10-K 1 truvenhealthq410-k2014.htm 10-K Truven Health Q4 10-K 2014


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2014
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____

COMMISSION FILE NUMBER: 333-187931
Truven Holding Corp.
 
Truven Health Analytics Inc.
(Exact name of registrant parent guarantor as specified in its charter)
 
(Exact name of registrant parent guarantor as specified in its charter)
Delaware
 
45-5164353
 
Delaware
 
06-1467923
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

777 E. Eisenhower Parkway
Ann Arbor, Michigan 48108
(Address of registrants' principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (734) 913-3000
Securities registered pursuant to Section 12(b) of the Act: None
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 ¨     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 Securities Act. Yes þ     No ¨ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨      No ¨ 
The registrants are voluntary filers and have filed all reports that would have been required to have been filed by the registrants during the preceding 12 months had they been subject to such filing requirements
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ     No ¨ 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s 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. þ 
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨    Accelerated Filer ¨         Non-accelerated filer þ     smaller reporting company ¨
    (do not check if a 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 þ 

The aggregate market value of Truven Holding Corporation and Truven Health Analytics Inc. common stock held by non-affiliates were each $0 as of December 31, 2014.
As of December 31, 2014, there was one outstanding share of each of the registrants.




DOCUMENTS INCORPORATED BY REFERENCE-None




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
Page
Part I.
 
 
 
 
Item 1
Business
 
Item 1A
Risk Factors
 
Item 1B
Unresolved Staff Comments
 
Item 2
Properties
 
Item 3
Legal Proceedings
 
Item 4
Mine Safety Disclosure
Part II.
 
 
 
 
Item 5
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
 
Item 6
Selected Financial Data
 
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
 
Item 8
Financial Statements and Supplementary Data
 
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Item 9A
Controls and Procedures
 
Item 9B
Other Information
Part III.
 
 
 
 
Item 10
Directors, Executive Officers and Corporate Governance
 
Item 11
Executive Compensation
 
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
 
Item 13
Certain Relationships and Related Transactions, and Director Independence
 
Item 14
Principal Accountant Fees and Services
Part IV.
 
 
 
 
Item 15
Exhibits and Financial Statement Schedules
 
 
Exhibits
 
 
Signatures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





NOTE ON FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (the "Annual Report") contains certain “forward-looking statements” (as defined in Section 27A of the U.S. Securities Act of 1933, as amended, or the “Securities Act,” and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, or the “Exchange Act”) that reflect our expectations regarding our future growth, results of operations, performance and business prospects and opportunities. Words such as “anticipates,” “believes,” “plans,” “expects,” “intends,” “aims,” “estimates,” “projects,” “targets,” “can,” “could,” “may,” “should,” “will,” “would,” and similar expressions have been used to identify these forward-looking statements, but are not the exclusive means of identifying these statements. For purposes of this Annual Report , any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements reflect our current beliefs and expectations and are based on information currently available to us. As such, no assurance can be given that our future growth, results of operations, performance and business prospects and opportunities covered by such forward-looking statements will be achieved. We have no intention or obligation to update or revise these forward-looking statements to reflect new events, information or circumstances.
Such forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
A number of important factors could cause our actual results to differ materially from those indicated by such forward-looking statements, including those described under the heading “Risk Factors” in Part I, Item 1A. herein and elsewhere in this Annual Report.


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Definition of Terms
Unless otherwise indicated or the context otherwise requires, references in this report to:
the term “Holdings LLC” refers to VCPH Holdings LLC, a Delaware limited liability company;
the terms “Company”, "we", "us", and "our" refer to Truven Holding Corp. and Truven Health Analytics Inc., together with their subsidiaries;
the terms “Truven Holding” and "Parent" refers to Truven Holding Corp., a Delaware corporation that is directly owned by Holdings LLC and that is the direct parent of Truven;
the term “TRHI” refers to Thomson Reuters (Healthcare) Inc., a Delaware corporation, which, upon consummation of the Merger, became a direct wholly-owned subsidiary of VCPH Holding Corp. (now known as Truven Holding) and subsequently changed its name to Truven Health Analytics Inc.;
the terms “Thomson Reuters Healthcare” and “Predecessor” refer to TRHI, together with certain other assets and liabilities of the Thomson Reuters Healthcare business prior to and including the date of the closing of the Prior Acquisition on June 6, 2012;
the term “Wolverine” refers to Wolverine Healthcare Analytics, Inc., a Delaware corporation and an affiliate of The Veritas Capital Fund IV, L.P., a private equity fund managed by Veritas Capital, which was formed on May 16, 2012 as a direct wholly-owned subsidiary of VCPH Holding Corp. (now known as Truven Holding) and, upon consummation of the Prior Acquisition, merged with and into TRHI, with TRHI surviving the Merger as a direct wholly-owned subsidiary of VCPH Holding Corp. (now known as Truven Holding) and subsequently changing its name to Truven Health Analytics Inc.;
the terms “Truven” and the “Issuer” refer to Truven Health Analytics Inc., a Delaware corporation and a direct wholly-owned subsidiary of Truven Holding, and its subsidiaries;
the term “Prior Acquisition” refers to the acquisition by Wolverine of 100% of the equity interests of TRHI and certain assets and liabilities of the Thomson Reuters Healthcare business, pursuant to the Stock and Asset Purchase Agreement, dated as of April 23, 2012, which VCPH Holding Corp. (now known as Truven Holding) entered into with the Stock Seller and Thomson Reuters Global Resources and subsequently assigned to Wolverine on May 24, 2012, and which closed on June 6, 2012;
the term “Merger” refers to the merger upon the closing of the Prior Acquisition, whereby Wolverine (which was formed solely for the purpose of completing the Prior Acquisition) merged with and into TRHI, with TRHI surviving the Merger as a direct wholly-owned subsidiary of VCPH Holding Corp. (now known as Truven Holding) and subsequently changing its name to Truven Health Analytics Inc.;
the term “Stock Seller” refers to Thomson Reuters U.S. Inc.;
the terms “Sponsor” and “Veritas Capital” refers to Veritas Capital Fund Management, L.L.C.;
the terms “Thomson Reuters” and the “Predecessor Parent” refers to Thomson Reuters Corporation;
the term “Stock and Asset Purchase Agreement” refers to the Stock and Asset Purchase Agreement among VCPH Holding Corp., the Stock Seller and Thomson Reuters Global Resources, dated as of April 23, 2012, which VCPH Holding Corp. assigned to Wolverine on May 24, 2012;
the term “Predecessor Period” refers to all periods prior to and including the date of the closing of the Prior Acquisition on June 6, 2012;
the term “Successor” refers to Truven Holding, on a consolidated basis with its subsidiaries;
the term “Successor Period” refers to all periods from inception of Truven Holding (April 20, 2012 to - December 31, 2012), which includes all periods after the closing of the Prior Acquisition on June 6, 2012.
the term "Notes" refers to refers to the 10.625% Senior Notes;
the term "Senior Credit Facility" refers to the Term Loan Facility and Revolving Credit Facility from syndicate of banks and other financial institutions;
the term "Old Notes" refers to the 10.625% Senior Notes, Series A, issued in a private offering under an indenture, dated June 6, 2012, and which were exchanged for the Exchange Notes (as defined below);
the term "Exchange Notes" refers to the 10.625% Senior Notes, Series B, registered under the Securities Act 1933;
the term "Additional Notes" refers to the 10.625% Senior Notes, [Series A], issued in connection with the JWA Transaction and the HBE Transaction;
the term "Simpler" refers to Simpler Consulting, LLC. and certain of its affiliated entities and persons, which was acquired by certain wholly-owned subsidiaries of the Company on April 11, 2014;

ii



the term "Simpler Transaction" refers to the transactions under the Purchase Agreement dated April 11, 2014, whereby Truven acquired all of the outstanding equity of Simpler in exchange for a purchase price of $81.1 million, including a preliminary working capital adjustment of $1.1 million, and the issuance by Holdings LLC, the direct parent of the Company, of $3.7 million of equity interests to Simpler;
the term "JWA" refers to Joan Wellman and Associates, Inc. which was acquired by the Company on October 31, 2014;
the term "JWA Transaction" refers to transactions under the Purchase Agreement dated October 31, 2014, whereby Truven indirectly acquired all of the outstanding equity of JWA in exchange for a cash purchase price of $15.3 million, including a $1.2 working capital adjustment and $0.1 million holdback payment;
the term "HBE" refers to HBE Solutions, LLC which was acquired by certain wholly-owned subsidiaries of the Company on November 12, 2014; and
the term "HBE Transaction" refers to the November 12, 2014 transactions under the Purchase Agreement dated November 5, 2014, whereby Truven indirectly acquired all of the outstanding equity of HBE in exchange for a cash purchase price of $17.6 million, including a negative working capital adjustment of $2.4 million.

 

iii



PART I

ITEM 1 - BUSINESS

Overview

We are a leading analytics company focused on improving quality and decreasing costs across the healthcare industry. Through the better use of analytics and data, we enable our clients to reduce costs, manage risk, improve operational performance, enhance patient outcomes and increase transparency. We combine our analytic expertise, information assets and technology services to offer our clients data insights and analytical solutions. Furthermore, we increase the value of our analytical solutions with performance improvement and analytic consulting expertise.
Our platform delivers a wide range of analytics solutions and services. These solutions and services leverage our extensive experience in the healthcare industry, are responsive to growing market needs and are often embedded in customer operations. Our analytics solutions include population heath and cost analysis, provider performance management, payment integrity, patient care and research solutions. Our services include analytic consulting, research and data management.
Positioned at the convergence of risk and care management, Truven is helping the industry transform into an integrated, sustainable healthcare system that is demanded by consumers, business and government. In 2014:
We informed decision‑making on the health benefits for one in three Americans;
Our solutions helped improve care quality and efficiency in more than 4,000 hospitals in the United States and more than 1,800 healthcare facilities internationally;
We provided analytics solutions impacting more than 50% of Medicaid beneficiaries;
We provided payment integrity solutions to 24 state Medicaid agencies to reduce fraud and abuse;
Our consumer cost transparency solution reached approximately 28 million consumers, providing critical information to make personal healthcare choices and reduce costs; and
Our data assets totaled 4.5 petabytes of data including approximately 30 billion claims records on over 214 million de‑identified patient lives.
We provide our analytic solutions and service offerings across the full spectrum of healthcare constituents, including state and federal government agencies, hospitals, health systems, employers, health plans, life sciences companies and consumers. In 2014, our customer base included more than 60% of Fortune 100 companies; over 125 health plans, third‑party administrators (“TPAs”) and related organizations; federal government agencies, such as the Centers for Medicare & Medicaid Services (“CMS”), the Department of Veterans Affairs (“VA”), and the Department of Defense (“DOD”); 31 state Medicaid agencies; over 4,000 U.S. hospitals; and each of the top 25 global life sciences companies based on revenue. We believe our solutions are critical to our clients’ decision‑making as demonstrated by our long‑term customer relationships, multi‑year contracts and high customer retention. The average length of our relationship with our top 20 clients measured by 2014 revenue is approximately 13 years.
Through more than 40 years of operating history, we have developed one of the most sophisticated data integration and analytics technology platforms within the healthcare industry. Our platform combines healthcare utilization, performance, clinical quality and cost data with our proprietary analytic methodologies that transform the large, complex quantities of data into actionable insights. We developed our technology and data operations to aggregate and integrate disparate data streams, allowing us to build longitudinal views of patient health. Our platform integrates our client data with our analytics solutions, which helps our clients better understand performance trends, create better programs, engage consumers and improve patient outcomes and financial performance.

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The healthcare industry is experiencing transformational change driven by intense cost pressures, a changing regulatory environment, new payment and delivery models and innovation in therapies and treatments. In this new healthcare paradigm, we enable our clients to analyze data more effectively, improve decision making, and deliver higher quality, more efficient healthcare. We believe that a powerful component of our value proposition is the breadth and depth of data and analytics we provide to help our clients address their fundamental questions in the changing healthcare environment.
Formerly the healthcare business of Thomson Reuters, we were acquired by Veritas Capital on June 6, 2012. In partnership with Veritas, management has made substantial investments in our business. Since the Prior Acquisition we have:
Completed our separation from Thomson Reuters and made an incremental investment of more than $30 million to establish our standalone data center operations and improve our technology infrastructure, enabling more flexible and efficient deployment of our solutions;
Reorganized our go‑to‑market strategy from operating in six channels to two focused segments, Government and Commercial, allowing us to focus on the unique needs of our customers in each of these two distinct markets and organize our internal resources to more effectively capture these opportunities;
Enhanced our market positioning to emphasize our analytic power, our global perspective across healthcare and our ability to combine our solutions and services for data‑driven transformation;
Completed the acquisition of Simpler on April 11, 2014, adding complementary provider "Lean" consulting services to our leading analytics capabilities and deepening our relationships with senior leadership across healthcare systems;
Completed the acquisition of JWA, which provides "Lean" healthcare consulting services on October 31, 2014;
Completed the acquisition of HBE, a leading provider of stakeholder information that is essential for life sciences companies to gain drug approval, reimbursement, and adoption, on November 12, 2014; and
Improved our offshore capabilities, nearly doubling the number of direct employees in our Indian subsidiary to over 200 since it was established following the Prior Acquisition.
We believe that these strategic initiatives have enhanced our competitive position and will enable us to address a broader set of customer opportunities.
Our business model provides substantial revenue visibility. The majority of our subscriptions have multi‑year terms and include services such as implementation, training, data integration and analytics consulting. The scope of a subscription often grows over time as modules, licenses and services are added to meet a client’s growing needs. An increasingly broad range of analytic consulting, research, data management and performance improvement services are also sold as projects, which are often multi‑year and can expand, extend and repeat over time.
Through more than 40 years of operating history, we have developed one of the most sophisticated analytics technology platforms within the healthcare industry, combining our data assets, analytic capabilities, proprietary methods and value‑added services. Our 4.5 petabytes of online data represents a collection of some of the most comprehensive data assets in the industry, such as one of the largest collections of commercially insured patient data, one of the largest databases of operational benchmarks and clinical performance data for hospitals and one of the most comprehensive databases of evidence‑based clinical decision support content. We employ proprietary and industry standard analytic methods including classifications, groupers, measures, projections, predictive models and other statistical and big data techniques. Our data assets, coupled with our proprietary methods, form the foundation of our analytics solutions. In addition to our analytics solutions, we provide services such as analytics consulting and research, strategic consulting and advisory services, and data warehousing and management. We believe the complementary nature of our analytics solutions and services offerings enhances our value proposition to our clients.

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We believe that our platform would be difficult for others to replicate in breadth, depth and quality. Clients continuously contribute new information to our existing databases, allowing us to refresh and enrich our content, databases and analytics. Our technology and data operations aggregate and integrate disparate data streams, including financial, administrative and clinical information, allowing us to build more valuable longitudinal views of a patient’s health. We continuously integrate our client’s data with our analytics solutions, which enhances the value of our insights and leads to self‑ reinforcing customer relationships and increased client tenure. We believe the dynamic nature of our processes and customer relationships continues to enhance our competitive position in the markets we serve.
Our growth strategy
We believe we are well positioned for continued growth across the markets and customers we serve. Our strategy for achieving growth includes:
Expand our existing client relationships. We have built a large and loyal customer base as represented by the nearly 13 year average tenure of our top 20 clients. We believe the length of our key client relationships highlights the value we provide to our clients and creates a platform to expand and grow our client relationships over time. With many of our customers, a subscription that begins with the successful implementation of a core solution leads to profitable follow‑on sales of additional modules, consulting services, data management services and new solutions. We believe that there is a significant opportunity for growth through cross‑sales into our current customer base, since many of our clients are currently utilizing only a subset of our applicable solutions and services. Also of importance, our clients continually add data to our database, which in turn, makes our data assets even more valuable to existing and potential new customers. We believe this self‑ reinforcing aspect of our client relationships helps us to retain our clients and drive deeper penetration of our solutions across our customer base.
Enhance our customized services and solutions. We are implementing a strategy to deliver our capabilities to clients through tailored services that meet their evolving, complex needs. For example, in order to further leverage our significant experience in creating and managing healthcare databases that are embedded in our solutions, we are increasingly engaged in defining, implementing and operating custom data warehouses for several clients. We are also increasingly applying our analytic tools and methods directly to our client’s data as an analytic consulting service to enable client analysis and decision making through their proprietary systems and processes. We have expanded our ability to deliver tailored, client specific solutions, which we believe enhances our relevance to customers and expands our addressable market.
Increase the scope of our government services. To accelerate growth in federal and state markets, we have invested in additional capabilities, custom development, and staff and support resources. We have been able to build on our strong reputation and expand our business with CMS and with other agencies with which we have long‑standing relationships. We have also expanded our scope into additional state agencies and federal agencies, such as the DOD, National Institutes of Health, Centers for Disease Control and Prevention, Food and Drug Administration, and Social Security Administration. Our network of potential partners to contract with in the Government segment has also expanded which allows us to jointly bid on government business, prime more contracts directly, and leverage partner relationships and contract vehicles. For example, in 2014 we won several IDIQ (Indefinite Delivery/Indefinite Quantity) task orders and won the CMS Research Management Assessment Design and Analysis IDIQ (RMADA), naming us as one of 15 prime contractors able to bid on RMADA task orders with a $7 billion total spending ceiling.
Continuously expand product and data offerings. We further leverage our strong position across the segments we serve by continuously investing in features and functionality to improve solutions and services and enhance opportunities to expand into new markets. For example, we have recently introduced enhanced solution capabilities in physician performance, consumer engagement and interactive reporting, and have added access to oncology EMR data to support outcomes research services.

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Grow through strategic acquisitions. We expect to continue to increase the value of our business through acquisitions that improve our strategic and market position. In 2014, we completed the acquisition of Simpler, adding "Lean" transformational performance improvement services capabilities that complement our analytics solutions and services, JWA, which provides "Lean" healthcare consulting services, and HBE, a leading provider of stakeholder information that is essential for life sciences companies to gain drug approval, reimbursement and adoption. Our acquisition priorities include: increasing access to the value of analytics through integration, tools and services; expanding usage within customer organizations; enhancing our differentiated service capabilities that leverage our data and analytics in growing areas of need; and extending our core analytic capability with expanded data, content and analytics methods.
Expand globally through existing international infrastructure. We have developed a global platform for the sale and distribution of our solutions and services in more than 80 countries, primarily focused on our patient care offerings. Leveraging our distributor network, direct sales teams and international office locations, we seek to increase the sale of our analytic solutions and services that meet the needs of our international clients.
Our offerings
We market healthcare analytics solutions and services that address critical market needs. Our extensive data and content assets combined with our healthcare data integration and analytics capabilities are embedded across our offerings. Analytics solutions typically include implementation and product support services. Many of our analytics solutions are also bundled with related services such as data management and analytic consulting that are tailored to client demands. Our principal offerings are grouped into categories based on the customer needs that they address.

