S-1/A 1 d748301ds1a.htm AMENDMENT NO.3 TO FORM S-1 Amendment No.3 to Form S-1
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As filed with the Securities and Exchange Commission on May 24, 2019

Registration No. 333-230345

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 3

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Change Healthcare Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   7389   82-2152098

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

3055 Lebanon Pike, Suite 1000

Nashville, Tennessee 37214

Telephone: 615-932-3000

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Neil E. de Crescenzo

President and Chief Executive Officer

Change Healthcare Inc.

3055 Lebanon Pike, Suite 1000

Nashville, Tennessee 37214

Telephone: 615-932-3000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Joshua Ford Bonnie

William R. Golden III

Simpson Thacher & Bartlett LLP

900 G Street, N.W.

Washington, D.C. 20001

Telephone: (202) 636-5500

 

Craig E. Marcus

Tara Fisher

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, Massachusetts 02199

Telephone: (617) 951-7000

 

 

Approximate date of commencement of the proposed sale of the securities to the public: As soon as practicable after the Registration Statement is declared effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
 

Proposed

Maximum

Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee(3)

Common Stock, par value $0.001 per share

  $100,000,000   $12,120

        % Tangible Equity Units(4)

  $100,000,000   $12,120

Stock Purchase Contracts

       

Amortizing Notes

       

Total

  $200,000,000   $24,240

 

 

 

(1)

Estimated solely for the purpose of determining the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933.

(2)

Includes                 shares of common stock that are subject to the underwriters’ option to purchase additional shares.

(3)

The Registrant previously paid $12,120 of the registration fee, with respect to $100,000,000 of the proposed maximum aggregate offering price of Common Stock, par value $0.001 per share, in connection with the initial filing of this registration statement and $12,120 of the registration fee, with respect to $100,000,000 of the proposed maximum aggregate offering price of the         % Tangible Equity Units, in connection with the filing of Amendment No. 2 of this registration statement.

(4)

Includes                 Tangible Equity Units that are subject to the underwriters’ option to purchase additional Tangible Equity Units. Each Tangible Equity Unit is composed of a stock purchase contract and an amortizing note. This registration statement also registers the shares of the Registrant’s common stock that are issuable upon settlement of the purchase contracts that are a component of the Tangible Equity Units registered hereby, at the initial rate of                 shares of common stock per purchase contract assuming the maximum number of shares issuable upon automatic settlement of such purchase contracts. Under Rule 457(i), there is no additional filing fee payable with respect to the shares of common stock issuable upon settlement of the purchase contracts because no additional consideration will be received in connection with the settlement. The number of shares of the Registrant’s common stock issuable upon such settlement will vary based on the public offering price of the common stock registered hereby and is subject to adjustment upon the occurrence of certain events described herein. Pursuant to Rule 416 under the Securities Act, the number of shares of the Registrant’s common stock to be registered includes an indeterminable number of shares of common stock that may become issuable upon settlement of the purchase contracts as a result of such adjustments.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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EXPLANATORY NOTE

This Registration Statement contains a prospectus relating to an offering of shares of Change Healthcare Inc.’s common stock (for purposes of this Explanatory Note, the “Common Stock Prospectus”), together with separate prospectus pages relating to an offering of Change Healthcare Inc.’s Tangible Equity Units (for purposes of this Explanatory Note, the “Tangible Equity Units Prospectus”). The complete Common Stock Prospectus follows immediately. Following the Common Stock Prospectus are the following alternative and additional pages for the Tangible Equity Units Prospectus:

 

   

front and back cover pages, which will replace the front and back cover pages of the Common Stock Prospectus;

 

   

pages for the “Summary—The Offering” section, which will replace the “Summary—The Offering” section of the Common Stock Prospectus;

 

   

pages for the “Risk Factors—Risks Related to the Units, the Separate Purchase Contracts, the Separate Amortizing Notes and our Common Stock” section, which will replace the “Risk Factors—Risks Related to this Offering and Ownership of our Common Stock” section of the Common Stock Prospectus;

 

   

pages for the “Description of the Units,” “Description of the Purchase Contracts” and “Description of the Amortizing Notes” sections, which will replace the “Tangible Equity Units Offering” section of the Common Stock Prospectus;

 

   

pages for the “Certain United States Federal Income and Estate Tax Consequences” section, which will replace the “Certain United States Federal Income and Estate Tax Consequences to Non-U.S. Holders” section of the Common Stock Prospectus;

 

   

pages for the “Certain ERISA Considerations” and “Book-Entry Procedures and Settlement” sections, which will be added to the Tangible Equity Units Prospectus; and

 

   

pages for the “Underwriting” section, which will replace the “Underwriting” section of the Common Stock Prospectus.

