014. The change in the fair value of this now-expired interest rate swap agreement was previously recognized in other comprehensive (loss) income, with the corresponding amount included in other assets or other liabilities in our consolidated balance sheets. We recognized the following activity related to this now-expired interest rate swap agreement:

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2015

 

 

2014

 

Effective portion:

 

 

 

 

 

 

 

 

Current period increase in fair value recognized in other comprehensive (loss)

   income, net

 

$

0

 

 

$

166

 

Tax effect

 

 

0

 

 

 

(66

)

Net

 

$

0

 

 

$

100

 

 

 

 

 

 

 

 

 

 

Loss reclassified from accumulated other comprehensive loss to interest expense

 

$

0

 

 

$

199

 

 

 

 

 

 

 

 

 

 

Amount excluded from effectiveness assessment and ineffective portion gain

   (loss) recognized in other income (expense), net

 

$

0

 

 

$

0

 

As of March 31, 2015, we did not have any outstanding interest rate swap agreements. No gains (losses) were reclassified from other comprehensive (loss) income into earnings as a result of forecasted transactions that failed to occur during the three months ended March 31, 2014.

 

 

9. Contingencies

In addition to commitments and obligations in the ordinary course of business, we are currently subject to various legal proceedings and claims that have not been fully adjudicated, certain of which are discussed below. We intend to vigorously defend ourselves in these matters.

No less than quarterly, we review the status of each significant matter and assess our potential financial exposure. We accrue a liability for an estimated loss if the potential loss from any legal proceeding or claim is considered probable and the amount can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether the amount of an exposure is reasonably estimable, and accruals are based only on the information available to our management at the time the judgment is made.

The outcome of legal proceedings is inherently uncertain, and we may incur substantial defense costs and expenses defending any of these matters. If one or more of these legal proceedings were resolved against us in a reporting period for amounts in excess of our management’s expectations, our consolidated financial statements for that reporting period could be materially adversely affected. Additionally, the resolution of a legal proceeding against us could prevent us from offering our products and services to current or prospective clients, which could further adversely affect our operating results.

In the opinion of our management, based on the information currently available, there was not at least a reasonable possibility that we may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to the following matter.

15


On September 14, 2010, Pegasus Imaging Corporation filed a complaint against us in the Circuit Court of the Thirteenth Judicial Circuit of the State of Florida in and for Hillsborough County, Florida, which we transferred to the Special Superior Court for Complex Business Cases. The lawsuit also named former officers Jeffrey Amrein and John Reinhart as defendants. The amended complaint added two defunct Florida corporations that did business with us, and asserted causes of action against defendants for fraudulent misrepresentations, negligent misrep