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Analytics solutions
Category
Description
Key Products
Division(s)
Population health and cost analysis solutions
Solutions that help our clients integrate and analyze healthcare data on utilization, patient characteristics and costs for populations receiving healthcare services (e.g., a company’s employees and families, a state’s Medicaid enrollees, or an ACO’s members). Analytic methods are integrated with clinical and claims data and tools to enable care management, health benefits management, performance measurement, data exchange and integration, treatment cost transparency and personalized consumer engagement.
Advantage Suite Consumer Advantage Unify
Commercial Government
Provider performance management solutions
Solutions that help care delivery organizations track, measure and improve performance across core functions, including operational, financial, marketing and planning, and clinical and quality domains.
ActionOI CareDiscovery Market Expert
Commercial
Payment integrity and compliance solutions
Payment integrity solutions support government clients, for both Medicare and Medicaid data, as well as health plans and employers, to fight fraud, waste and abuse by way of powerful applications, advanced analytic methods, an extensive algorithm library and data mining capabilities.
DataProbe J‑SURS
Commercial Government
Patient care solutions
Clinical and intelligent evidence solutions help providers combine real‑time patient data with reference information to provide point of care decision support. These solutions include the leading evidence‑based reference information for drug, disease, toxicology, patient education and neonatology. Our clinical solutions integrate with providers’ clinical systems, giving immediate access to the evidence‑based information needed, at the point of care.
Micromedex Evidence 360 Care Insights Patient Connect
Commercial Government
Research solutions
Market analysis, claims management and research solutions provide a broad, up‑to‑date picture of treatment patterns and costs by tracking detailed information about important aspects of care for patients as they travel through the U.S. healthcare system.
MarketScan Treatment Pathways
Commercial Government

5



Analytics services
Category
Description
Analytics consulting services
Through our analytic consulting services, we help our customers gain greater value from our solutions and apply our data and solutions to specific problems. Our analytic consultants deliver insights that help customers identify and implement the best course of action to achieve their objectives. Projects range in size and can address a specific issue, provide an in‑depth analysis of a more complex challenge, or monitor and evaluate results. In specialized areas, such as fraud detection and prevention, our analytics services are provided by a deeply experienced team that specializes in fraud analytics.
Strategic consulting and advisory services
Experts across our business deliver custom consulting services leveraging advanced analytics in areas such as cost containment, budgeting, new payment models, plan and provider profiling, program integrity and operational and quality improvement. As a result of the acquisition of Simpler and JWA, we provide multi‑year coaching and enablement services that use both clinical and non‑clinical applications of "Lean" principles to help our customers streamline processes and decrease waste. And, with the acquisition of Heartbeat Experts, we offer a comprehensive range of analytics, data management, stakeholder engagement, strategic consulting, and health economics and outcomes research services to life sciences companies.
Research services
Our research staff has deep, cross‑industry knowledge that they leverage to deliver projects that are designed to improve healthcare access, enhance quality and reduce costs. Our staff includes senior researchers with established expertise in a range of specialty areas, including outcomes research, provider quality and efficiency measurement, health and productivity research, research data development and behavioral health and quality research. Many of our researchers have PhD and other advanced degrees and are well‑known and highly regarded in their respective fields.
Data Management and Systems Integration
We partner with clients to support their initial and ongoing data management and data warehousing needs, freeing up their resources to focus on other opportunities and mission‑critical issues. We leverage our relationships with thousands of data suppliers, as well as the proven experience and in‑depth knowledge of our on‑staff experts, to meet the information management goals of our clients. We also provide program and implementation management services.
Our data suppliers
We maintain a diverse data supplier base in which the vast majority of our data comes from our clients. Many of our clients provide us with raw clinical, operational, financial and/or administrative claims data that we process to create our analytic databases. We return this enhanced data to clients through analytic solutions to help benchmark performance. The value of our data assets increases as an inherent function of the business, as each current client refreshes data and each new client contributes additional depth and breadth of data.
Our technology
We have designed our technology infrastructure to be secure, scalable and efficient. Our approach to technology architecture and design, platform development, infrastructure and operations, data management and data security and privacy addresses industry requirements and is flexible and adaptable to support our growth strategies. We deliver the majority of our analytics solutions (determined by revenue) through our HIPAA compliant, secure, private cloud. Our cloud leverages virtualization technologies enabling us to provide highly efficient and flexible client data processing and integration, capacity planning, resource and operations management, and maintenance. We deliver the remainder of our analytics solutions on dedicated infrastructure hosted in our data center or located at client sites. Our technology operations deliver secure computing, storage, network, database and data center capacity to meet and exceed contractual customer service levels and support customized infrastructure and data center solutions for large customer engagements.

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Our clients
For over 40 years, we have provided high quality healthcare data and analytics solutions to our clients. Over that time, we have successfully built a leading position and have reached a scale that we believe is noteworthy in the industry, covering a significant portion of key constituents in the U.S. healthcare market. At the end of 2014 our clients included:
Over 60% of Fortune 100 companies and almost 30% of Fortune 500 companies;
Over 125 health plans;
Over 4,000 hospitals in the U.S. and more than 1,800 healthcare facilities internationally;
Medicaid agencies in 31 states covering over 50% of Medicaid beneficiaries;
A diverse set federal agencies, including CMS, Agency for Healthcare Research and Quality, and the VA; and
Each of the top 25 life sciences companies.
Our revenue is well distributed among a large, diversified and loyal customer base of blue‑chip customers. The average tenure of our top 20 clients is approximately 13 years.
Our segments
We currently operate and manage our business under two segments:
Commercial
The Commercial segment provides analytic solutions and services to improve the cost, quality, and effectiveness of healthcare for commercial organizations across the healthcare industry including providers, integrated delivery networks, insurers, professional services organizations, healthcare exchanges, manufacturers, and corporations.
Government
The Government segment provides integrated analytic solutions and services to improve the cost, quality, and effectiveness of healthcare for federal and state Government channels (e.g. Centers for Medicare & Medicaid Services and state Medicaid agencies) and federally owned and operated healthcare facilities. Our sales and client services are tailored to meet the specific procurement, sales and support requirements of the government market.
Our competition
We compete with a diverse set of businesses, including large companies that compete in a variety of our markets, small companies that compete in some of our markets, and new entrants that compete with us in specific end markets or solution areas. Competition in healthcare analytics solutions and services is largely based on analytical capabilities and healthcare industry expertise, the size and quality of the underlying datasets and benchmarks, ease of use, reputation and customer service.
We are singularly focused on increasing the value of analytics solutions and services for our customers across the healthcare industry, unlike some of our largest competitors which are part of large health insurance companies or group purchasing organizations, or largely based in one particular end market. We believe that many of our customers value our independence and objectivity, and prefer to have access to more robust benchmarks based on data sourced across a diverse set of organizations. As the growth in healthcare spending and changes in government regulation draw increasing attention to healthcare analytics and data, new competitors, such as consultants, technology companies and start‑ ups, are participating in the sector.

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Commercial competition
Across the Commercial Division, we compete against organizations with broad offerings such as The Advisory Board Company, Deloitte, Evidera, Healthagen (Aetna), IBM, IMS, McKesson, Optum (United Health Group), Premier, Reed Elsevier, Verisk and Wolters Kluwer as well as with smaller, more narrowly focused solution providers with emphasis on a specific type of solution such as Benefitfocus, Castlight, and RTI Health Solutions.
Government competition
Many of the industry players noted in the Commercial segment are also our competitors in the Government segment. Additionally, large and specialized system integrators compete for government contracts. Sometimes we bid against these companies, and sometimes they seek us out as a sub‑contractor or partner given our specialized and domain expertise. Certain companies with a large government focus such as Accenture, HMS Holdings, General Dynamics, Lockheed Martin and Northrop Grumman have established material positions in the industry.
Research and development
We have focused our product research and development ("R&D") on a number of interrelated areas to expand our analytics market position, address emerging industry needs, and provide additional flexibility and usability. Specific examples of recent and ongoing development include:
new predictive analytic methods to measure risk and apply results to real‑time decision making;
improving data management processes and increasing the integration into patient and provider workflows;
improving reporting, including a new interface and reporting engine;
new advanced search and user interface that enables users to better leverage and access evidence data, as well as mobile applications for point‑ of‑care; and
investments in the collection of additional data types related to certain health reform provisions.
R&D costs mainly related to labor costs and services bought and are expensed as incurred. The R&D costs expensed were $1.0 million for the year ended December 31, 2014, $1.7 million for the year ended December 31, 2013, $0.5 million for the period from April 20, 2012 (inception) to December 31, 2012, and $1.6 million for the Predecessor Period from January 1, 2012 to June 6, 2012.
Our employees
As of December 31, 2014, we had approximately 2,500 employees. None of our employees are represented by a labor union. We consider our relationship with our employees to be good.

8



Regulation and legislation
Introduction
The healthcare industry is highly regulated and subject to changing political, legislative, regulatory and other influences. The Patient Protection and Affordable Care Act (“PPACA”) is changing how healthcare services are covered, delivered and reimbursed through expanded coverage of uninsured individuals, reduced Medicare program spending and substantial insurance market reforms. PPACA also imposes significant Medicare Advantage funding cuts and material reductions to Medicare and Medicaid program spending. PPACA provides additional resources to combat healthcare fraud, waste and abuse and also requires HHS to adopt standards for electronic transactions, in addition to those required under HIPAA, and to establish operating rules to promote uniformity in the implementation of each standardized electronic transaction.
While many of the provisions of PPACA will not be directly applicable to us, PPACA, as enacted, affects the businesses of our customers. PPACA’s complexity, lack of implementing regulations or interpretive guidance, former court challenges and political debate makes it difficult to predict the ways in which PPACA will impact us or the business of our customers.
In addition to PPACA, the healthcare industry is faced with other challenges. The Health Information Technology for Economic and Clinical Health Act ("HITECH") offers incentives for certain healthcare providers to adopt "meaningful use" health information technology and provides penalties in later years if they are unable to do so. The October 1, 2015 mandated adoption of a new medical classification system, also known as ICD‑10 is impacting both payers and providers. The healthcare industry is also 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. 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 adversely impacted by enforcement initiatives. See “Risk factors-Risks related to our business-Government regulation creates risks and challenges with respect to our compliance efforts and our business strategies.”
Requirements regarding the confidentiality, privacy and security of personal information
HIPAA Privacy Standards and Security Standards. HIPAA Privacy Standards and HIPAA Security Standards apply directly to us when we are functioning as a Business Associate of our Covered Entity customers. As a result, stricter limitations have been placed on certain types of uses and disclosures. The HIPAA Privacy Standards extensively regulate the use and disclosure of individually identifiable health information by Covered Entities and their Business Associates. The HIPAA 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. See "Risk factors-Risks related to our business-Government regulation creates risks and challenges with respect to our compliance efforts and our business strategies."
Data 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, as well as the federal Government through HIPAA, 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. 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. See "Risk factors-Risks related to our business-Government regulation creates risks and challenges with respect to our compliance efforts and our business strategies."

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Other requirements. In addition to HIPAA, numerous other international, state and federal laws govern the collection, dissemination, use, access to and confidentiality of individually identifiable health information and healthcare provider information. Some states also are considering new laws and regulations that further protect the confidentiality, privacy and security of medical records or other types of medical information.
False claims laws and other fraud, waste and abuse restrictions
We provide solutions to health plan sponsors and other customers that relate to the reimbursement of health services covered by Medicare, Medicaid, other federal healthcare programs and private 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 and improper coding and billing for medically unnecessary goods and services. Further, providers may not contract with individuals or entities excluded from participation in any federal healthcare program. Like the federal Anti‑Kickback Statute, these provisions are very broad. See “Risk factors-Risks related to our business-Government regulation creates risks and challenges with respect to our compliance efforts and our business strategies.”
Some of these laws, including restrictions contained in amendments to the Social Security Act, commonly known as the federal civil monetary penalty laws ("CMPL"), require a lower burden of proof than other fraud, waste and abuse laws. Federal and state governments increasingly use the federal CMPL, 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 CMPL 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 ("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. Under PPACA, civil penalties also may now be imposed for the failure to report and return an overpayment made by the federal Government within 60 days of identifying the overpayment and may also result in liability under the FCA. Whistleblowers, the federal Government and some courts have taken the position that entities that have violated other statutes, such as the federal Anti‑Kickback Statute, have thereby submitted false claims under the FCA. PPACA clarifies this issue with respect to the federal Anti‑Kickback Statute by providing that submission of a claim for an item or service generated in violation of the federal Anti‑Kickback Statute constitutes a false or fraudulent claim under the FCA.
Our intellectual property
We rely upon a combination of trade secret, copyright and trademark laws, license agreements, confidentiality procedures, nondisclosure agreements and technical measures to protect the intellectual property used across our segments and customer channels. 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 solutions across our segments and customer channels. We also rely on a variety of intellectual property rights that we license from third parties. Although we believe that alternatives are generally available to replace such licensed intellectual property, these third party properties may not continue to be available to us on commercially reasonable terms or at all.
We also have several patents and patent applications covering solutions we provide, including software applications. Due to the nature of our applications, we believe that patent protection is a less significant factor than our ability to further develop, enhance and modify our current solutions in order to remain competitive.

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The steps we have taken to protect our copyrights, trademarks, service marks 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.

ITEM 1A - RISK FACTORS
You should carefully consider the risks described below and all of the information contained in this Annual Report. The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of those risks actually occurs, our business, financial condition and results of operations could suffer. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed or implied in these forward-looking statements. See “Forward-Looking Statements” in this Annual Report.
Risks related to our business
We are highly dependent on customers and, in many cases, their insurance carriers, as well as third-party vendors, to supply us with data necessary for the delivery of our solutions and services and any deterioration in our key sources of data would adversely affect our business.
Our solutions and services incorporate data that we obtain from our customers and, with respect to our employer customers, the insurance carriers that service them, as well as data that we purchase from third-party vendors. These data suppliers provide us with a majority of the data that we use for our products and services. Some of our customers have expressed concern about the commercial uses of the data that they contribute to us and insurance carriers are concerned that certain data they supply could be used in ways that disadvantage them. Health insurance carriers generally view certain health plan data as proprietary information and are increasingly asserting control over how the data may be used and to whom it may be provided, even if authorized by the health plan sponsor. The imposition of restrictions or limitations on our use of or access to customer and health plan data could adversely affect our solutions and service offerings, including product functionality, our ability to provide data and corresponding products and services to commercial customers, our ability to develop new product and service offerings and our reputation and brand equity resulting from diminished data access. In addition, we may be unable to find alternative, up to date data sources from third-party vendors on commercially reasonable terms or at all. Third party vendors of data may increase restrictions on our use of data, increase pricing to purchase or license data or refuse altogether to provide us with data. Any significant impairment to the access to data that we currently enjoy, due to increased pricing, the imposition of restrictions and limitations that we consider onerous or the withdrawal of the provision of data to us from key sources, could have a material adverse impact on our business, results of operations or financial condition.
We receive, process, store, use and transmit individually identifiable health information and other sensitive data, which subjects us to governmental regulation and other legal obligations related to privacy and security, and any actual or perceived failure to comply with such obligations could harm our business.
We receive, process, store, use and transmit individually identifiable health information and other sensitive data. There are numerous federal and state laws regarding privacy and the storing, sharing, use, processing, disclosure and protection of individually identifiable health information and other personal information, the scope of which is changing and subject to differing interpretations. We strive to comply with applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data protection to the extent feasible. However, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to customers or third parties or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of individually identifiable health information or other sensitive data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause our customers to lose trust in us, which could have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot provide assurances with regard to how governmental regulation and other legal obligations related to privacy and security will be interpreted, enforced or applied to our operations.

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If our security measures are breached, or if the systems our customers use to gain access to our solutions are compromised, we could lose sales and customers.

Our business involves the storage, use and transmission of individually identifiable health information and other highly confidential data. Therefore, the security features of our offerings are extremely important.  A security breach or failure could result from a variety of circumstances and events, including third-party actions such as computer hacker attacks or phishing, employee malfeasance or error, computer viruses and malware, software bugs or other technical malfunctions, power outages, hardware or telecommunications failures, and catastrophic events. If our security measures are breached or fail, or if our computer systems, or those of our customers, or our third party providers are compromised, unauthorized data access may occur. Any of these circumstances could lead to interruptions, delays or shutdowns, causing loss of critical data or the unauthorized disclosure or use of personally identifiable or other confidential information. Security breaches or compromises of computer systems or security measures may be difficult to prevent, detect and resolve. Because the techniques used to obtain unauthorized access, disable service or sabotage systems change frequently, may originate from less regulated and remote areas around the world and generally are not recognized until launched against us, we may be unable to proactively address these techniques or to implement adequate preventative measures.

We outsource to third parties certain important aspects of the storage and transmission of the information provided to us by our customers and other sources.  These outsourced functions include services such as co-location data centers, software development, software engineering, database consulting, system administration, network security and firewall services. We attempt to address the associated risks by requiring our subcontractors with data access to sign agreements, including Business Associate agreements where necessary, obligating them to take security measures to protect such data.  In addition, certain of our third party subcontractors are subject to security audits.  However, we cannot assure you that these contractual measures and other safeguards will provide adequate protection against the risks associated with the storage and transmission of the data in our care.

In the event of a security breach or compromise that results in performance or availability problems with respect to our solutions, data assets or services, or the loss or unauthorized disclosure of individually identifiable health or other confidential information, our reputation could be severely damaged and the costs to our business could increase substantially. Our existing customers may lose trust and confidence in us and our solutions and services, causing them to decrease or stop the use of our solutions and services. We may experience difficulty in attracting new customers. We could be subject to lawsuits, government enforcement action and other claims that could result in third party liability, penalties, and fines, and we could be required to expend significant resources to remediate the damage and protect against future security breaches. These consequences could diminish our competitive position and have a material adverse effect on our business, results of operations and financial condition.

Failure of our customers to obtain proper permissions or provide us with accurate 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 obtain necessary permissions for the use and disclosure of the information that we receive. If they fail to 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 or other laws. Also, we rely on our customers to provide us with accurate and correct data. 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 use or disclosure of information by reason of lack of valid permissions or due to data inaccuracy. 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 activities present the potential for identity theft or similar illegal behavior by our employees or contractors with respect to third parties.
Our services involve the use and disclosure of personal information that in some cases could be used to impersonate third parties or otherwise improperly gain access to their data or funds. If any of our employees or contractors takes, converts or misuses such information, or we experience a data breach creating a risk of identity theft, we could be liable

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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 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” rules, which require the implementation of identity theft prevention programs to detect, prevent and mitigate identity theft in connection with customer accounts.
 