The following disclosures and references contained within the Common Stock Prospectus will be replaced or removed in the Tangible Equity Units Prospectus:

 

   

the following disclosure on page iii: “Unless indicated otherwise, the information included in this prospectus assumes no exercise by the underwriters of their option to purchase up to an additional                 shares of common stock from us and that the shares of common stock to be sold in this offering are sold at $                 per share of common stock, which is the midpoint of the price range set forth on the cover page of this prospectus.” will be replaced in its entirety with “Unless indicated otherwise, the information included in this prospectus assumes no exercise by the underwriters in this offering of their over-allotment option to purchase additional Units.” in the Tangible Equity Units Prospectus;

 

   

references to “shares of our common stock” contained in the first paragraph under “Table of Contents,” the first paragraph under “Summary,” the first paragraph of “Summary—Investment Risks” and the first paragraph under “Risk Factors” will be replaced with references to “the Units” in the Tangible Equity Units Prospectus;

 

   

the reference to “—Risks Related to this Offering and Ownership of Our Common Stock—Sales or issuances of a substantial amount of shares of our common stock in the public market, particularly sales by our directors, executive officers and significant stockholders, including our pre-IPO owners, or the perception that these sales or issuances may occur, or the settlement of the purchase contracts, could cause the market price of our common stock to decline and may make it more difficult for investors to sell their common stock at a time and price that they deem appropriate” contained in “Shares Eligible For Future Sale” will be replaced with a reference to “—Risks Related to the Units, the Separate Purchase Contracts, the Separate Amortizing Notes and our Common Stock—Sales or


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issuances of a substantial amount of shares of our common stock in the public market, particularly sales by our directors, executive officers and significant stockholders, including our pre-IPO owners, or the perception that these sales or issuances may occur, or the settlement of the purchase contracts, could cause the market price of the Units, the purchase contracts and our common stock to decline and may make it more difficult for investors to sell their Units and common stock at a time and price that they deem appropriate.” in the Tangible Equity Units Prospectus;

 

   

the disclosure under “Summary—Concurrent Offering” will be replaced in its entirety with “Concurrently with this offering, Change Healthcare Inc. is offering, by means of a separate prospectus,                 shares of its common stock (and up to an additional                  shares of its common stock that the underwriters in the Concurrent Offering have the option to purchase from Change Healthcare Inc.). Change Healthcare Inc. estimates that the net proceeds to it from the sale of shares of its common stock in the Concurrent Offering will be approximately $                 million (or approximately $                 million if the underwriters exercise in full their option to purchase additional shares of common stock), assuming an initial public offering price of $                 per share (which is the midpoint of the price range set forth on the cover page of the prospectus relating to the Concurrent Offering), in each case after deducting estimated underwriting discounts and commissions. The Joint Venture will bear or reimburse Change Healthcare Inc. for all of the expenses payable by it in the Concurrent Offering. We estimate these offering expenses (excluding underwriting discounts and commissions), will be approximately $                million. The closing of this offering is conditioned upon the closing of the Concurrent Offering, but the closing of the Concurrent Offering is not conditioned upon the closing of this offering, and there can be no assurance that the Concurrent Offering will be completed on the terms described in the prospectus relating to the Concurrent Offering or at all.” in the Tangible Equity Units Prospectus;

 

   

the first sentence of the first paragraph under “Dilution” will be replaced in its entirety with “Investors in shares of our common stock in the Concurrent Offering will experience immediate dilution in their investment to the extent of the difference between the initial public offering price per share of common stock in the Concurrent Offering and the pro forma net tangible book value per share of common stock after the Offering Transactions.” in the Tangible Units Prospectus;

 

   

references to “this offering” contained in “Summary—Organizational Structure,” “Organizational Structure,” “Use of Proceeds,” “Capitalization,” “Dilution,” “Unaudited Pro Forma Condensed Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Management,” “Certain Relationships and Related Person Transactions,” “Principal Stockholders,” “Description of Certain Indebtedness,” “Description of Capital Stock” and “Shares Eligible for Future Sale” will be replaced with references to “the Concurrent Offering” in the Tangible Equity Units Prospectus;

 

   

references to “the concurrent offering of the Units” contained in “Summary—Organizational Structure,” “Organizational Structure,” “Use of Proceeds,” “Capitalization,” “Unaudited Pro Forma Condensed Financial Information,” and “Shares Eligible for Future Sale” will be replaced with references to “this offering” in the Tangible Equity Units Prospectus;

 

   

references to the “concurrent issuance of the Units” will be replaced with references to “issuance of Units in this offering” in the Tangible Equity Units Prospectus;