Government regulation creates risks and challenges with respect to our compliance efforts and our business strategies.
The healthcare industry is highly regulated and subject to changing political, legislative, regulatory and other influences. Healthcare laws, including HIPAA, are complex and their application to specific services and relationships may not be clear. We may also be impacted by non-healthcare laws as a result of some of our solution platforms.
Given the evolving legal and regulatory environment, we are unable to predict what changes to laws or regulations might be made or how those changes could affect our business or costs of compliance. We have attempted to structure our operations to comply with legal requirements directly applicable to us and to our customers, but there can be no assurance that our operations will not be challenged or adversely impacted by enforcement initiatives. Any determination by a court or agency that our solutions 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 solutions 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 customers. Laws and regulations impacting our operations include the following:
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 national privacy and security standards that limit the use and disclosure of individually identifiable health information and require the implementation of administrative, physical and technological safeguards to ensure the confidentiality, integrity and availability of individually identifiable health information in electronic form. In addition to regulating privacy of individual health information, HIPAA includes several anti-fraud and abuse laws and extends criminal penalties to private healthcare benefit programs.
Many of our customers are directly subject to the so called HIPAA Privacy Standards, and HIPAA Security Standards. As such, they are required to enter into written agreements with us, known as Business Associate agreements, which obligate us to safeguard individually identifiable health information and restrict how we may use and disclose that information. HITECH addresses the privacy and security concerns associated with the electronic transmission of health information, in part, through several provisions that strengthen the civil and criminal enforcement of HIPAA, which directly affects our business and increases penalties for noncompliance. Prior to HITECH, the HIPAA Privacy Standards and HIPAA Security Standards applied to us indirectly as a result of our contractual obligation to our customers. Effective February 2010, the American Recovery and Reinvestment Act of 2009 ("ARRA") extended the direct application of certain provisions of the HIPAA Privacy Standards and HIPAA Security Standards to us when we are functioning as a Business Associate of our customers that are "Covered Entities" under HIPAA. ARRA required the Department of Health and Human Services ("HHS") to issue regulations implementing HITECH. The Final Rule aligning the HIPAA Privacy Standards, HIPAA Security Standards and enforcement rules with HITECH's statutory changes was released at the end of January 2013. Along with changes in breach notification standards, which are expected to lead to a higher proportion of data security incident being classified as reportable breaches, the rule extends Business Associate status to subcontractors of Business Associates, making us a Business Associate in some contexts where we previously had only contractual liability.

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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 and Business Associates that violate the HIPAA Privacy Standards or the HIPAA 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 $1.5 million in a calendar year for violations of the same requirement.

We have implemented and maintain policies and processes to assist us in complying with the HIPAA Privacy Standards, the HIPAA Security Standards and our contractual obligations. We cannot provide assurance regarding how these standards will be interpreted, enforced or applied to our operations.
Data breach laws. 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, as well as the federal Government through HIPAA, have responded to these incidents by enacting laws requiring holders of personal information to maintain safeguards and 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. HIPAA Covered Entities must report breaches of unsecured individually identifiable 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 individually identifiable 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 has prosecuted some data breach cases as unfair and deceptive acts or practices under the Federal Trade Commission Act. 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 applicable laws and regulations regarding the protection of this data and properly responding to any security breaches or incidents. However, data breaches could subject us to certain liabilities and could result in a loss of business, exposure to adverse publicity and injury to our reputation, any of which could adversely affect our ability to retain and attract customers.
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. Some states also 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.
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 and improper coding and billing for medically unnecessary items or services. The False Claims Act ("FCA") and some state false claims laws contain whistleblower provisions that allow private individuals to bring qui tam actions, which are 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 Statute prohibiting any person from knowingly and willfully soliciting, receiving or paying any remuneration to induce another person to refer, recommend or arrange the purchase, lease or order of goods or services that are in any way paid for by a federal healthcare program such as Medicare or Medicaid, have been found to violate the FCA. 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.
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, including restrictions contained in amendments to the Social Security Act, commonly known as the “federal Anti-Kickback Statute.” The federal Anti-

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Kickback Statute prohibits any person or entity from offering, paying, soliciting or receiving, directly or indirectly, anything of value with the intent of generating 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. While unlikely, 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 or 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 who are or do business with government programs, any one of which 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.
Customer contracts with governmental agencies, or which are funded by government programs, impose strict compliance burdens on us, may give rise to conflicts with some of our other important businesses and are subject to termination and delays in funding.
A significant portion of our revenues comes from customers that are governmental agencies or are funded by government programs. Our contracts and subcontracts with these customers may be subject to some or all of the following:
termination when appropriated funding for the current fiscal year is exhausted;
termination for the governmental customer’s 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, and the right to make unilateral changes in contract requirements, subject to negotiated price adjustments;
compliance and reporting requirements related to, among other things, agency specific policies and regulations, cost principles and accounting systems, equal employment opportunity, affirmative action for veterans and workers with disabilities and accessibility for the disabled;
broad audit rights;
specialized remedies for breach and default, including set off rights, retroactive price adjustments and civil or criminal fraud penalties, as well as mandatory administrative dispute resolution procedures instead of state contract law remedies; and
potential delays or terminations of, or failures to renew, existing U.S. government contracts and subcontracts, as well as the potential delay or reduction in the rate of creation of new contracts, as a result of budget cuts relating to the Budget Control Act of 2011 and the related automatic sequestration process that followed.
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 organizational 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. For example, there has been an increasing focus on payment integrity issues with respect to government programs, and solutions and services that we provide to hospitals may constitute an organizational conflict of interest under our payment integrity contracts. If an organizational conflict of interest cannot be mitigated, then we may be disqualified from certain government contracts.
Inaccuracies in the solutions and services that we deliver to our customers could have an adverse effect on our reputation and business and expose us to liability.
The information solutions and services that we deliver to our customers are becoming increasingly sophisticated. Errors in these solutions and services could cause serious problems for our customers. Some of these risks are heightened as we seek to expand our solutions and service offerings, including various patient safety solutions utilized by clinicians. 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.

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Failures, delays, or interruptions in the operation of our computer and communications systems or the failure to implement system enhancements may harm our business.
Our success depends on the efficient and uninterrupted operation of our computer and communications systems and other aspects of our information technology infrastructure. We must meet our customers’ service level expectations and our contractual obligations with respect to the delivery of our information products and services. Failure to do so could subject us to liability, as well as cause us to lose 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. If problems like these occur, our customers may seek full or partial refunds or credits from us or may seek to terminate their agreements with us, withhold payments due to us, or initiate litigation or other dispute resolution procedures. Also, our business could be harmed if our customers and potential customers believe our service is unreliable.

We depend on data centers that are not owned or operated by us. While we control and have access to our servers and the components of our network that are located in our external data centers, we do not own or control the operation of these facilities. The agreement that governs our use of the data centers is for a specified term, and we have no assurance that it can be renewed on commercially reasonable terms or at all.
Damage or failure of systems and technology environment. A failure at our data centers or of our network or data gathering and dissemination processes could impede the processing of data, delivery of databases and services, client orders and day to day management of our business and could result in the corruption or loss of data. While we have disaster recovery plans for our main data center and our other operations that we believe are appropriate, we currently do not have full backup facilities for all of our operations to provide redundant network capacity in the event of a data center or system failure. Despite any precautions we may take, damage from fire, floods, hurricanes, power loss, telecommunications failures, computer viruses, malware, break-ins, sabotage, breaches of security, epidemics and similar events at our various computer facilities could result in interruptions in the flow of data to and from our servers.
In addition, any failure by our computer information technology environment to provide our required data communications capacity could result in interruptions in our service. If at any time our data facility providers are unable to satisfy our requirements, we could be required to transfer our operations to an alternative provider of server hosting services. Such a transfer, whether planned or unplanned, could result in significant delays in our ability to deliver our products and services to our clients. Additionally, significant delays in the planned delivery of system enhancements, improvements and inadequate performance of the systems once they are completed could damage our reputation and harm our business.
Long term business disruption. Finally, long term disruptions in the infrastructure caused by events such as natural disasters, the outbreak of war, the escalation of hostilities, epidemics or acts of terrorism (particularly involving cities in which we have offices or maintain our data) could adversely affect our businesses. Although we carry property casualty and business interruption insurance, our coverage may not be adequate to compensate us for all losses that may occur. The occurrence of any of these events could disrupt our business and operations or harm our brand and reputation, either of which could materially adversely affect our business, results of operations and financial condition.
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 recurring revenue model. Historically, a significant percentage of our revenue has come from ongoing customer relationships. We may not be able to maintain similarly high renewal and/or retention rates in the future. Our success in securing renewals depends in part upon our clients’ budgetary environment, our reputation and performance and our competitors. Our subscription-based revenues depend in part upon maintaining our customer renewal and retention rates. If we are unable to retain customers at an acceptable rate, our business, results of operations and financial condition could be materially adversely impacted.
General economic, political and market forces and dislocations beyond our control could reduce demand for our solutions and harm our business.

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The demand for our solutions may be impacted by domestic and international factors that are beyond our control, including macroeconomic, political and market conditions, the availability of short-term and long-term funding and capital, the level and volatility of interest rates, currency exchange rates and inflation. The United States economy recently experienced periods of contraction and both the future domestic and global economic environments may continue to be less favorable than those of prior years. Any one or more of these factors may contribute to reduced activity and prices in the securities markets generally and could result in a reduction in demand for our solutions, which could have an adverse effect on our results of operations and financial condition. A significant additional decline in the value of assets for which risk is transferred in market transactions could have an adverse impact on the demand for our solutions. In addition, the decline of the credit markets has reduced the number of mortgage originators, and therefore, the immediate demand for our related analytics solutions.
Content innovation and technological developments could render our solutions and services obsolete or uncompetitive and we may not be able to develop new content innovations and technology necessary for our business to remain competitive.
To remain competitive, we must consistently deliver comprehensive and effective data solutions and services to our clients in forms that are easy to use while simultaneously providing clear answers to complex questions, some of which require us to focus on content innovation. In addition, the technologies supporting the industries we serve and our platforms for delivering our solutions and services to our customers are susceptible to rapid changes and in order to be competitive we must consistently develop cost effective technologies for secure and reliable data collection and analysis. We may not be able to develop new content innovations or technologies, or enhancements to, updates of or new versions of our technologies, as necessary for our business or we may not do so as quickly or cost effectively as our competition.
Further, the introduction of new solutions and services embodying new technologies and the emergence of new industry standards could render existing solutions and services obsolete. Our continued success will depend on our ability to adapt to changing technologies, manage and process ever increasing types and amounts of data and improve the performance, features and reliability of our data solutions and services in response to changing client and industry demands. We may experience difficulties that could delay or prevent the successful design, development, testing, introduction or marketing of our solutions and services. New solutions and services, or enhancements or updates to existing solutions and services, may not adequately meet the requirements of current and prospective customers or achieve any degree of significant market acceptance.
Our business is subject to significant or potentially significant competition that is likely to intensify.
Our future growth and success depend on our ability to successfully compete with other companies that provide similar services in the same markets, some of which may have financial, marketing, technical and other advantages. Some of our existing customers, including some for which we act as a subcontractor, 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. The ability of customers or other competitors to replicate our solutions and services may adversely affect the terms and conditions we are able to negotiate in our agreements and our transaction volume with them, which directly impacts our revenues. We are competing with other vendors to be the first to deliver real time and prospective analytics and the integration of financial and clinical data, and any vendor that exhibits an advantage in any of these areas will be at a distinct competitive advantage. In addition, some of our solutions and services allow health care sponsors and carriers to outsource business processes that have been or could be performed internally and, in order for us to be able to compete, use of our solutions and services must be more efficient for them than use of internal resources. We are also often required to respond to requests for proposals (“RFPs”) to compete for a contract. This requires that we accurately estimate our cost structure for servicing a proposed contract, the time required to establish operations and likely terms of the proposals submitted by competitors. We cannot assure you that we will continue to obtain contracts in response to RFPs or that our proposals will result in profitable contracts. In addition, competitors may protest contracts awarded to us through the RFP process which may cause the award to be delayed or overturned or may require the client to reinitiate the RFP process.

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Our business could be harmed if we are no longer able to license or integrate third party technologies, or to the extent any problems arise with the functionality or successful integration of any software or other technologies licensed to us by third party vendors.
We depend upon licenses from third party vendors for some of the technology used in our business intelligence and software tools and the technology platforms upon which these tools operate. We also use third party software to maintain and enhance, among other things, content generation and delivery, and to support our technology infrastructure. These technologies might not continue to be available to us on commercially reasonable terms or at all. Most of these licenses can be renewed only by mutual agreement and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. Our inability to obtain and maintain any of these licenses could delay our ability to provide services until alternative technology can be identified, licensed and integrated, which may harm our financial condition and results of operations. Some of our third party licenses are non-exclusive and our competitors may obtain the right to use any of the technology covered by these licenses to compete directly with us.
Our use of third party technologies exposes us to risks associated with the integration of new technology into our solutions, the diversion of our resources from development of our own proprietary technology and the generation of revenue from licensed technology sufficient to offset associated procurement and maintenance costs. Because some of our products and services incorporate software developed and maintained by third parties, we are, to a certain extent, dependent upon such third parties’ ability to maintain or enhance their current products and services, to ensure that their products are free of defects or security vulnerabilities, to develop new products and services on a timely and cost-effective basis and to respond to emerging industry standards and other technological changes. To the extent any problems arise with the proper functioning or successful integration of any software or other technologies licensed to us by third party vendors, this could prevent our products and services from operating as our customers expect them to, thereby harming our relationships with our customers. 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, or file a lawsuit. Further, we may be subject to claims against us by others affected by any such problems. As a result, our business, financial condition and results of operations could suffer. In addition, if our vendors choose to discontinue support of the licensed technology in the future, we might not be able to modify or adapt our own solutions.
Client procurement strategies could put additional pressure on the pricing of our information services, thereby leading to decreased earnings.
Certain of our clients may continue to seek further price concessions from us. This puts pressure on the pricing of our information services, which could limit the amounts we earn. If our competitors offer deep discounts on certain products in an effort to recapture or gain market share or to sell other products, we may then need to lower prices or offer other favorable terms in order to compete successfully. Any such changes would be likely to reduce margins and could adversely affect operating results. If we cannot offset price reductions with a corresponding increase in sales or with lower spending, then the reduced software revenues resulting from lower prices would adversely affect our results. In some areas of our Commercial segment, we see pricing pressure as healthcare reform drives clients to manage healthcare information technology spending in the context of other technology investments they are implementing concurrently.
As is common in high technology industries with rapid technological change, our customers may also require us to continue to add functionality to our products in order to maintain price. Additionally, changes in the pricing model for our products and solutions could require us to implement a new pricing model in order to remain competitive. A change in pricing model could require significant resources in order to transition successfully and could reduce our revenue during such a transition. While we attempt to mitigate the revenue impact of any pricing pressure through effective negotiations and by providing services to individual businesses within particular groups, there can be no assurance as to the degree to which we will be able to do so, which could materially adversely affect our business, results of operations and financial condition.
The protection of our intellectual property may require substantial resources.
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 United States or in foreign countries or take similar steps to secure patents for our proprietary applications. Further, despite our efforts, it

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may be possible for third parties to reverse engineer or otherwise obtain, copy and use information that we regard as proprietary. Third parties may infringe upon or misappropriate our copyrights, trademarks, service marks and other intellectual property rights, which could have a material and adverse effect 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. If we expand our overseas offerings, the laws of some countries do not protect and enforce proprietary rights to the same extent as the laws of the United States. As a result, if anyone misappropriates our intellectual property, it may have a material adverse effect on our business, results of operations and financial condition.
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 certain solutions.
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 management’s 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 solutions 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.
We are, and may become, involved in litigation that could harm the value of our business.
In the normal course of our business, we are involved in lawsuits, claims, audits and investigations. The outcome of these matters could have a material adverse effect on our business, results of operation or financial condition. In addition, we may become subject to future lawsuits, claims, audits and investigations that could result in substantial costs and divert our attention and resources. For example, we have, and may in the future, become subject to claims relating to unfavorable patient outcomes based on information that we may have made available to clinicians or pharmaceutical customers. There can be no assurances that the outcome of any such litigation if successful will not have a material effect on our business.
Our success depends in part on our ability to identify, recruit and retain skilled management, including our executive officers, 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. In particular, our executive officers are critical to the management of our business. The loss of any of our executive officers could impair our ability to execute our business plan and growth strategy, reduce revenues, cause us to lose customers or lead to employee morale problems and/or the loss of key employees. Competition for qualified personnel in the healthcare information technology and services industry is intense, and we may not be able to hire or retain a sufficient number of qualified personnel to meet our requirements, or 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.

Failure to successfully complete or integrate acquisitions into our existing operations could have an adverse impact on our business, financial condition and results of operations.
We regularly evaluate opportunities for strategic growth through acquisitions. Recently, we completed the acquisitions of Simpler, JWA and HBE. Potential issues associated with acquisitions could include, among other things; our ability to realize the full extent of the benefits or cost savings that we expect to realize as a result of the completion of the acquisition within the anticipated time frame, or at all; receipt of necessary consents, clearances and approvals in connection with the acquisition; and diversion of management's attention from base strategies and objectives. Further, we may be unsuccessful in our effort to combine our businesses with the business of the acquired company in a manner

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that permits cost savings to be realized, including sales and administrative support activities and information technology systems, motivating, recruiting and retaining executives and key employees, conforming standards, controls, procedures and policies, business cultures and compensation structures, consolidating and streamlining corporate and administrative infrastructures, consolidating sales and marketing operations, retaining existing customers and attracting new customers, identifying and eliminating redundant and underperforming operations and assets, coordinating geographically dispersed organizations, and managing tax costs or inefficiencies associated with integrating our operations following completion of the acquisitions. The process of integrating acquired companies and operations may result in unforeseen operating difficulties and may require significant financial resources and management's time and attention that would otherwise be available for the ongoing development or expansion of our existing operations. In addition, acquisitions outside of the United States increase our exposure to risks associated with foreign operations, including fluctuations in foreign exchange rates and compliance with foreign laws and regulations. [A significant portion of the operations and personnel of HBE, which we acquired in November, are outside of the United States.] If an acquisition is not successfully completed or integrated into our existing operations, our business, results of operations and financial condition could be materially adversely impacted.
To the extent the availability of free or relatively inexpensive information increases, the demand for some of our solutions may decrease.
Public sources of free or relatively inexpensive information have become increasingly available recently, particularly through the Internet, and this trend is expected to continue. Governmental agencies in particular have increased the amount of information to which they provide free public access. Public sources of free or relatively inexpensive information may enable third parties to create value added, analytically enhanced or authoritative content that may compete with and reduce demand for our solutions. To the extent that customers choose not to obtain solutions from us and instead rely on these alternative new sources, our business and results of operations may be adversely affected.
Our foreign operations expose us to political, economic, regulatory and other risks, which could adversely impact our financial results.
We conduct a portion of our operations in the United Kingdom and India, [Canada, Brazil, Belgium and Japan], including some sales functions and some data service functions. Operating in overseas environments carries risks for our business, including currency exposures, unexpected changes in local government laws and regulations, including those relating to intellectual property, data management, labor and cross-border trade, volatility of an emerging economy, corruption and fraudulent business practices, recruiting and retention of skilled personnel, tax law changes, and other exposures inherent in operating in foreign jurisdictions.
We are controlled by the Sponsor, whose interest as equity holder may conflict with yours as a holder of Notes.
We are controlled by the Sponsor, through its affiliated private equity funds. The Sponsor controls the election of our directors and thereby has the power to control our affairs and policies, including the appointment of management, the issuance of additional equity and the declaration and payment of dividends if allowed under the terms of the credit agreement governing our Senior Credit Facility, the terms of the indenture governing the Notes and the terms of our other indebtedness outstanding at the time. The Sponsor does not have any liability for any obligations under or relating to the Notes and their interests may be in conflict with yours. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the Sponsor may pursue strategies that favor equity investors over debt investors. In addition, the Sponsor, through its affiliated private equity funds, may have an interest in pursuing acquisitions, divestitures, financing or other transactions that, in its judgment, could enhance their equity investments, even though such transactions may involve risk to you as a holder of the Notes. Additionally, the Sponsor, through its affiliated private equity funds, may make investments in businesses that directly or indirectly compete with us, or may pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. For information concerning our arrangements with the Sponsor, see "Management" and "Certain relationships and related party transactions."