 

   

references to “midpoint of the price range set forth on the cover page of this prospectus” will be replaced with “midpoint of the price range set forth on the cover page of the prospectus relating to the Concurrent Offering” in the Tangible Equity Units Prospectus;

 

   

references to “assuming the number of shares offered by us remains the same as set forth on the cover page of this prospectus” will be replaced with “assuming the number of shares of common stock offered by Change Healthcare Inc., shown on the cover page of the prospectus relating to the Concurrent Offering, remains the same” in the Tangible Equity Units Prospectus;

 

   

the second paragraph under “Use of Proceeds” will be moved as the first paragraph under the section in the Tangible Equity Units Prospectus;


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the references to “, if completed,” will be removed from the second and third paragraphs under the “Use of Proceeds” section in the Tangible Equity Units Prospectus;

 

   

the last sentence of the second paragraph under the “Capitalization” section will be removed in the Tangible Equity Units Prospectus;

 

   

the references to “, as described in “Tangible Equity Units Offering” in footnotes (2) and (3) under the “Capitalization” section will be removed in the Tangible Equity Units Prospectus;

 

   

references to “this prospectus” contained in “Shares Eligible for Future Sale—Lock-Up Agreements” and “Certain Relationships and Related Person Transactions—Directed Share Program” will be replaced with references to “the prospectus relating to the Concurrent Offering” in the Tangible Equity Units Prospectus;

 

   

the reference to “See “Underwriting” for more information,” in “Certain Relationships and Related Person Transactions—Directed Share Program” will be removed in the Tangible Equity Units Prospectus; and

 

   

the references to “shares of common stock” in “Legal Matters” and “Where You Can Find More Information” will be replaced with references to “the tangible equity units, stock purchase contracts and amortizing notes” in the Tangible Equity Units Prospectus.

All words and phrases similar to those specified above that appear throughout the Common Stock Prospectus will be revised accordingly to make appropriate references in the Tangible Equity Units Prospectus.

Each of the complete Common Stock Prospectus and Tangible Equity Units Prospectus will be filed with the Securities and Exchange Commission in accordance with Rule 424 under the Securities Act of 1933, as amended. The closing of the offering of common stock is not conditioned upon the closing of the offering of Tangible Equity Units, but the closing of the offering of Tangible Equity Units is conditioned upon the closing of the offering of common stock.


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED MAY 24, 2019

PRELIMINARY PROSPECTUS

                Shares

 

 

LOGO

Change Healthcare Inc.

Common Stock

$                per share

This is the initial public offering of shares of common stock of Change Healthcare Inc. We are selling                 shares of our common stock. We currently expect the initial public offering price to be between $                and $                per share of common stock. We have applied to list our shares of common stock on the Nasdaq Global Select Market (“Nasdaq”) under the trading symbol “CHNG.”

Concurrently with this offering, Change Healthcare Inc. is also making a public offering of         % tangible equity units (the “Tangible Equity Units” or the “Units”), which is being made by means of a separate prospectus and not by means of this prospectus. In that offering, Change Healthcare Inc. has granted the underwriters of that offering an option to purchase, within 13 days beginning on, and including, the date of the initial issuance of the Units, up to an additional                  Units, solely to cover over-allotments. We cannot assure you that the offering of Units will be completed or, if completed, on what terms it will be completed. The closing of this offering is not conditioned upon the closing of the offering of Units, but the closing of the offering of Units is conditioned upon the closing of this offering.

We are an “emerging growth company” as defined under the federal securities laws. We have elected, however, to comply in the registration statement of which this prospectus forms a part with the disclosure requirements otherwise applicable generally to registrants that are not emerging growth companies.

Investing in shares of our common stock involves risks. See “Risk Factors ” beginning on page 32.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions

   $        $    

Proceeds, before expenses, to Change Healthcare Inc.

   $        $    

Please see the section entitled “Underwriting” for a description of compensation payable to the underwriters.

To the extent that the underwriters sell more than                 shares of our common stock, the underwriters have the option to purchase up to an additional                shares of our common stock from us at the initial public offering price less the underwriting discount, within 30 days from the date of this prospectus.

The underwriters expect to deliver the shares of our common stock against payment in New York, New York on or about                 , 2019.

 

 

 

Barclays   Goldman Sachs & Co. LLC   J.P. Morgan

 

 

The date of this prospectus is                 , 2019.