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If we do not remediate material weakness in our internal control over financial reporting or are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.
In connection with the audit of our financial statements for the 2014 period, we have identified control deficiencies in our internal control over financial reporting that constituted a material weakness. A material weakness is defined under the standards issued by the Public Company Accounting Oversight Board as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected and corrected on a timely basis. Specifically, it was determined that we do not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of GAAP. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2014 because of the material weaknesses discussed above. We are currently in the process of remediating this weakness. During the course of the remediation effort, we may identify additional control deficiencies, which could give rise to other material weaknesses, in addition to the material weakness described above. In connection with the audit of our financial statements for 2013 and 2012, we identified other control deficiencies that constituted material weakness, which we have remediated following discussion of these material weaknesses. See "Controls and Procedures-Identification of Material Weaknesses". If we are unable to successfully remediate this material weakness, it could harm our operating results, cause us to fail to meet our U.S. Securities and Exchange Commission (the "SEC") reporting obligations or result in inaccurate financial reporting or material misstatements in our annual or interim consolidated and combined financial statements that would not be prevented or detected in a timely basis. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the material weakness described above or avoid potential future material weaknesses.
Further, our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal controls over financial reporting.
We were unable to file our Quarterly Report on Form 10‑Q for the fiscal quarter ended March 31, 2014 by the prescribed time due to an unexpected delay in completing the notes to our financial statements for that period.
As an "emerging growth company" under the JOBS Act, we rely on exemptions from some disclosure requirements.
As an "emerging growth company" under the JOBS Act, we rely on exemptions from some disclosure requirements. We are an emerging growth company until the earliest of: (i) the last day of the fiscal year during which we had total annual gross revenues of $1 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement under the Securities Act; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt or (iv) the date on which we are deemed to be a "large accelerated filer" as defined under the federal securities laws. For so long as we remain an emerging growth company, we will not be required to, among other things:

have an auditor attestation report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; and
include detailed compensation discussion and analysis in our filings under the Exchange Act, and instead may provide a reduced level of disclosure concerning executive compensation.

To the extent we take advantage of these reduced burdens, the information that we provide you in our public filings may be different than that of other public companies in which you hold securities.

Risks related to the Notes
Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under the Notes.
As of December 31, 2014, our total principal indebtedness was $992.0 million and we have undrawn availability under the Revolving Credit Facility of $42.5 million (after giving effect to approximately $7.5 million of outstanding letters of credit, which, while not drawn, reduce the available balance under the Revolving Credit Facility). Of this total

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amount, $624.9 million is secured indebtedness under our Senior Credit Facility (excluding $7.5 million represented by letters of credit under the Revolving Credit Facility), to which the Notes are effectively subordinated to the extent of the value of the assets securing such indebtedness. We may also request incremental increases in commitments under the Senior Credit Facility in an aggregate principal amount up to (x) $75.0 million plus (y) up to an additional $75.0 million if the consolidated senior secured leverage ratio is less than or equal to 4.0:1.0, subject to certain conditions.
Subject to the limits contained in the credit agreement that governs our Senior Credit Facility, the indenture that governs the Notes and our other debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could have important consequences to the holders of the Notes, including the following:
making it more difficult for us to satisfy our obligations with respect to the Notes and our other debt;
limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;
requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;
increasing our vulnerability to general adverse economic and industry conditions;
exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our Senior Credit Facility, are at variable rates of interest;
limiting our flexibility in planning for and reacting to changes in the industry in which we compete;
placing us at a disadvantage compared to other, less leveraged competitors; and
increasing our cost of borrowing.
In addition, the indenture that governs the Notes and the credit agreement that governs our Senior Credit Facility contain restrictive covenants that limit our ability to engage in activities that may be in our long term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt.
We may not be able to generate sufficient cash to service all of our indebtedness, including the Notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or refinance our debt obligations, including the Notes, depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the Notes. See “Management’s discussion and analysis of financial condition and results of operations-Liquidity and capital resources.”
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness, including the Notes. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. Our credit agreement that governs our Senior Credit Facility and the indenture that governs the Notes restricts our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.
As of the date of this Annual Report, we have nine foreign subsidiaries, that do not guarantee our obligations under our Senior Credit Facility or the Notes. These foreign subsidiaries are insignificant and account for less than 3% of our consolidated revenues, operating income and total assets, As of the date of this Annual Report, Truven Holding and

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our domestic subsidiaries guarantee the debt. In the future, we may choose to acquire or form additional subsidiaries in connection with the operation of our business that will be restricted subsidiaries. Any such future direct or indirect subsidiary that is a borrower under or that guarantees obligations under our Senior Credit Facility or that guarantees our other indebtedness or indebtedness of any future subsidiary guarantors will guarantee the Notes. We may also have future subsidiaries that may not be guarantors of the Notes or our other indebtedness. Accordingly, repayment of our indebtedness, including the Notes, may be dependent in part on the generation of cash flow by our current and future subsidiaries, and their ability to make such cash available to us by dividend, debt repayment or otherwise. Unless they are guarantors of the Notes or our other indebtedness, our subsidiaries will not have any obligation to pay amounts due on the Notes or our other indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness, including the Notes. Each such subsidiary will be a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from subsidiaries. While the indenture that governs the Notes, our credit agreement that governs our Senior Credit Facility and certain of our other existing indebtedness will limit the ability of any subsidiary to incur consensual restrictions on its ability to pay dividends or make other intercompany payments to us, these limitations are subject to qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness, including the Notes.
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our obligations under the Notes.
If we cannot make scheduled payments on our debt, we will be in default and holders of the Notes could declare all outstanding principal and interest to be due and payable, the lenders under our Senior Credit Facility could terminate their commitments to loan money and foreclose against the assets securing the Senior Credit Facility and we could be forced into bankruptcy or liquidation. All of these events could result in your losing your investment in the Notes.
Certain of our assets collateralize our Senior Credit Facility and any such assets may not be available to pay our other indebtedness.
Our Senior Credit Facility is collateralized by a security interest in substantially all of our tangible and intangible assets, including the stock and the assets of Truven and certain of our wholly-owned U.S. subsidiaries and a portion of the stock of certain of our non-U.S. subsidiaries. The furnishing of security interests with respect to such assets may materially and adversely affect our financial flexibility, including the costs of or ability to raise additional financing.
Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks to our financial condition described above.
We and our subsidiaries may be able to incur significant additional indebtedness in the future. Although the indenture that governs the Notes and our credit agreement that governs our Senior Credit Facility contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. If we incur any additional indebtedness that ranks equally with the Notes, subject to collateral arrangements, the holders of that debt will be entitled to share ratably with you in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding up of our company. This may have the effect of reducing the amount of proceeds paid to you. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. In addition, as of December 31, 2014, our Revolving Credit Facility had unused commitments of approximately $42.5 million (after giving effect to approximately $7.5 million of outstanding letters of credit, which, while not drawn, reduce the available balance under the Revolving Credit Facility). Further, we may request incremental increases in commitments under the Senior Credit Facility in an aggregate principal amount up to (x) $75.0 million plus (y) up to an additional $75.0 million if the consolidated senior secured leverage ratio is less than or equal to 4.0:1.0, subject to certain conditions. All of the borrowings under our Senior Credit Facility are and will be secured indebtedness and, therefore, effectively senior to the Notes and the guarantees of the Notes to the extent of the value of the assets securing such debt. If new debt is added to our current debt levels, the related risks that we and the guarantors face could intensify.

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The terms of the credit agreement that governs our Senior Credit Facility and the indenture that governs the Notes will restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
The indenture that governs the Notes and the credit agreement that governs our Senior Credit Facility contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long term best interest, including, among other things, restrictions on our ability to:
incur additional indebtedness and guarantee indebtedness;
pay dividends or make other distributions in respect of, or repurchase or redeem, capital stock;
prepay, redeem or repurchase certain debt;
make loans, investments and acquisitions;
sell or otherwise dispose of assets;
incur liens;
enter into transactions with affiliates;
alter the businesses we conduct;
enter into sale-leaseback transactions;
enter into certain swap agreements;
change our fiscal year;
enter into agreements restricting our subsidiaries’ ability to pay dividends and incur liens; and
consolidate, merge or sell all or substantially all of our assets.
The covenants in the indenture that governs the Notes are subject to important exceptions and qualifications. Certain of these covenants will cease to apply to the Notes when the Notes have investment grade ratings from both Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Ratings Group (“Standard & Poor’s”).
In addition, the restrictive covenants in the credit agreement that governs our Senior Credit Facility require us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we may be unable to meet them.
A breach of the covenants or restrictions under the indenture that governs the Notes or under the credit agreement that governs our Senior Credit Facility could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross acceleration or cross default provision applies. In addition, an event of default under the credit agreement that governs our Senior Credit Facility would permit the lenders under our Senior Credit Facility to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under our Senior Credit Facility, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or noteholders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. As a result of these restrictions, we may be:
limited in how we conduct our business;
unable to raise additional debt or equity financing to operate during general economic or business downturns; or
unable to compete effectively or to take advantage of new business opportunities.
These restrictions may affect our ability to grow in accordance with our strategy. In addition, our financial results, our substantial indebtedness and our credit ratings could adversely affect the availability and terms of our financing.

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Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under our Senior Credit Facility are at variable rates of interest with an established LIBOR floor rate of 1.25% and may expose us to interest rate risk. If interest rates were to increase above the floor rate, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease. Assuming $50.0 million of the Revolving Credit Facility is drawn, a one percent change in interest rates in excess of the floor established by the Senior Credit Facility would result in a $0.50 million change in annual interest expense on our indebtedness under our Senior Credit Facility. In the future, we may enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk.
The Notes are effectively subordinated to our subsidiary guarantors’ indebtedness under our Senior Credit Facility and any other secured indebtedness of our company to the extent of the value of the property securing that indebtedness.
The Notes are not secured by any of our or our subsidiary guarantors’ assets. As a result, the Notes and the guarantees are effectively subordinated to our and the guarantors’ indebtedness under our Senior Credit Facility to the extent of the value of the assets that secure that indebtedness. As of December 31, 2014, we had approximately $624.9 million of principal indebtedness outstanding under our Term Loan Facility, all of which is effectively senior to the Notes, and we had approximately $7.5 million in letters of credit outstanding under our Revolving Credit Facility, resulting in total unused availability of approximately $42.5 million under our Revolving Credit Facility. In addition, we may request incremental increases in commitments under the Senior Credit Facility in an aggregate principal amount up to (x) $75.0 million plus (y) up to an additional $75.0 million if the consolidated senior secured leverage ratio is less than or equal to 4.0:1.0, subject to certain conditions. Further, we may incur additional secured debt in the future under the indenture governing the Notes and under the credit agreement that governs our Senior Credit Facility if certain specified conditions are satisfied. The effect of this subordination is that upon a default in payment on, or the acceleration of, any of our secured indebtedness, or in the event of bankruptcy, insolvency, liquidation, dissolution or reorganization of our company or any subsidiary guarantor, the proceeds from the sale of assets securing our secured indebtedness will be available to pay obligations on the Notes only after all indebtedness under our Senior Credit Facility and such other secured debt has been paid in full. As a result, the holders of the Notes may receive less ratably than the holders of secured debt in the event of our or any of our subsidiary guarantors’ bankruptcy, insolvency, liquidation, dissolution or reorganization.
 
The Notes are structurally subordinated to all obligations of subsidiaries that do not become guarantors of the Notes.

The Notes are guaranteed by Truven Holding and by each of our subsidiaries that guarantee our Senior Credit Facility or that, in the future, guarantee our other indebtedness or indebtedness of any subsidiary guarantor. Except for such subsidiary guarantors of the Notes, our subsidiaries, including our foreign subsidiaries (none of which is a guarantor of the Notes or under the Senior Credit Facility), will have no obligation, contingent or otherwise, to pay amounts due under the Notes or to make any funds available to pay those amounts, whether by dividend, distribution, loan or other payment. The Notes and guarantees are structurally subordinated to all indebtedness and other obligations of any non-guarantor subsidiary such that in the event of insolvency, liquidation, reorganization, dissolution or other winding up of any such subsidiary that is not a guarantor, all of that subsidiary's creditors (including trade creditors) would be entitled to payment in full out of that subsidiary's assets before we would be entitled to any payment.
In addition, the indenture that governs the Notes, subject to some limitations, permits any non-guarantor subsidiaries to incur additional indebtedness and did not contain any limitation on the amount of other liabilities, such as trade payables, that may be incurred by such subsidiaries.
As of the date of this Annual Report, we have foreign subsidiaries that do not guarantee our obligations under our Senior Credit Facility or the Notes. Moreover, in the future, we may choose to acquire or form one or more subsidiaries in connection with the operation of our business that will be a restricted subsidiary. If any such future direct or indirect subsidiary is not a borrower under our Senior Credit Facility and does not guarantee obligations under our Senior Credit

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Facility or guarantee our other indebtedness or indebtedness of any future subsidiary guarantors, it will be a non- guarantor subsidiary.
In addition, any subsidiary guarantors will be automatically released from their guarantees upon the occurrence of certain events, including the following:
the designation of any subsidiary guarantor as an unrestricted subsidiary;
the release or discharge of any guarantee or indebtedness that resulted in the creation of the guarantee of the Notes by such subsidiary guarantor; or
the sale or other disposition, including the sale of substantially all the assets, of that subsidiary guarantor.
If any guarantee is released, no holder of the Notes will have a claim as a creditor against that subsidiary guarantor, and the indebtedness and other liabilities, including trade payables and preferred stock, if any, whether secured or unsecured, of that subsidiary guarantor will be effectively senior to the claim of any holders of the Notes.
We may not be able to repurchase the Notes upon a change of control.
Upon the occurrence of certain kinds of change of control events, we will be required to offer to repurchase all outstanding Notes at 101% of their principal amount, together with accrued and unpaid interest to the purchase date. Additionally, under our Senior Credit Facility, a change of control (as defined in the credit agreement governing our Senior Credit Facility) constitutes an event of default that permits the lenders to accelerate the maturity of borrowings under our credit agreement and the commitments to lend would terminate, and any of our future debt agreements may contain similar provisions. The source of funds for any purchase of the Notes and repayment of borrowings under our Senior Credit Facility would be our available cash or cash generated from our subsidiaries’ operations or other sources, including borrowings, sales of assets or sales of equity. We may not be able to repurchase the Notes upon a change of control because we may not have sufficient financial resources to purchase all of the debt securities that are tendered upon a change of control and repay our other indebtedness that will become due. If we fail to repurchase the Notes in that circumstance, we will be in default under the indenture that governs the Notes. We may require additional financing from third parties to fund any such purchases, and we may be unable to obtain financing on satisfactory terms or at all. Further, our ability to repurchase the Notes may be limited by law. In order to avoid the obligations to repurchase the Notes and events of default and potential breaches of our credit agreement that governs our Senior Credit Facility, we may have to avoid certain change of control transactions that would otherwise be beneficial to us.
In addition, certain important corporate events, such as leveraged recapitalizations, may not, under the indenture that governs the Notes, constitute a “change of control” that would require us to repurchase the Notes, even though those corporate events could increase the level of our indebtedness or otherwise adversely affect our capital structure, credit ratings or the value of the Notes.
The exercise by the holders of Notes of their right to require us to repurchase the Notes pursuant to a change of control offer could cause a default under the agreements governing our other indebtedness, including future agreements, even if the change of control itself does not, due to the financial effect of such repurchases on us. In the event a change of control offer is required to be made at a time when we are prohibited from purchasing Notes, we could attempt to refinance the borrowings that contain such prohibitions. If we do not obtain a consent or repay those borrowings, we will remain prohibited from purchasing Notes. In that case, our failure to purchase tendered Notes would constitute an event of default under the indenture that governs the Notes, which could, in turn, constitute a default under our other indebtedness. Finally, our ability to pay cash to the holders of Notes upon a repurchase may be limited by our then existing financial resources.
Holders of the Notes may not be able to determine when a change of control giving rise to their right to have the Notes repurchased has occurred following a sale of “substantially all” of our assets.
One of the circumstances under which a change of control may occur is upon the sale or disposition of “all or substantially all” of our assets. There is no precise established definition of the phrase “substantially all” under applicable law and the interpretation of that phrase will likely depend upon particular facts and circumstances. Accordingly, the ability of a holder of Notes to require us to repurchase its Notes as a result of a sale of less than all our assets to another person may be uncertain.

26



Federal and state fraudulent transfer laws may permit a court to void the Notes and/or the guarantees thereof, and if that occurs, you may not receive any payments on the Notes.
Federal and state fraudulent transfer and conveyance statutes may apply to the issuance of the Notes and the incurrence of the guarantees of the Notes. Under federal bankruptcy law and comparable provisions of state fraudulent transfer or conveyance laws, which may vary from state to state, the Notes or the guarantees thereof could be voided as a fraudulent transfer or conveyance if we or any of the guarantors, as applicable, (a) issued the Notes or incurred the guarantees with the intent of hindering, delaying or defrauding creditors or (b) received less than reasonably equivalent value or fair consideration in return for either issuing the Notes or incurring the guarantees and, in the case of (b) only, one of the following is also true at the time thereof:
we or any of the guarantors, as applicable, were insolvent or rendered insolvent by reason of the issuance of the Notes or the incurrence of the guarantees;
the issuance of the Notes or the incurrence of the guarantees left us or any of the guarantors, as applicable, with an unreasonably small amount of capital or assets to carry on the business;
we or any of the guarantors intended to, or believed that we or such guarantor would, incur debts beyond our or such guarantor’s ability to pay as they mature; or
 
we or any of the guarantors were a defendant in an action for money damages, or had a judgment for money damages docketed against us or the guarantor if, in either case, the judgment is unsatisfied after final judgment.
As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or a valid antecedent debt is secured or satisfied. A court would likely find that a guarantor did not receive reasonably equivalent value or fair consideration for its guarantee to the extent the guarantor did not obtain a reasonably equivalent benefit directly or indirectly from the issuance of the Notes.
We cannot be certain as to the standards a court would use to determine whether or not we or the guarantors were insolvent at the relevant time or, regardless of the standard that a court uses, whether the Notes or the guarantees would be subordinated to our or any of our guarantors’ other debt. In general, however, a court would deem an entity insolvent if:
the sum of its debts, including contingent and unliquidated liabilities, was greater than the fair saleable value of all of its assets;
the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
it could not pay its debts as they became due.
If a court were to find that the issuance of the Notes or the incurrence of a guarantee was a fraudulent transfer or conveyance, the court could void the payment obligations under the Notes or that guarantee, could subordinate the Notes or that guarantee to presently existing and future indebtedness of ours or of the related guarantor or could require the holders of the Notes to repay any amounts received with respect to that guarantee. In the event of a finding that a fraudulent transfer or conveyance occurred, you may not receive any repayment on the Notes. Sufficient funds to repay the Notes may not be available from other sources, including remaining guarantors, if any. Further, the avoidance of the Notes could result in an event of default with respect to our and the guarantors’ other debt that could result in acceleration of that debt.
Finally, as a court of equity, the bankruptcy court may subordinate the claims in respect of the Notes to other claims against us under the principle of equitable subordination if the court determines that (1) the holder of Notes engaged in some type of inequitable conduct, (2) the inequitable conduct resulted in injury to our other creditors or conferred an unfair advantage upon the holders of Notes and (3) equitable subordination is not inconsistent with the provisions of the bankruptcy code.

27



A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital.
Our debt has a non-investment grade rating, and any rating assigned could be lowered or withdrawn entirely by a rating agency if in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes in our business, so warrant. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the Notes. Credit ratings are not recommendations to purchase, hold or sell the Notes. Additionally, credit ratings may not reflect the potential effect of risks relating to the structure or marketing of the Notes. Any downgrade by either Moody’s or Standard & Poor’s could increase the interest rate on our Senior Credit Facility or decrease earnings and would likely make it more difficult or more expensive for us to obtain additional debt financing. If any credit rating initially assigned to the Notes is subsequently lowered or withdrawn for any reason, you may not be able to resell your Notes at a favorable price or at all.
 
Many of the covenants in the indenture that governs the Notes will not apply during any period in which the Notes are rated investment grade by both Moody’s and Standard & Poor’s.
Many of the covenants in the indenture that governs the Notes will not apply to us during any period in which the Notes are rated investment grade by both Moody’s and Standard & Poor’s, provided at such time no default or event of default has occurred and is continuing. These covenants will restrict, among other things, our ability to pay distributions, incur indebtedness and enter into certain other transactions. There can be no assurance that the Notes will ever be rated investment grade or, if they are rated investment grade, that the Notes will maintain these ratings. However, suspension of these covenants would allow us to engage in certain transactions that would not be permitted while these covenants were in force. To the extent the covenants are subsequently reinstated, any such actions taken while the covenants were suspended would not result in an event of default under the indenture that governs the Notes.

ITEM 1B - UNRESOLVED STAFF COMMENTS

None.

ITEM 2 - PROPERTIES

We do not own any real estate property as we lease all of our existing facilities. Our registered principal office is located in a leased office space in Ann Arbor, Michigan. Our operating facilities accommodate product development, marketing and sales, information technology, administration, training, graphic services and operations personnel. As of December 31, 2014, our three main facilities are as follows:
 
Facility Address
Square
Feet
 
Purpose
Lease Start Date
Lease
Expiration Date
777 East Eisenhower Parkway, Ann Arbor, MI 48108
172,004

Corporate headquarters/Operating facilities
6/1/2012
2/28/2017
1 North Dearborn Street, Suite 1400, Chicago, IL 60602
40,695

Operating facilities
6/1/2012
11/1/2020
6200 S. Syracuse Way, #300, Greenwood Village, CO 80111
102,631

Operating facilities
8/31/2013
7/31/2021
 
ITEM 3 - LEGAL PROCEEDINGS
From time to time, we become involved in legal proceedings arising in the ordinary course of our business. The following matters are the significant pending legal proceedings against us.

28



We have been named as a defendant in approximately 200 separate pharmaceutical tort lawsuits relating to the use of Reglan or its generic version, the first of which was filed by June 2010 and the most recent of which was filed in March 2012. All of these actions are pending in the Court of Common Pleas in Philadelphia County, Pennsylvania. In these matters, the plaintiffs complain that they sustained various injuries (including neurological disorders) as a result of their ingestion of Reglan. While a host of drug manufacturers and pharmacies are named as defendants in each of the suits, claims have also been asserted against so-called "Patient Education Monograph" ("PEM") defendants, including us. It is generally alleged in all of the actions that certain PEM defendants provided Reglan "patient drug information" to pharmacies which, in turn, provided that drug information to the pharmacies' customers, the plaintiffs in these actions. Plaintiffs further allege that the PEM defendants' patient drug information did not provide adequate warning information about the use of Reglan. Other PEM defendants have also been named in these and other similar actions. In general, the lawsuits have been procedurally consolidated in Philadelphia as mass tort actions. To date none of the actions against us specifically identifies us as the author of a PEM that was supplied to a plaintiff. Instead, plaintiffs in these cases allege only that they read an unnamed PEM and, in effect, that it must have been published by at least one of the PEM defendants named in the action.
Along with other PEM defendants, we made one dispositive motion to dismiss all the actions. While that motion to dismiss has been denied, it was without prejudice, permitting us to renew at a later stage in the litigation.
Pending the resolution of appeals by the co-defendant generic drug company defendants, the resolution of which will not affect the continuation of the actions against us, there has been no active discovery involving Truven. At this time, we believe that we have meritorious defenses to the claims in each of these actions.
On December 15, 2011, Midwest Health Initiative, a client of our research business, requested arbitration of a dispute relating to our performance under a client services agreement. The arbitration proceedings were initiated in St. Louis and were settled by both parties during the fourth quarter of 2013. The settlement amount was immaterial.
Pacific Alliance Medical Center ("PAMC") claimed in 2007 that we failed to properly submit some of PAMC's data, resulting in denial of Medicare reimbursement to PAMC in the approximate amount of $600,000. PAMC was denied relief by administrative agencies and appealed to the U.S. District Court in the Central District of California for judicial review, which was denied. PAMC later appealed to and was denied relief by the United States Court of Appeals for the Ninth Circuit. The parties have entered into a tolling agreement. If a claim is filed against us, we expect to defend it.
We filed U.S. trademark applications for the trademarks Truven Health Analytics and Truven Health Unify.  In May, 2013 and March, 2014, respectively, Truveris, Inc. (“Truveris”) filed notices of opposition against these applications in the Trademark Trial and Appeal Board of the United States Patent and Trademark Office alleging that the Truven Health Analytics and Truven Health Unify applications create a likelihood of confusion with Truveris’s alleged common law trademark Truveris as well as its registered trademarks Trubid, Truguard, Trubuy, Trureport and Trurxpay.  Truveris has also alleged that Truven’s use of the Truven alleged mark is likely to cause confusion with Truveris’s alleged trademark.  We plan to vigorously defend these claims.

We are involved in various other litigation and administrative proceedings that arise in the ordinary course of business. While it is not possible to predict the outcome of any of these proceedings, the Company's management, in conjunction with its legal advisors, based on its assessment of the facts and circumstances now known, does not believe that any of these proceedings, individually or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations and cash flows.


ITEM 4 - MINE SAFETY DISCLOSURE

Not applicable.

29




PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

There is no established public trading market for the registrants' common stock. Truven Health Analytics Inc. is 100% owned by Truven Holding Corp, which is also 100% owned by VCPH Holding LLC.
The registrant has not paid any cash dividends in the past. We anticipate that any earnings will be retained for development of our business and we do not anticipate paying any cash dividends in the foreseeable future. Our credit facility, senior subordinated notes and senior secured notes all restrict our ability to issue cash dividends. Any future dividends declared would be at the discretion of our board of directors and would depend on our financial condition, results of operations, contractual obligations, the terms of our financing agreements at the time a dividend is considered, and other relevant factors.

ITEM 6 - SELECTED FINANCIAL DATA

The following table sets forth our selected historical financial and other data for the periods and at the dates indicated:
The term Predecessor Period refers to all periods related to the Thomson Reuters Healthcare business (the Predecessor) prior to and including the date of the closing of the Prior Acquisition on June 6, 2012. We have derived the statement of comprehensive income (loss) and cash flow data for the period from January 1 to June 6, 2012, years ended December 31, 2011 and 2010 from our Predecessor’s audited combined financial statements.
The term Successor Period refers to all periods from inception of Truven Holding (April 20, 2012 onwards), which includes all periods of Truven after the closing of the Prior Acquisition on June 6, 2012. Following the Prior Acquisition and the related Merger, Truven (formerly TRHI) owns certain other assets and liabilities of the Thomson Reuters Healthcare business and is a direct wholly-owned subsidiary Truven Holding (the Successor). We have derived the balance sheet data as of December 31, 2014 , 2013 and 2012, and the statement of comprehensive loss and cash flow data for the years ended December 31, 2014, 2013, and April 20, 2012 to December 31, 2012 from Successor’s audited consolidated financial statements included elsewhere in this Annual Report, which represent the consolidated financial position of Truven Holding and its subsidiaries.
The selected historical financial and other data included below and elsewhere in this Annual Report are not necessarily indicative of future results. The selected financial data presented below has been derived from financial statements that have been prepared in accordance with GAAP and should be read with the information included under the headings “Risk Factors”, “Management’s discussion and analysis of financial condition and results of operations” and with our audited consolidated financial statements and the related notes thereto, included elsewhere in this Annual Report.

30



 
Year ended December 31,
Year ended December 31,
 
 
From inception (April 20, 2012) to December 31,
January 1, 2012 to June 6,
Year ended December 31,
Year ended December 31,
 
2014
2013
 
 
2012
2012
2011
2010
 
Successor
 
 
Predecessor
 
 
 
 
 
 
 
 
 
 
Revenues, net (a)
$
544,475

$
492,702

 
 
$
241,786

$
208,998

$
483,207

$
450,008

Operating costs and expenses
Cost of revenues, excluding depreciation and amortization (b)
(292,999
)
(265,541
)
 
 
(141,558
)
(112,050
)
(245,609
)
(233,430
)
Selling and marketing, excluding depreciation and amortization (c)
(57,413
)
(56,157
)
 
 
(30,958
)
(25,917
)
(54,814
)
(55,975
)
General and administrative, excluding depreciation and amortization (d)
(55,937
)
(41,042
)
 
 
(13,042
)
(27,173
)
(44,867
)
(32,634
)
Allocation of costs from Predecessor Parent and affiliates (e)


 
 

(10,003
)
(34,496
)
(33,358
)
Depreciation (f)
(22,350
)
(21,219
)
 
 
(6,700
)
(6,805
)
(14,851
)
(13,418
)
Amortization of developed technology and content (g)
(38,752
)
(31,894
)
 
 
(15,470
)
(12,460
)
(24,208
)
(23,660
)
Amortization of other identifiable intangible assets (h)
(45,402
)
(34,460
)
 
 
(19,527
)
(8,226
)
(19,691
)
(20,112
)
Goodwill impairment (i)

(366,662
)
 
 




Other operating expenses (j)
(20,784
)
(35,038
)
 
 
(49,622
)
(18,803
)
(20,002
)
(1,995
)
Total operating costs and expenses
(533,637
)
(852,013
)
 
 
(276,877
)
(221,437
)
(458,538
)
(414,582
)
Operating income (loss)
10,838

(359,311
)
 
 
(35,091
)
(12,439
)
24,669

35,426

  Net interest income from Predecessor Parent (k)


 
 


134

156

Interest expense (l)
(69,616
)
(70,581
)
 
 
(49,014
)

(63
)

  Interest income


 
 

3


60

Other finance costs
(930
)
(24
)
 
 




Income (Loss) before income taxes
(59,708
)
(429,916
)
 
 
(84,105
)
(12,436
)
24,740

35,642

Benefit from (Provision for) income taxes
22,686

84,927

 
 
29,993

4,803

(9,859
)
(13,989
)
Net income (loss)
$
(37,022
)
$
(344,989
)
 
 
$
(54,112
)
$
(7,633
)
$
14,881

$
21,653

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
(139
)
(165
)
 
 




Total comprehensive income (loss)
$
(37,161
)
$
(345,154
)
 
 
$
(54,112
)
$
(7,633
)
$
14,881

$
21,653

 
 
 
 
 
 
 
 
 
Cash flow data:
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
45,217

$
(1,365
)
 
 
$
27,352

$
17,806

$
85,017

$
97,684

Net cash used in investing activities (m)
(142,067
)
(43,785
)
 
 
(1,280,672
)
(10,285
)
(40,521
)
(43,925
)
Net cash provided by (used in) financing activities
99,338

31,765

 
 
1,277,125

(7,513
)
(44,659
)
(55,227
)
 
 
 
 
 
 
 
 
 
Balance sheet data:
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
12,604

$
10,255

 
 
$
23,805

n.a.
$
70

$
233

Working capital deficit (n)
(45,892
)
(59,762
)
 
 
(80,628
)
n.a.
(75,481
)
(75,444
)
Total assets
1,233,089

1,164,603

 
 
1,597,127

n.a.
590,875

800,611

Long-term debt, net of original issue discount (o)
977,722

872,258

 
 
837,972

n.a.


Total equity
47,123

79,283

 
 
419,252

n.a.
354,299

568,089






31






a.
Includes (i) subscription revenues from sales of products and services that are delivered under a contract over a period of time, which are recognized on a straight line basis over the term of the subscription, (ii) revenues from implementation and hosting arrangement that comprised: (1) the design, production, testing and installation of the customer's database (implementation phase); and (2) the provision of ongoing data management and support services in conjunction with the licensed data and subscription of software data or application (on-going service phase, hosting or subscription).

b.
Includes all personnel and other costs of revenue, including but not limited to, client support, client operations, product management, royalties, allocation of technology support costs administered by our Predecessor relating to market data and professional service costs.

c.
Includes all personnel and other costs related to sales and marketing, including but not limited to, sales and marketing staff, commissions and marketing events.

d.
Includes all personnel and other costs related to general administration as well as costs shared across the organization, including but not limited to technology, finance and strategy.

e.
As described in Note 18 to the financial statements, included elsewhere in this Annual Report, our Predecessor historically engaged in related party transactions with Thomson Reuters relative to certain support services, including among others, finance, accounting, treasury, tax, transaction processing, information technology, legal, human resources, payroll, insurance and real estate management.

f.
Includes depreciation of computer hardware, furniture, fixture and equipments, and leasehold improvements.

g.
Includes amortization of developed technology and contents used internally and capitalized once a project has progressed beyond a conceptual, preliminary stage to that of application development stage. Costs that qualify for capitalization include both internal and external costs, but are limited to those that are directly related to a specific project.

h.
Includes amortization of definite-lived trade names, acquired customer relationships, backlog and noncompete agreements.

i.
On November 1, 2013, we performed our annual goodwill impairment test and determined that the carrying value of all our reporting units exceeded our fair value due to lower-than-expected growth in revenue and cash flow in fiscal year 2013 resulting from certain selling cycle delays, particularly in the government sector, uncertainty in the healthcare sector related to the Patient Protection and Affordable Care Act, higher-than-expected costs due to significant investments in technology infrastructure, as well as an increase in the discount rate used in the discounted cash flow analysis as compared to the rate used in the prior year’s analysis. As a result, we recorded an aggregate non-cash goodwill impairment charge of $366.7 million in the fourth quarter of 2013.

j.
Other operating expenses in the Predecessor period includes related disposal costs incurred as part of the Prior Acquisition process (comprised of audit services, accounting and consulting services and legal fees), severance and retention bonuses relating to the Prior Acquisition, and costs relating to other acquisition activities of our Predecessor. Other operating expenses in 2012 and 2013 (Successor periods) includes direct costs related to the Prior Acquisition in 2012 as well as costs incurred related to technology and other costs in connection with our transition to a standalone business. These costs include nonrecurring expenses associated with data center migration and separating infrastructure from Thomson Reuters, costs related to the transitional service agreement with Thomson Reuters and related to rebranding, consulting, professional fees and Sponsor fees. Other operating expenses in 2014 includes professional fees related to the acquisition of Simpler, HBE and JWA in 2014, certain costs related to business improvement processes, and certain costs associated with data migration, asset write‑offs, losses on discontinued projects and Sponsor fees. Refer to Note 14 to the consolidated financial statements, included elsewhere in this Annual Report.

k.
Prior to the Prior Acquisition, certain of our Predecessor’s cash management transactions with Thomson Reuters were subject to written loan agreements specifying repayment terms and interest payments, under which Thomson Reuters was required to pay interest to our Predecessor equal to the average monthly rate earned by Thomson Reuters

32



on its cash investments held with its primary U.S. banker. Interest on these notes is reflected in ‘‘Interest income from Predecessor Parent’’ in our Predecessor’s combined statement of operations. These loan agreements were satisfied upon completion of the Prior Acquisition.

l.
Interest earned or incurred related to third-party transactions.

m.
Includes purchase price of Prior Acquisition in 2012 and acquisition of Simpler, HBE and JWA in 2014. Capital expenditures includes purchases of hardware, software and costs of developed technology and contents.

n.
Working capital is defined as current assets excluding cash and cash equivalents and deferred tax assets minus current liabilities excluding debt, capital lease obligations and tax related liabilities.

o.
Total debt includes current and non-current portion, net of original issue discount of $14.3 million, $15.9 million and $14.2 million as of December 31, 2014, December 31, 2013 and December 31, 2012, respectively.



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations covers periods prior to and including the closing of the Prior Acquisition on June 6, 2012 (the Predecessor Period) and periods from the inception of Truven Holding (April 20, 2012) through December 31, 2014, which was after the closing of the Prior Acquisition (the Successor Period). The following discussion and analysis should be read in conjunction with our consolidated financial statements, and the related notes thereto included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that are based on management's current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of various factors.
  

Overview
We are a leading analytics company focused on improving quality and decreasing costs across the healthcare industry. Through the better use of analytics and data, we enable our clients to reduce costs, manage risk, improve operational performance, enhance patient outcomes and increase transparency. We combine our analytic expertise, information assets and technology services to offer our clients data insights and analytical solutions. Furthermore, we increase the value of our analytical solutions with performance improvement and analytic consulting expertise.
The Prior Acquisition
On April 23, 2012, VCPH Holding Corp. (now known as Truven Holding), an affiliate of Veritas, entered into the Stock and Asset Purchase Agreement with TRUSI and Thomson Reuters Global Resources, both affiliates of the Thomson Reuters, which VCPH Holding Corp. assigned to Wolverine on May 24, 2012. Pursuant to the Stock and Asset Purchase Agreement, on June 6, 2012, Wolverine acquired 100% of the equity interests of TRHI and certain other assets and liabilities of the Thomson Reuters Healthcare business. Upon the closing of the Prior Acquisition, Wolverine merged with and into TRHI, with TRHI surviving the Merger as a direct wholly‑owned subsidiary of VCPH Holding Corp. (now known as Truven Holding), and subsequently changed its name to Truven Health Analytics Inc. Following the Merger, the assets and liabilities acquired are now held by Truven (formerly TRHI), which remains a direct wholly‑owned subsidiary of Truven Holding. Truven Holding was formed on April 20, 2012 for the purpose of consummating the Prior Acquisition. We financed the Prior Acquisition and paid related costs and expenses associated with the Prior Acquisition and the financing as follows: (i) approximately $464.4 million in common equity was contributed by entities affiliated with the Sponsor and certain co‑investors; (ii) $527.6 million principal amount was borrowed under the Term Loan Facility; and (iii) $327.1 million principal amount of Old Notes were issued.

33



In connection with the offering of the existing notes and the Prior Acquisition, VCPH Holding Corp. (now known as Truven Holding) and Wolverine entered into the Senior Credit Facility, which consisted of (i) the $527.6 million Term Loan Facility and (ii) the $50.0 million Revolving Credit Facility. In connection with the Merger, Truven succeeded to the obligations of Wolverine under (i) the credit agreement that governs our Senior Credit Facility and (ii) the indenture that governs the Old Notes.
In accordance with the acquisition method of accounting, following the Prior Acquisition on June 6, 2012, we, with the assistance of a third‑party valuation firm, estimated the fair values of acquired assets and assumed liabilities based on the actual tangible and identifiable intangible assets and liabilities that existed as of June 6, 2012. These fair values were finalized and are reflected in our balance sheet on the date of the Prior Acquisition. In this process, we applied certain assumptions as inputs to the valuation calculations. These assumptions represent our best estimates based on historic performance of the respective reporting segments, trends within the market place and our consideration of the potential impact of political, economic and social factors that are considered beyond our control. Significant assumptions included within our discounted cash flow valuation include revenue growth rates, operating profit margins, implied rate of return used and terminal growth rates. The impact of this acquisition accounting results in certain differences between Predecessor and Successor financial statements discussed herein, and thereby affects comparability between such statements.
Predecessor and successor periods
Successor Period. The consolidated financial statements for the year ended December 31, 2014 and 2013, and for the periods from April 20, 2012 (inception) through December 31, 2012 include the accounts of Truven Holding from inception and its subsidiaries subsequent to the closing of the Prior Acquisition on June 6, 2012. The consolidated financial statements of the Successor reflect the Prior Acquisition under the acquisition method of accounting, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations.
Predecessor Period. The accompanying combined financial statements of the Thomson Reuters Healthcare business prior to the Prior Acquisition, include the combined financial statements of TRHI and certain assets owned by subsidiaries of Thomson Reuters.
The combined financial statements of our Predecessor and the consolidated financial statements of the Successor included in this report have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). The combined financial statements of our Predecessor have been derived from the accounting records of Thomson Reuters using historical results of operations and the historical bases of assets and liabilities, adjusted as necessary to conform to GAAP. All significant transactions between our Predecessor and other Thomson Reuters entities are included in our Predecessor’s combined financial statements. Management believes the assumptions underlying our Predecessor’s combined financial statements are reasonable. However, the combined financial statements may not necessarily reflect what our Predecessor’s results of operations, financial position and cash flows would have been had it operated as a standalone company without the shared resources of Thomson Reuters for the periods presented.



34



Our segments
The determination of reportable segments was based on the discrete financial information provided to the Chief Operating Decision Maker (the "CODM"). The Chief Executive Officer has the authority for resource allocation and assessment of the Company’s performance and is, therefore, the CODM. The Company’s segment structure enables us to more effectively focus on business and market facing opportunities and to simplify our business decision-making process. The Company's reportable segments are as indicated below:
Commercial
The Commercial segment provides analytic solutions and services to improve the cost, quality, and effectiveness of healthcare for commercial organizations across the healthcare industry including providers, integrated delivery networks, insurers, professional services organizations, healthcare exchanges, manufacturers, and corporations. 
Government
The Government segment provides integrated analytic solutions and services to improve the cost, quality, and effectiveness of healthcare for federal and state Government channels (e.g. Centers for Medicare & Medicaid Services and state Medicaid agencies) and federally owned and operated healthcare facilities. Our sales and client services are tailored to meet the specific procurement, sales and support requirements of the government market.

Center/shared services consist of items that are not directly attributable to reportable segments, such as corporate administrative costs and elimination of intercompany transactions. Additionally, corporate expenses may include other non-recurring or non-operational activity that the CODM excludes in assessing operating segment performance. These expenses, along with depreciation and amortization, other operating income/expense and other non-operating activity such as interest expense/income, are not considered in the measure of the segments’ operating performance, but are shown herein as reconciling items to the Company’s consolidated loss before income taxes.
The accounting policies for the reportable segments are the same as those for the consolidated Company. The Company’s operations and customers are based primarily in the United States.

2014 Acquisitions
Simpler Acquisition
On April 11, 2014, we acquired Simpler. Simpler provides "Lean" enterprise transformation consulting services. This strategic acquisition combines the Company's market-leading cost and quality analytics in the commercial segment with Simpler's performance management consulting capabilities to deliver performance improvement solutions to healthcare and commercial customers. We acquired all of the outstanding equity of Simpler for a purchase price of $81.1 million, including a working capital adjustment of $1.1 million, and the issuance of equity interests by Holdings LLC, the direct parent of the Company, of $3.7 million to Simpler. The related acquisition costs amounted to $3.6 million. We financed the acquisition and related costs and expenses through an increase in the Tranche B Term Loans under the Senior Credit Facility. We did not assume any indebtedness in connection with the Simpler Transaction.
JWA Acquisition
On October 31, 2014, we acquired JWA, a company that provides "Lean" healthcare consulting services. We acquired all of the outstanding equity of JWA for a cash purchase price of $15.3 million, including a $1.2 million working capital adjustment and $0.1 million holdback payment (the "JWA Transaction"). Truven also agreed to pay $1.9 million in three annual payments to a former major shareholder of JWA who became Truven's employee, as long as the former major shareholder remained with Truven for the next three years. The related acquisition costs amounted to $0.5 million. We did not assume any indebtedness in connection with the JWA Transaction. We financed the acquisition and related costs and expenses through the issuance of the Additional Notes.
HBE Acquisition
On November 12, 2014, we acquired HBE, a leading provider of stakeholder information that is essential for life sciences companies to gain drug approval, reimbursement, and adoption, for a cash purchase price of $17.6 million, including negative working capital adjustment of $2.4 million. The related acquisition costs amounted to $1.0 million. We financed the acquisition and related costs and expenses through the issuance of the Additional Notes. We did not assume any indebtedness in connection with the HBE Transaction.
In accordance with the acquisition method of accounting, following the date of each of the foregoing acquisitions, we, with the assistance of a third‑party valuation firm, have estimated the fair values of acquired assets and assumed liabilities based on the

35



actual tangible and identifiable intangible assets and liabilities that existed at the date of the acquisitions. These fair values are preliminary and were reflected on our balance sheet on the date of the acquisitions. In this process, we applied certain assumptions as inputs to the valuation calculations. These assumptions represent our best estimates based on historic performance of the respective reporting segments, trends within the market place and our consideration of the potential impact of political, economic and social factors that are considered beyond our control. Significant assumptions included within our discounted cash flow valuation include revenue growth rates, operating profit margins, implied rate of return used and terminal growth rates. Our results of operations, financial position and cash flows are impacted by the effects of the acquisitions, which were financed primarily through borrowings, including transaction‑related costs, debt commitment fees and recurring interest costs.

Deferred Revenue; Fair Value Adjustments

Our revenues are derived from the sale of subscription data, and analytics solutions and services. Our revenues from the sale of subscription data and analytics solutions are typically billed annually in advance and recognized on a straight‑line basis over the contract term, which is typically one to three years. As a result, cash collections from customers for subscription data and analytic solutions can be greater than the revenue recognized (which only correspond to those revenues associated with services already rendered). In cases of billings in advance or advanced receipt of payments from customers, we record deferred revenue, a liability that is reduced as revenue is recognized. Our revenues from services are invoiced according to the terms of the contract, typically in arrears (after the corresponding services have been rendered), and recognized over the term of the contract. Contracts for services vary in length from a few months to several years. The carrying value of our deferred revenue as of June 6, 2012 totaled $138.7 million. Following the completion of the Prior Acquisition, we determined, with the assistance of a third‑party valuation firm, that the fair value of our deferred revenue should be adjusted to $80.2 million. As a result, deferred revenue on certain contracts of $58.5 million was written off, which negatively impacted our revenue for the year ended December 31, 2014, 2013 and period from April 20, 2012 (inception) to December 31, 2012 by $3.2 million, $8.8 million and $43.5 million, respectively.

Following the acquisitions of Simpler, HBE and JWA during 2014, the carrying values of deferred revenues from acquired companies totaled $11.7 million and with the assistance of a third-party valuation firm, it was determined that the fair value of the deferred revenue should be adjusted to $4.8 million. As a result, deferred revenue on certain contracts of $6.9 million was written off, which negatively impacted our revenue for the period ended December 31, 2014 by $2.9 million.

The write‑offs will have a future aggregate negative impact of $7.0 million in future periods with the majority expected to be reflected over the next 12 months.

Unaudited Pro Forma Financial Information
The following unaudited pro forma combined financial information is based on the audited combined statement of operations of our Predecessor's (for the period from January 1, 2012 to June 6, 2012) and Successor's (for the period April 20, 2012 to December 31, 2012) audited consolidated statement of operations, which represent the combined results of operations of Truven Holding and its subsidiaries for the year ended December 31, 2012, included elsewhere in this Annual Report, and has been prepared to give effect to the Prior Acquisition, assuming that the Prior Acquisition occurred on January 1, 2012. The pro forma adjustments and certain assumptions underlying these adjustments, using the acquisition method of accounting, are described in the accompanying notes and should be read in conjunction with these unaudited pro forma combined financial statements. The pro forma adjustments are based on valuation estimates, available information and assumptions that we believe are reasonable as of the date of preparation. Our unaudited pro forma combined financial information is not necessarily indicative of what our actual results of operations would have been had the Prior Acquisition occurred as of the date or for the periods indicated, nor does it purport to represent our future results of operations.

The pro forma adjustments contained in the unaudited pro forma combined statement of operations for the year ended December 31, 2012 give effect to the Prior Acquisition as if it was consummated on January 1, 2012. The unaudited pro forma combined financial information gives effect to events that are (1) directly attributable to the Prior Acquisition, (2) factually supportable and (3) expected to have a continuing impact on us. The unaudited pro forma combined statement of comprehensive income (loss) for the year ended December 31, 2012, does not include the effects of any future restructuring activities, including severance or other employee related costs that pertain to the combined operations, or other operating efficiencies or inefficiencies, which may result from the Prior Acquisition but are either non-recurring or at this point not factually supportable. Furthermore, the unaudited pro forma combined financial statements do not include certain non-recurring expenses, such as: (i) for accelerated vesting of employee awards; (ii) other employee benefits costs; and (iii) certain transition costs that we expect to incur in the next 12 months as we transition to be a standalone entity.
Management believes that the assumptions used to derive the pro forma statement of operations are reasonable given the information available. The pro forma combined statement of operations has been provided for informational purposes only and

36



is not necessarily indicative of the results of future operations or the actual results that would have been achieved had the Prior Acquisition occurred on the date indicated.

Truven Holding Corp.
Unaudited Pro Forma Statement of Operations
For the year ended December 31, 2012

(Dollars in thousands)
 
From inception (April 20, 2012) to December 31, 2012
 
 
January 1, 2012 to June 6, 2012
 
Acquisition related adjustments
 
 
Pro forma
 
 
 
(Successor)
 
(Predecessor)
 
 
 
 
 
Revenues, net
 
$
241,786

 
 
$
208,998

 
$
(5,553
)
(a)
 
$
445,231

 
Operating costs and expenses
 
 
 
 
 
 
 
 
 

 
Cost of revenues, excluding depreciation and amortization
 
(141,558
)
 
 
(112,050
)
 

 
 
(253,608
)
 
Selling and marketing, excluding depreciation and amortization
 
(30,958
)
 
 
(25,917
)
 

 
 
(56,875
)
 
General and administrative, excluding depreciation and amortization
 
(13,042
)
 
 
(27,173
)
 

 
 
(40,215
)
 
Allocation of costs from Predecessor Parent and affiliates
 

 
 
(10,003
)
 

 
 
(10,003
)
 
Depreciation
 
(6,700
)
 
 
(6,805
)
 
3,392

(b)
 
(10,113
)
 
Amortization of developed technology and content
 
(15,470
)
 
 
(12,460
)
 
2,228

(b)
 
(25,702
)
 
Amortization of other identifiable intangible assets
 
(19,527
)
 
 
(8,226
)
 
(6,118
)
(b)
 
(33,871
)
 
Goodwill impairment
 

 
 

 

 
 

 
Other operating expenses
 
(49,622
)
 
 
(18,803
)
 
55,452

(c)
 
(12,973
)
 
Total operating costs and expenses
 
(276,877
)
 
 
(221,437
)
 
54,954

 
 
(443,360
)
 
Operating income (loss)
 
(35,091
)
 
 
(12,439
)
 
49,401

 
 
1,871

 
Net interest income (expense)
 
(49,014
)
 
 
3

 
(27,770
)
(d)
 
(76,781
)
 
Other finance costs
 

 
 

 
 
 
 

 
Income (Loss) before income taxes
 
(84,105
)
 
 
(12,436
)
 
21,631

 
 
(74,910
)
 
Benefit from income taxes
 
29,993

 
 
4,803

 
(8,436
)
(e)
 
26,360

 
Net loss
 
$
(54,112
)
 
 
$
(7,633
)
 
$
13,195

 
 
$
(48,550
)
 










Segment discussion

37



(Dollars in thousands)
 
From inception (April 20, 2012) to December 31, 2012
 
 
January 1, 2012 to June 6, 2012
 
Acquisition related adjustments (a)
 
Pro forma
 
 
(Successor)
 
 
(Precessor)
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Revenues
 
172,235

 
 
195,470

 
(4,902
)
 
362,803

Segment operating income
 
42,036

 
 
55,206

 
(4,902
)
 
92,340

Government
 
 
 
 
 
 
 
 

Revenues
 
36,763

 
 
46,316

 
(651
)
 
82,428

Segment operating income (loss)
 
(228
)
 
 
10,654

 
(651
)
 
9,775



The following adjustments were made in the preparation of the unaudited pro forma combined statement of operations:
(a) This adjustment reflects the full year impact of adjustment on deferred revenue that negatively impacted our revenue in 2012. As part of the purchase accounting adjustment, our deferred revenues of $138.7 million from various contracts have been adjusted to their fair value of $80.2 million at the date of the Prior Acquisition. As a result, the deferred revenue on certain contracts has been written off by $58.5 million and had a negative impact on our revenue in the current period and will continue to impact our revenue in the next four years. Had the acquisition happened at January 1, 2012, our revenue in 2012 would have been reduced by $49.0 million. The historical results of the Successor Period include a reduction in revenue of $43.5 million as a result of the decline in value of deferred revenue. The pro forma adjustment of $5.5 million reflects the incremental negative impact on revenue had the Prior Acquisition occurred on January 1, 2012.
(b) Reflects the incremental change in depreciation and amortization resulting from new fair values established for computer hardware and other property, developed technology and content, and other identifiable intangible assets with finite lives. As part of the purchase price accounting for the Prior Acquisition, management, including the assistance of a third party valuation specialist, has identified the following assessed fair values and estimated useful lives:
 
(In thousands)
Fair value at acquisition date
Estimated
useful lives
Computer hardware and other property
$
24,573

  
 
3-7 years
Developed technology and content
159,622

  
 
3-10 years
 
$
184,195

  
 
 
Other identifiable intangible assets:
 
  
 
 
Trade names
$
86,200

  
 
15 years
Customers relationships
329,800

  
 
11-12 years
 
$
416,000

  
 
 
To recognize the impact of the Prior Acquisition as if they had been completed as of January 1, 2012, depreciation and amortization expense would differ in the unaudited pro forma combined statement of operations for the year ended December 31, 2012, primarily due to incremental depreciation and amortization that should have been recognized during the Predecessor Period as follows:
 
(In thousands)
Developed technology and content

Other identifiable intangible assets

Computer hardware and other propoerty

Pro forma depreciation and/or amortization (Predecessor Period)
$
10,232

$
14,344

$
3,413

Historical depreciation and/or amortization (Predecessor Period)
12,460

8,226

6,805

Increase (decrease) in depreciation and amortization
$
(2,228
)
$
6,118

$
(3,392
)
 

(c) This adjustment eliminates non-recurring costs directly related to the Prior Acquisition, including certain non-recurring audit services, accounting and consulting services and legal fees related to the Predecessor Parent’s disposal of our Predecessor, and severance and retention bonuses to management employees the Prior Acquisition. The adjustment also

38



includes the portion of the Sponsor's annual fee that would have been incurred had the Prior Acquisition occurred on January 1, 2012. The Sponsor's fee adjustment reflects the full year impact of $2.5 million of the Sponsor's management fee. Approximately $1.5 million is already reflected in the historical results of the Successor Period.
 
(In thousands)
Year ended December 31, 2012
Direct acquisition costs, including nonrecurring audit, accounting and consulting fees
$
38,569

Severance and retention bonuses
17,925

Sponsor’s fee
(1,042
)
Net decrease in expenses
$
55,452

 

(d) This adjustment reflects (1) the interest expense of the Exchange Notes and the variable rate Term Loan Facility, as calculated below, together with commitment fees on the unused portion of the Revolving Credit Facility and (2) the amortization of capitalized debt issuance costs associated with the issued debt as follows:

(In thousands)
Year ended
December 31, 2012
Pro forma interest expense:
 
Term Loan Facility (i)
$
30,338

Exchange Notes (ii)
34,760

Revolving Credit Facility Commitment fees (iii)
250

Amortization of original issue discount (i/iv)
2,143

Amortization of debt issuance costs (i/v)
2,673

Pro forma interest expense
70,164

Historical interest expense
(42,394
)
Adjustment to interest expense
$
27,770

 


(i) The variable interest rate of the Term Loan Facility was assumed at 5.75%, representing the LIBOR floor rate of 1.25% plus an applicable margin of 4.5% in accordance with the amended credit agreement governing our Senior Credit Facility. On October 3, 2012, we entered into a first amendment to the credit agreement governing our Senior Credit Facility, pursuant to which this applicable margin for all loans was reduced by 1%. As of the time of the amendment, the loans with certain lenders were determined to be extinguished under ASC 470-50, Modification or Extinguishment of debt. We incurred lenders' fees of $6.7 million in connection with the amendment. The unaudited pro forma combined statement of operations includes adjustments to reflect the reduction in applicable margin starting on January 1, 2012. In addition, the pro forma amortization of the original issue discount and debt issuance costs have been adjusted to reflect the impact of certain original issue discount and debt issuance costs associated with the debt from certain lenders that were determined to have been extinguished and were written off. The related loss on early extinguishment of debt amounting to $6.7 million and included as part of interest expense is reflected in the Successor historical financial statements and no pro forma adjustment has been included herein.

(ii) The fixed interest rate of 10.625% was used for the Exchange Notes.

(iii) The commitment fee on the Revolving Credit Facility was based on the applicable fee of 0.5% of the unused balance.

(iv) The original issue costs discount on Senior Term loan and Exchange Notes is amortized using the effective interest rate method.
(v) The deferred debt issuance costs are amortized over the term of the related debt.

The underlying one-month LIBOR rate as of December 31, 2012 was 0.21%. Based on a one-year time frame and all other variables remaining constant, a one-eighth of one percent (12.5 basis points) change in the interest rate would have no impact on the interest expense on our Term Loan Facility, as the LIBOR floor of 1.25% applicable to the Term Loan Facility is significantly higher than the prevailing LIBOR rates.


39



(e) This adjustment is for income tax expense provided at an estimated statutory rate of 39% in effect during period for which pro forma income statement are presented. Because the tax rate used for these pro forma financial statements is an estimate, it may vary from the actual effective tax rate in periods subsequent to the Prior Acquisition.


Results of Operations

The following section provides a comparative discussion of our results of operations for the year ended December 31, 2014 and 2013, and a comparative discussion of our results of operations for the year ended December 31, 2013 and periods in 2012 on both an "as reported" and a "pro forma" basis. The reported results are not necessarily representative of our ongoing operations as "Combined" amounts merely combine pre- and post-acquisition periods without reflecting all relevant pro forma adjustments to give effect to the acquisition. Therefore, to facilitate an understanding of our trends and on-going performance, we have presented pro forma results in addition to the reported results. The unaudited pro forma combined statements of operations were prepared in accordance with the requirements of Article 11- Pro forma Financial Information, of Regulation S-X. See "Unaudited Pro Forma Financial Information" under Management's Discussion and Analysis of Financial Condition and Results of Operations.

The results of operations should be read in conjunction with our consolidated and combined financial statements and the related notes thereto, included elsewhere in this Annual Report. Factors that relate primarily to a specific business segment are discussed in more detail within that business segment.


Year ended December 31, 2014 compared to Year ended December 31, 2013
The following table summarizes our consolidated and combined results of operations for the periods indicated:
(Dollars in thousands)
Year ended December 31, 2014
 
% of revenue
 
Year ended December 31, 2013
 
% of revenue
 
Change
 
% change
 
 
 
 
 
 
 
 
 
 
 
 
Revenues, net(a)
$
544,475

 
100
 %
 
$
492,702

 
100
 %
 
$
51,773

 
11
 %
Operating costs and expenses
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues, excluding depreciation and amortization(b)
(292,999
)
 
(54
)%
 
(265,541
)
 
(54
)%
 
(27,458
)
 
10
 %
Selling and marketing, excluding depreciation and amortization(c)
(57,413
)
 
(11
)%
 
(56,157
)
 
(11
)%
 
(1,256
)
 
2
 %
General and administrative, excluding depreciation and amortization(d)
(55,937
)
 
(10
)%
 
(41,042
)
 
(8
)%
 
(14,895
)
 
36
 %
Depreciation (e)
(22,350
)
 
(4
)%
 
(21,219
)
 
(4
)%
 
(1,131
)
 
5
 %
Amortization of developed technology and content (f)
(38,752
)
 
(7
)%
 
(31,894
)
 
(6
)%
 
(6,858
)
 
22
 %
Amortization of other identifiable intangible assets (g)
(45,402
)
 
(8
)%
 
(34,460
)
 
(7
)%
 
(10,942
)
 
32
 %
Goodwill impairment (h)

 
 %
 
(366,662
)
 
(74
)%
 
366,662

 
(100
)%
Other operating expenses (i)
(20,784
)
 
(4
)%
 
(35,038
)
 
(7
)%
 
14,254

 
(41
)%
Total operating costs and expenses
(533,637
)
 
(98
)%
 
(852,013
)
 
(173
)%
 
318,376

 
(37
)%
Operating income (loss)
10,838

 
2
 %
 
(359,311
)
 
(73
)%
 
370,149

 
(103
)%
Net interest expense (j)
(69,616
)
 
(13
)%
 
(70,581
)
 
(14
)%
 
965

 
(1
)%
Other finance costs
(930
)
 
 %
 
(24
)
 
 %
 
(906
)
 
3,775
 %
Income (Loss) before income taxes
(59,708
)
 
(11
)%
 
(429,916
)
 
(87
)%
 
370,208

 
(86
)%
Benefit from (provision for) income taxes
22,686

 
4
 %
 
84,927

 
17
 %
 
(62,241
)
 
(73
)%
Net income (loss)
$
(37,022
)
 
(7
)%
 
$
(344,989
)
 
(70
)%
 
$
307,967

 
(89
)%
(a)
Includes (i) subscription revenues from sales of products and services that are delivered under a contract over a period of time, which are recognized on a straight line basis over the term of the subscription, (ii) revenues from implementation and hosting arrangement that comprised: (1) the design, production, testing and installation of the customer's database (implementation phase); and (2) the provision of ongoing data management and support services in conjunction with the licensed data and subscription of software data or application (on-going service phase, hosting or subscription).

40



(b)
Includes all personnel and other costs attributable to a revenue stream, including but not limited to, client support, client operations, product management, royalties, allocation of technology support costs relating to market data and professional service costs.
(c)
Includes all personnel and other costs related to sales and marketing, including but not limited to, sales and marketing staff, commissions and marketing events.
(d)
Includes all personnel and other costs related to general administration as well as costs shared across the organization, including but not limited to technology, finance and strategy.
(e)
Includes depreciation of computer hardware, furniture, fixture and equipments, and leasehold improvements
(f)
Includes amortization of developed technology and contents used internally and capitalized once a project has progressed beyond a conceptual, preliminary stage to that of application development stage. Costs that qualify for capitalization include both internal and external costs, but are limited to those that are directly related to a specific project.
(g)
Includes amortization of definite‑lived trade names and acquired customer relationship assets.
(h)
On November 1, 2013, we performed our annual goodwill impairment test and determined that the carrying value of all our reporting units exceeded our fair value due to lower‑than‑expected growth in revenue and cash flow in fiscal year 2013 resulting from certain selling cycle delays, particularly in the government sector, uncertainty in the healthcare sector related to the Patient Protection and Affordable Care Act, higher‑than‑expected costs due to significant investments in technology infrastructure, as well as an increase in the discount rate used in the discounted cash flow analysis as compared to the rate used in the prior year’s analysis. As a result, we recorded an aggregate non‑cash goodwill impairment charge of $366.7 million in the fourth quarter of 2013.
(i)
Other operating expenses in 2013 includes direct costs related to the Prior Acquisition in 2012 as well as costs incurred related to technology and other costs in connection with our transition to a standalone business. These costs include nonrecurring expenses associated with data center migration and separating infrastructure from Thomson Reuters, costs related to the transitional service agreement with Thomson Reuters and related to rebranding, consulting, professional fees and Sponsor fees. Other operating expenses in 2014 includes professional fees related to the acquisitions of Simpler, HBE and JWA , certain costs related to business improvement processes, and certain costs associated with data migration, asset write‑offs, losses on discontinued projects and Sponsor fees. Refer to Note 14 to the consolidated financial statements, included elsewhere in this Annual Report.
(j)
Interest earned or paid related to third party transactions.

Discussion of Year ended December 31, 2014 compared to Year ended December 31, 2013
Revenues, net
Our net revenues were $544.5 million  for the year ended December 31, 2014 as compared to $492.7 million for the year ended December 31, 2013, an increase of $51.8 million or 11%. The increase was primarily due to the $51.6 million increase in revenue from our Commercial segment and $0.5 million increase in revenue from our Government segment. The increase in revenue from our Commercial segment was primarily due to revenues from our acquired businesses in 2014 of $38.3 million, $8.7 million increase in revenue due to new sales from customers and incremental fees from our employer and healthplan, life sciences and provider solutions services and $4.6 million decrease in deferred revenue adjustment in connection with the Prior Acquisition. The slight increase in Government was due to the increase in work in federal government projects despite lower implementation project revenue from state government projects due to timing.
The total impact of deferred revenue adjustment for both our Commercial and Government segments in connection with Prior Acquisition and acquisitions during the 2014 amounted to $4.5 million in 2014 compared to $8.8 million in 2013.
For a more detailed explanation of the variations in revenue for each of our segments, see the individual segment discussions below.

41



Cost of revenues, excluding depreciation and amortization
Our cost of revenues, excluding depreciation and amortization, was $293.0 million for the year ended December 31, 2014 as compared to $265.5 million for the year ended December 31, 2013, an increase of $27.5 million, or 10%. The increase was mainly due to cost of revenues from the operations of our acquired businesses in 2014 of $18.9 million. We also had an increase of $6.1 million in employee cost related to increase in headcount and reduction of certain benefits in 2013 and remaining increase is due to the higher maintenance costs of developed technology and content upon completion of our transition to a standalone business and higher costs in our Government segment due to initiatives to improve revenue in the federal and state agencies.
Selling and marketing expense, excluding depreciation and amortization
Our selling and marketing expense, excluding depreciation and amortization, was $57.4 million for the year ended December 31, 2014 as compared to $56.2 million for the year ended December 31, 2013, an increase of $1.3 million, or 2%, which are mainly due to selling and marketing expenses attributable to our acquired businesses in 2014.
General and administrative expense, excluding depreciation and amortization
Our general and administrative expense, excluding depreciation and amortization, was $55.9 million for the year ended December 31, 2014 as compared to $41.0 million for the year ended December 31, 2013, an increase of $14.9 million, or 36%. The increase was primarily due to $12.0 million of additional general and and administrative expenses attributable to our acquired businesses in 2014. The remaining increase relates to incremental salaries and wages expense and consulting fees increased to build the accounting, internal audit, procurement, and human resource departments, as well as from the additional hiring of senior executive management in operations.
Depreciation and amortization
Our depreciation and amortization expense was $106.5 million for the year ended December 31, 2014 as compared to $87.6 million for the year ended December 31, 2013, an increase of $18.9 million or 22%. This increase was primarily due to the overall impact of new computer hardware and other property, and developed technology and content related to the new data center and new information system infrastructure that were placed in service in late 2013 and the $10.9 million incremental amortization of intangible assets from the acquired businesses in 2014.
Other operating expenses
Our other operating expense was $20.8 million for the year ended December 31, 2014 as compared to $35.0 million for the year ended December 31, 2013, a decrease of $14.3 million or 41%. This decrease was primarily due to higher acquisition related expenses incurred in 2013. In 2014, other operating expenses include $10.7 million of Acquisition related costs and nonrecurring expenses, consisting of professional fees directly related to the acquisitions of Simpler, HBE and JWA, business integration and improvement processes, loss on discontinued projects, and costs associated with data migration, $2.5 million of severance, $4.7 million of asset write offs and $2.9 million of Sponsor advisory fees. In 2013, other operating expenses included $27.0 million of acquisition related costs, consisting of expenses incurred mainly related to data migration and the separation of our IT infrastructure from our Predecessor Parent and costs related to the Transitional Services Agreement with Thomson Reuters, $3.8 million of severance and retention bonuses, $1.3 million of asset write-offs and $2.9 million of Sponsor advisory fees.
Goodwill impairment
The Company performed its annual goodwill impairment test during the fourth quarter of 2013 and concluded that the Company's goodwill on each of its three reporting units is impaired because the carrying value of all the reporting units exceeded its fair values due to lower-than-expected growth in revenue and cash flow in fiscal year 2013 resulting from certain selling cycle delays, particularly in the Government sector, uncertainty in the healthcare sector related to the PPACA, higher-than-expected costs due to significant investments in technology infrastructure, as well as an increase in the discount rate used in the discounted cash flow analysis as compared to the rate used in the prior year’s analysis.

42



Accordingly, the Company recorded a total of $366.7 million of non-cash goodwill impairment charge in the fourth quarter of 2013.

Operating income (loss)
Our operating income was $10.8 million for the year ended December 31, 2014 as compared to an operating loss of $359.3 million for the year ended December 31, 2013, an increase of $370.1 million or 103%, from 2013. The increase was primarily due to the goodwill impairment in 2013. As discussed above, revenue increased by $51.8 million while total operating expenses decreased by $318.4 million.
Net interest expense
Our net interest expense was $69.6 million for the year ended December 31, 2014, as compared to $70.6 million for the year ended December 31, 2013, an increase of $1.0 million, or 1%. The slight decrease was mainly due to a $3.3 million loss on early extinguishment of debt as a result of refinancing the Term Loan Facility in April 2013 that effectively reduced the interest rate on the Term Loan Facility by 1.25%, offset by an increase in interest expense due to the increase of $100 million in the term loan partly to finance the acquisition of Simpler in April 2014 and an increase of $40 million in Additional Notes to finance the acquisitions of HBE and JWA.

Other finance costs

Other finance costs mainly represents foreign exchange gains/losses from our international operations. Also included in other finance costs are bank charges and fees.

Benefit from income taxes

Our income tax benefit was $22.7 million for the year ended December 31, 2014 as compared to a benefit of $84.9 million for the year ended December 31, 2013, a decrease of $62.2 million or 73%. Income tax benefit for the year ended December 31, 2014 at an effective tax rate of 38.0% is different from the amount derived by applying the federal statutory tax rate of 35%, mainly due to the impact of certain state taxes and tax credits partially offset by non deductible expenses and a valuation allowance recorded against the Company's net deferred tax asset as it is not more likely than not that the net deferred tax asset will be realized. Income tax benefit for the year ended December 31, 2013, at an effective tax rate of 19.7% respectively, is different from the amount derived by applying the federal statutory tax rate of 35%, mainly due to the impact of certain state taxes, non deductible goodwill impairment charge and foreign rate differential.

Segment discussion
The following table summarizes our segment information for the year ended December 31, 2014 and 2013:

(Dollars in thousands)
Year ended December 31, 2014
 
% of revenue
Year ended December 31, 2013
 
% of revenue
 
Change
 
% change
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
Revenues
$
446,500

 
100
%
$
394,896

 
100
%
 
$
51,604

 
13
 %
Segment operating income
156,900

 
35
%
140,173

 
35
%
 
16,727

 
12
 %
Government
 
 
 
 
 
 
 
 
 

Revenues
98,282

 
100
%
97,806

 
100
%
 
476

 
 %
Segment operating income (loss)
$
7,043

 
7
%
$
11,053

 
11
%
 
$
(4,010
)
 
(36
)%


43



Commercial segment

Revenues

Our Commercial segment revenue was $446.5 million for 2014 as compared to $394.9 million for 2013, an increase of $51.6 million or 13%. The increase was primarily due to the $38.3 million of revenue from operations of newly acquired businesses and $4.6 million decrease in deferred revenue adjustment in connection with the Prior Acquisition. The $8.7 million increase in revenue was due to new sales from customers and the remaining is due to the incremental fees from our employer and healthplan, life sciences and provider solutions services.

Operating income

Our Commercial segment operating income was $156.9 million for 2014 as compared to $140.2 million for 2013, an increase of $16.7 million or 12%. The increase was mainly due to the increase in revenue discussed above and decrease in the deferred revenue adjustment which was partially offset by higher maintenance costs of developed technology and content, telecommunications costs and other revenue related costs upon completion of our transition to a standalone company, as well as the increase in administrative costs to maintain our international branches established in mid-2013. Operating income from operations of newly acquired businesses amounted to $5.8 million.

Government segment

Revenues

Our Government segment revenue was $98.3 million for 2014 as compared to $97.8 million for 2013, an increase of $0.5 million. The increase was due to the increase of work in certain projects in the federal government channel, partially offset by lower implementation project revenue from the state government channel due to the timing of projects.

Operating income

Our Government segment operating income was $7.0 million for 2014 as compared to $11.1 million for 2013, a decrease in operating income of $4.0 million or 36%. The decrease was mainly due to the higher costs of operations upon completion of our transition to a standalone company and due to higher costs of the Company's initiatives to improve sales in the federal and state government channels, such as Centers for Medicare & Medicaid Services and state Medicaid agencies, as well as federally owned and operated healthcare facilities.
 
 



44



Year ended December 31, 2013 compared to Predecessor fiscal Period from January 1, 2012 to June 6, 2012 and Successor fiscal Period from April 20, 2012 to December 31, 2012

The following table summarizes our consolidated and combined results of operations for the periods indicated:
(Dollars in thousands)
Year ended December 31, 2013
 
% of revenue
 
From inception (April 20, 2012) to December 31, 2012
 
% of revenue
 
 
January 1, 2012 to June 6, 2012
 
% of revenue
 
(Successor)
 
 
 
(Successor)
 
 
 
(Predecessor)
Revenues, net(a)
$
492,702

 
100
 %
 
$
241,786

 
100
 %
 
 
$
208,998

 
100
 %
Operating costs and expenses
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues, excluding depreciation and amortization(b)
(265,541
)
 
(54
)%
 
(141,558
)
 
(59
)%
 
 
(112,050
)
 
(54
)%
Selling and marketing, excluding depreciation and amortization(c)
(56,157
)
 
(11
)%
 
(30,958
)
 
(13
)%
 
 
(25,917
)
 
(12
)%
General and administrative, excluding depreciation and amortization(d)
(41,042
)
 
(8
)%
 
(13,042
)
 
(5
)%
 
 
(27,173
)
 
(13
)%
Allocation of costs from Predecessor Parent and affiliates(e)

 
 %
 

 
 %
 
 
(10,003
)
 
(5
)%
Depreciation(f)
(21,219
)
 
(4
)%
 
(6,700
)
 
(3
)%
 
 
(6,805
)
 
(3
)%
Amortization of developed technology and content(g)
(31,894
)
 
(6
)%
 
(15,470
)
 
(6
)%
 
 
(12,460
)
 
(6
)%
Amortization of other identifiable intangible assets(h)
(34,460
)
 
(7
)%
 
(19,527
)
 
(8
)%
 
 
(8,226
)
 
(4
)%
Goodwill impairment(i)
(366,662
)
 
(74
)%
 

 
 %
 
 

 
 %
Other operating expenses(j)
(35,038
)
 
(7
)%
 
(49,622
)
 
(21
)%
 
 
(18,803
)
 
(9
)%
Total operating costs and expenses
(852,013
)
 
(173
)%
 
(276,877
)
 
(115
)%
 
 
(221,437
)
 
(106
)%
Operating income (loss)
(359,311
)
 
(73
)%
 
(35,091
)
 
(15
)%
 
 
(12,439
)
 
(6
)%
Net interest expense(k)
(70,581
)
 
(14
)%
 
(49,014
)
 
(20
)%
 
 
3

 
 %
Other finance costs
(24
)
 
 %
 

 
 %
 
 

 
 %
Income (Loss) before income taxes
(429,916
)
 
(87
)%
 
(84,105
)
 
(35
)%
 
 
(12,436
)
 
(6
)%
Benefit from (provision for) income taxes
84,927

 
17
 %
 
29,993

 
12
 %
 
 
4,803

 
2
 %
Net income (loss)
$
(344,989
)
 
(70
)%
 
$
(54,112
)
 
(22
)%
 
 
$
(7,633
)
 
(4
)%

(a)
Includes (i) subscription revenues from sales of products and services that are delivered under a contract over a period of time, which are recognized on a straight line basis over the term of the subscription, (ii) revenues from implementation and hosting arrangement that comprised: (1) the design, production, testing and installation of the customer's database (implementation phase); and (2) the provision of ongoing data management and support services in conjunction with the licensed data and subscription of software data or application (on-going service phase, hosting or subscription).
(b)
Includes all personnel and other costs attributable to a revenue stream, including but not limited to, client support, client operations, product management, royalties, allocation of technology support costs relating to market data and professional service costs.
(c)
Includes all personnel and other costs related to sales and marketing, including but not limited to, sales and marketing staff, commissions and marketing events.
(d)
Includes all personnel and other costs related to general administration as well as costs shared across the organization, including but not limited to technology, finance and strategy.
(e)
As described in Note 18 to the financial statements, included elsewhere in this Annual Report, our Predecessor historically engaged in related party transactions with Thomson Reuters relative to certain support services, including among others, finance, accounting, treasury, tax, transaction processing, information technology, legal, human resources, payroll, insurance and real estate management.

45



(f)
Includes depreciation of computer hardware, furniture, fixture and equipments, and leasehold improvements.
(g)
Includes amortization of developed technology and contents used internally and capitalized once a project has progressed beyond a conceptual, preliminary stage to that of application development stage. Costs that qualify for capitalization include both internal and external costs, but are limited to those that are directly related to a specific project.
(h)
Includes amortization of definite‑lived trade names and acquired customer relationship assets.
(i)
On November 1, 2013, we performed our annual goodwill impairment test and determined that the carrying value of all our reporting units exceeded our fair value due to lower‑than‑expected growth in revenue and cash flow in fiscal year 2013 resulting from certain selling cycle delays, particularly in the government sector, uncertainty in the healthcare sector related to the Patient Protection and Affordable Care Act, higher‑than‑expected costs due to significant investments in technology infrastructure, as well as an increase in the discount rate used in the discounted cash flow analysis as compared to the rate used in the prior year’s analysis. As a result, we recorded an aggregate non‑cash goodwill impairment charge of $366.7 million in the fourth quarter of 2013.
(j)
Other operating expenses in the PredecessorPeriod includes related disposal costs incurred as part of the Prior Acquisition process (comprised of audit services, accounting and consulting services and legal fees), severance and retention bonuses relating to the Prior Acquisition, and costs relating to other acquisition activities of our Predecessor. Other operating expenses in 2012 and 2013 (Successor Periods) includes direct costs related to the Prior Acquisition in 2012 as well as costs incurred related to technology and other costs in connection with our transition to a standalone business. These costs include nonrecurring expenses associated with data center migration and separating infrastructure from Thomson Reuters, costs related to the transitional service agreement with Thomson Reuters and related to rebranding, consulting, professional fees and Sponsor fees. Refer to Note 14 to the consolidated financial statements included in this Annual Report.
(k)
Interest earned or paid related to third party transactions.


Discussion of year ended December 31, 2013 (Successor) compared to Successor fiscal Period from April 20, 2012 to December 31, 2012 and Predecessor fiscal Period from January 1, 2012 to June 6, 2012
Revenues, net
Our net revenues were $492.7 million for the year ended December 31, 2013 compared to $241.8 million in the period from April 20, 2012 (inception) to December 31, 2012 and $209.0 million in the Predecessor Period from January 1, 2012 to June 6, 2012. The total increase was primarily due to the impact from the $8.8 million deferred revenue adjustment in 2013 compared to the $43.5 million deferred revenue adjustment in the 2012 Successor Period, in connection with the Prior Acquisition and due to implementation and migration revenue from large contracts in state government. For a more detailed explanation of the variations in revenue for each of our segments, see the individual segment discussions below.
Cost of revenues, excluding depreciation and amortization
Our cost of revenues, excluding depreciation and amortization, was $265.5 million for the year ended December 31, 2013 compared to $141.6 million for the period from April 20, 2012 (inception) to December 31, 2012 and $112.1 million in the Predecessor Period from January 1, 2012 to June 6, 2012. The total increase was primarily due to higher implementation and data migration costs related to new projects, particularly on several large state government contracts. In addition, we incurred higher maintenance costs of developed technology and content, royalties to Population Health content providers, telecommunications costs and other revenue related costs as we transitioned to a standalone company, partially offset by a lower bonus accrual in 2013.
Selling and marketing expense, excluding depreciation and amortization
Our selling and marketing expense, excluding depreciation and amortization, was $56.2 million for the year ended December 31, 2013 compared to $31.0 million in the period from April 20, 2012 (inception) to December 31, 2012 and $25.9 million in the Predecessor Period from January 1, 2012 to June 6, 2012, primarily due to a lower bonus accrual in 2013.

46



General and administrative expense, excluding depreciation and amortization
Our general and administrative expense, excluding depreciation and amortization, was $41.0 million for the year ended December 31, 2013 compared to $13.0 million in the period from April 20, 2012 (inception) to December 31, 2012 and $27.2 million in the Predecessor Period from January 1, 2012 to June 6, 2012. The total increase was primarily due to an increase in facilities related expense, telecommunications costs, salaries and related costs for additional new hires as we transitioned to a standalone company, partially offset by a lower bonus accrual in 2013.
Depreciation and amortization
Our depreciation and amortization expense was $87.6 million for the year ended December 31, 2013 compared to $41.7 million in the period from April 20, 2012 (inception) to December 31, 2012 and $27.5 million in the Predecessor Period from January 1, 2012 to June 6, 2012. The total increase primarily due to the overall impact of new computer hardware and other property, and developed technology and content that were placed in service in 2013 related to the completion of new data center and information system infrastructure.
Other operating expenses
Our other operating expense was $35.0 million for the year ended December 31, 2013 compared to $49.6 million in the period from April 20, 2012 (inception) to December 31, 2012 and $18.8 million in the Predecessor Period from January 1, 2012 to June 6, 2012. The total decrease was due to lower Acquisition-related expenses incurred in 2013. In 2013, other operating expenses included $27.0 million of Acquisition related costs, consisting of expenses incurred mainly related to data migration and the separation of our IT infrastructure from our Predecessor Parent and costs related to the Transitional Services Agreement with Thomson Reuters, $3.8 million of severance and retention bonuses, $1.3 million of asset write-offs and $2.9 million of Sponsor advisory fees. In the Successor Period of 2012, other operating expenses included $38.0 million of Prior Acquisition related costs (mainly consisting of $12.0 million of transaction fees paid to Veritas Capital and the remainder related to direct acquisition costs consisting of legal, finance, consulting and professional fees), $10.2 million of severances and retention bonuses and $1.5 million of Sponsor advisory fees. In the Predecessor Period of 2012, other operating expenses included $9.8 million of disposal related costs of our Predecessor, $7.7 million of severances and retention bonuses and $1.2 million of costs related to discontinued services.
Goodwill impairment
We performed our annual goodwill impairment test during the fourth quarter of 2013 and concluded that our goodwill on all our reporting units is impaired because each of the reporting unit's carrying value exceeded its fair value due to lower-than-expected growth in revenue and cash flow in fiscal year 2013 resulting from certain selling cycle delays, particularly in the Government sector, uncertainty in the healthcare sector related to the PPACA , higher-than-expected costs due to significant investments in technology infrastructure, as well as an increase in the discount rate used in the discounted cash flow analysis as compared to the rate used in the prior year’s analysis. Accordingly, we recorded a total of $366.7 million of non-cash goodwill impairment charge in the fourth quarter of 2013.

Operating income (loss)
Our operating loss was $359.3 million for the year ended December 31, 2013 compared to operating loss of $35.1 million in the period from April 20, 2012 (inception) to December 31, 2012 and $12.4 million in the Predecessor Period from January 1, 2012 to June 6, 2012. The total decrease was primarily due to the goodwill impairment, as discussed above.
Net interest expense
Our net interest expense was $70.6 million for the year ended December 31, 2013, compared to $49.0 million in the period from April 20, 2012 (inception) to December 31, 2012. The increase was mainly due to twelve months of interest expense in 2013 compared to approximately seven months in 2012, offset by the interest rate being lower by 2.25% as

47



a result of refinancing of the Term Loan Facility in October 2012 and April 2013. In addition, there was additional interest on incremental borrowings under the Term Loan Facility and Revolving Credit Facility of $11.3 million and $30.0 million, respectively. Also, included in the 2013 interest expense was $3.3 million of loss on early extinguishment of debt as a result of the April 2013 refinancing.

Other finance costs

Other finance costs mainly represents foreign exchange gains/losses as a result from our international operations. Also included in other finance costs are bank charges and fees.

Benefit from income taxes

Our income tax benefit was $84.9 million for the year ended December 31, 2013 compared to $30.0 million in the period from April 20, 2012 (inception) to December 31, 2012 and $4.8 million in the Predecessor Period from January 1, 2012 to June 6, 2012. Income tax benefit for the year ended December 31, 2013, Successor Period from April 20, 2012 to December 31, 2012 and Predecessor Period from January 1, 2012 to June 6, 2012 at an effective tax rate of 19.8%, 35.7% and 38.6%, respectively, are different from the amount derived by applying the federal statutory tax rate of 35%, mainly due to the impact of certain state taxes, non deductible goodwill impairment charge, and foreign rate differential.

Segment discussion
The following table summarizes our segment information for the years ended December 31, 2013, the period from April 20, 2012 (inception) to December 31, 2012 and the Predecessor Period from January 1, 2012 to June 6, 2012:


(Dollars in thousands)
Year ended December 31, 2013
 
% of revenue
 
From inception (April 20, 2012) to December 31, 2012
% of revenue
 
 
January 1, 2012 to June 6, 2012
 
% of revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
394,896

 
100
%
 
$
172,235

100
 %
 
 
$
195,470

 
100
%
 
Segment operating income
140,173

 
35
%
 
42,036

24
 %
 
 
55,206

 
28
%
 
Government
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
97,806

 
100
%
 
36,763

100
 %
 
 
46,316

 
100
%
 
Segment operating income (loss)
11,053

 
11
%
 
(228
)
(1
)%
 
 
10,654

 
23
%
 

Commercial segment

Revenues

Our Commercial segment revenue was $394.9 million for 2013 compared to $172.2 million in the period from April 20, 2012 (inception) to December 31, 2012 and $195.5 million in the Predecessor Period from January 1, 2012 to June 6, 2012. The total increase was primarily due to the lower impact from the deferred revenue adjustment ($7.2 million in 2013 compared to $38.4 million in the Successor Period of 2012) in connection with the Prior Acquisition and partially offset due to some cancellations and price competition in care management solutions.

Operating income


48



Our Commercial segment operating income was $140.2 million for 2013 compared to $42.0 million in the period from April 20, 2012 (inception) to December 31, 2012 and $55.2 million in the Predecessor Period from January 1, 2012 to June 6, 2012. The total increase was mainly due to the increase in revenue discussed above and higher costs of operations in 2012 as we transitioned to a standalone company.

Government segment

Revenues

Our Government revenue was $97.8 million for 2013 compared to $36.8 million in the period from April 20, 2012 (inception) to December 31, 2012 and $46.3 million in the Predecessor Period from January 1, 2012 to June 6, 2012. The total increase was primarily due to implementation and migration revenue from large state government contracts and the lower impact from the deferred revenue adjustment ($1.6 million in 2013 compared to $5.1 million in the 2012 Successor Period) in connection with the Prior Acquisition.

Operating income

Our Government operating income was $11.1 million for 2013 compared to an operating loss of $0.2 million in the period from April 20, 2012 (inception) to December 31, 2012 and operating income of $10.7 million in the Predecessor Period from January 1, 2012 to June 6, 2012. The total increase was mainly due to the increase in revenue discussed above, offset by higher costs mainly due to initiatives to improve sales from the federal and state government channels, such as Centers for Medicare & Medicaid Services, State Medicaid agencies, as well as federally owned and operated healthcare facilities.


49



Year ended December 31, 2013 compared to Pro forma year ended December 31, 2012

(Dollars in thousands)
Year ended December 31, 2013
 
% of revenue
 
Combined Year ended December 31, 2012
 
% of revenue
 
Change
 
% change
 
(Successor)
 
 
 
(Pro forma) (a)
 
 
 
 
 
 
Revenues, net
$
492,702

 
100
 %
 
$
445,231

 
100
 %
 
$
47,471

 
11
 %
Operating costs and expenses
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues, excluding depreciation and amortization
(265,541
)
 
(54
)%
 
(253,608
)
 
(57
)%
 
(11,933
)
 
5
 %
Selling and marketing, excluding depreciation and amortization
(56,157
)
 
(11
)%
 
(56,875
)
 
(13
)%
 
718

 
(1
)%
General and administrative, excluding depreciation and amortization
(41,042
)
 
(8
)%
 
(40,215
)
 
(9
)%
 
(827
)
 
2
 %
Allocation of costs from Predecessor Parent and affiliates

 
 %
 
(10,003
)
 
(2
)%
 
10,003

 
(100
)%
Depreciation
(21,219
)
 
(4
)%
 
(10,113
)
 
(2
)%
 
(11,106
)
 
110
 %
Amortization of developed technology and content
(31,894
)
 
(6
)%
 
(25,702
)
 
(6
)%
 
(6,192
)
 
24
 %
Amortization of other identifiable intangible assets
(34,460
)
 
(7
)%
 
(33,871
)
 
(8
)%
 
(589
)
 
2
 %
Goodwill impairment
(366,662
)
 
(74
)%
 

 
 %
 
(366,662
)
 
nm

Other operating expenses
(35,038
)
 
(7
)%
 
(12,973
)
 
(3
)%
 
(22,065
)
 
170
 %
Total operating costs and expenses
(852,013
)
 
(173
)%
 
(443,360
)
 
(100
)%
 
(408,653
)
 
92
 %
Operating income (loss)
(359,311
)
 
(73
)%
 
1,871

 
 %
 
(361,182
)
 
nm

Net interest income (expense)
(70,581
)
 
(14
)%
 
(76,781
)
 
(17
)%
 
6,200

 
(8
)%
Other finance costs
(24
)
 
 %
 

 
 %
 
(24
)
 
nm

Income (loss) before income taxes
(429,916
)
 
(87
)%
 
(74,910
)
 
(17
)%
 
(355,006
)
 
474
 %
Benefit from income taxes
84,927

 
17
 %
 
26,360

 
6
 %
 
58,567

 
222
 %
Net loss
$
(344,989
)
 
(70
)%
 
$
(48,550
)
 
(11
)%
 
$
(296,439
)
 
611
 %
(a)
Pro Forma year ended December 31, 2012 information gives effect to the Prior Acquisition as if it had occurred on January 1, 2012. See “Unaudited Pro Forma Financial Information.”

Discussion of year ended December 31, 2013 (Successor) compared to Pro forma year ended December 31, 2012
Revenues, net
Our net revenues were $492.7 million for the year ended December 31, 2013 as compared to $445.2 million for the pro forma year ended December 31, 2012, an increase of $47.5 million or 11%. This increase was primarily due to the impact from the $8.8 million deferred revenue adjustment in 2013 compared to the $49.1 million deferred revenue adjustment in the pro forma 2012 period, in connection with the Prior Acquisition and due to implementation and migration revenue from large state government contracts in 2013. For a detailed explanation of the variations in revenue for each of our segments, see the individual segment discussions below.
Cost of revenues, excluding depreciation and amortization
Our cost of revenues, excluding depreciation and amortization, was $265.5 million for the year ended December 31, 2013 as compared to $253.6 million for the pro forma year ended December 31, 2012, an increase of $11.9 million, or 5%. This increase was primarily due to higher implementation and data migration costs related to new projects, particularly on several large state government contracts. In addition, we incurred higher maintenance costs of developed

50



technology and content, royalties to Population Health content providers, telecommunications costs and other revenue related costs as we transitioned to a standalone company, partially offset by a lower bonus accrual in 2013.
Selling and marketing expense, excluding depreciation and amortization
Our selling and marketing expense, excluding depreciation and amortization, was $56.2 million for the year ended December 31, 2013 as compared to $56.9 million for the pro forma year ended December 31, 2012, a decrease of $0.7 million, or 1%, primarily due to a lower bonus accrual in 2013.
General and administrative expense, excluding depreciation and amortization
Our general and administrative expense, excluding depreciation and amortization, was $41.0 million for the year ended December 31, 2013 as compared to $40.2 million for the pro forma year ended December 31, 2012, an increase of $0.8 million, or 2%. The increase was primarily due to an increase in facilities related expense, telecommunications costs, salaries and related costs for additional new hires as we transitioned to a standalone company, partially offset by a lower bonus accrual in 2013.
Depreciation and amortization
Our depreciation and amortization expense was $87.6 million for the year ended December 31, 2013 as compared to $69.7 million for the pro forma year ended December 31, 2012, an increase of $17.9 million or 26%. This increase was primarily due to the overall impact of new computer hardware and other property, and developed technology and content that were placed in service in 2013 related to the completion of the new data center and information system infrastructure.
Other operating expenses
Our other operating expense was $35.0 million for the year ended December 31, 2013 as compared to $13.0 million for the pro forma year ended December 31, 2012, an increase of $22.1 million. This decrease was primarily due to higher expenses incurred mainly related to data migration and the separation of our IT infrastructure that started in the second half of 2012.
Goodwill impairment
We performed our annual goodwill impairment test during the fourth quarter of 2013 and concluded that our goodwill on all our reporting units is impaired because each of the reporting unit's carrying value exceeded its fair value due to lower-than-expected growth in revenue and cash flow in fiscal year 2013 resulting from certain selling cycle delays, particularly in the government sector, uncertainty in the healthcare sector related to the Patient Protection and Affordable Care Act, higher-than-expected costs due to significant investments in technology infrastructure, as well as an increase in the discount rate used in the discounted cash flow analysis as compared to the rate used in the prior year’s analysis. Accordingly, we recorded a total of $366.7 million of non-cash goodwill impairment charge in the fourth quarter of 2013.

Operating income (loss)
Our operating loss was $359.3 million for the year ended December 31, 2013 as compared to an operating income of $1.9 million for the pro forma year ended December 31, 2012, a decrease of $361.2 million. The decrease was primarily due to the goodwill impairment, as discussed above.
Net interest expense
Our net interest expense was $70.6 million for the year ended December 31, 2013, as compared to $76.8 million for the pro forma year ended December 31, 2012, a decrease of $6.2 million or 8%. The decrease was mainly due to a 2.25% lower interest rate and decrease by $3.4 million of loss on extinguishment of debt as a result of refinancing of

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the Term Loan Facility in October 2012 and April 2013. In addition, there was additional interest on incremental borrowings under the Term Loan Facility and Revolving Credit Facility of $11.3 million and $30.0 million, respectively.

Other finance costs

Other finance costs mainly represents foreign exchange gains/losses as a result from our international operations. Also included in other finance costs are bank charges and fees.

Benefit from income taxes

Our income tax benefit was $84.9 million for the year ended December 31, 2013 as compared to a benefit of $26.4 million for the pro forma year ended December 31, 2012, an increase of $58.6 million or 222%. Income tax benefit for the year ended December 31, 2013 and pro forma year ended December 31, 2012, at an effective tax rate of 19.8%, and 35.2%, respectively, are different from the amount derived by applying the federal statutory tax rate of 35%, mainly due to the impact of certain state income taxes, non deductible goodwill impairment charge, and foreign rate differential.

Segment discussion
The following table summarizes our segment information for the years ended December 31, 2013 and pro forma year end December 31, 2012:

(Dollars in thousands)
Year ended December 31, 2013
 
% of revenue
 
Year ended December 31, 2012
 
% of revenue
 
Change
 
% change
 
(Successor)
 
 
 
(Pro forma)(a)
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
Revenues