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LOGO


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Neither we nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus, any amendment or supplement to this prospectus or any free writing prospectus prepared by us or on our behalf. Neither we nor the underwriters take any responsibility for, or can provide any assurance as to the reliability of, any information other than the information in this prospectus, any amendment or supplement to this prospectus or any free writing prospectus prepared by us or on our behalf. We and the underwriters are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including                 , 2019 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

About this Prospectus

Financial Statement Presentation

On March 1, 2017, McKesson Corporation (NYSE: MCK) (“McKesson”) and Change Healthcare Inc. (formerly HCIT Holdings, Inc.), a Delaware corporation, completed the Transactions (as defined below) whereby the majority of McKesson’s Technology Solutions segment (“Core MTS”) and substantially all of Change Healthcare Performance, Inc. (formerly Change Healthcare, Inc.)’s legacy business (“Legacy CHC”) were contributed pursuant to an Agreement of Contribution and Sale, resulting in the establishment of a joint venture, Change Healthcare LLC, a Delaware limited liability company (the “Joint Venture”). From the time of its formation on June 17, 2016 until March 1, 2017 (the closing date of the Transactions), the Joint Venture had no substantive assets or operations.

Change Healthcare Inc. is a holding company that was formed in connection with the Joint Venture and related transactions and does not own any material assets or have any operations other than through its interest in

 

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the Joint Venture. Prior to and immediately following this offering, each of Change Healthcare Inc. and McKesson holds a 50% voting interest in the Joint Venture, with equal representation on the Joint Venture’s board of directors and with all major operating, investing and financial activities requiring the consent of both members. As a result, Change Healthcare Inc. does not consolidate the financial position and results of the Joint Venture. Instead, Change Healthcare Inc. accounts for its investment in the Joint Venture under the equity method of accounting.

For periods prior to March 1, 2017, this prospectus presents the financial position and results of Legacy CHC and Core MTS, the predecessors for accounting purposes to Change Healthcare Inc. In addition, this prospectus supplementally presents the consolidated financial position and results of the Joint Venture, the equity method investee of Change Healthcare Inc., in all periods since the Joint Venture’s inception.

Certain Definitions

As used in this prospectus, unless otherwise noted or the context requires otherwise:

 

   

“Blackstone” refers to investment funds associated with The Blackstone Group L.P.

 

   

“Change Healthcare,” the “Company,” “we,” “us” and “our” refer to Change Healthcare Inc., together with the Joint Venture, its equity method investee, and the Joint Venture’s consolidated subsidiaries.

 

   

“existing owners” or “pre-IPO owners” refer to our Sponsors, management and other equity holders who are the owners of Change Healthcare Inc. immediately prior to the Offering Transactions, together with McKesson, the holder of a 50% voting interest in the Joint Venture.

 

   

“Hellman & Friedman” refers to investment funds associated with the affiliated companies of Hellman & Friedman LLC.

 

   

“Legacy CHC Stockholders” refers to the equityholders of Legacy CHC (including our Sponsors) that contributed their interests in Legacy CHC to the Joint Venture as part of the Transactions.

 

   

“McKesson” refers to McKesson Corporation, a Delaware corporation.

 

   

“McK Members” refers to the subsidiaries of McKesson that serve as members of the Joint Venture.

 

   

“Sponsors” refers to Blackstone and Hellman & Friedman.

 

   

“Transactions” refers to the transactions consummated on March 1, 2017 whereby the Legacy CHC Stockholders and McKesson completed the establishment of the Joint Venture and related transactions. See “Summary—The Transactions.”

Method of Calculation

The “customer retention” figures in this prospectus represent the percentage of our top 50 provider and top 50 payer customers ranked by revenue generated during the previous fiscal year from whom we continued to generate revenue during the most recently completed fiscal year. Customer retention does not measure whether the revenue from any particular customer has increased or decreased in a specified fiscal period compared to the prior year fiscal period.

The “Recurring Revenue” figures in this prospectus represent revenue attributable to the ongoing use of or subscription to a service or solution after an initial sale or renewal without additional selling efforts. Such revenue consists of transaction, subscription, volume-based and other revenue (including from “evergreen” or automatically renewing contracts) associated with our various solutions that is of a recurring nature as described above, and excludes revenue, such as one-time license fees, upfront implementation fees and other payments relating to singular projects and transactions of a non-recurring or episodic nature. A significant portion of our

 

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Recurring Revenue is earned on a per transaction basis and, as a result, is tied to a customer’s transaction, payment and reimbursement volumes. Our Recurring Revenue is generally not subject to any required annual or other minimums under the agreements with our customers. With respect to volume-based fee arrangements, the level of recurrence in any period is reflected in the amount of Recurring Revenue presented for that period. In the event a customer with a volume-based fee arrangement were not to use the solution or service at all in a given period, Recurring Revenue would not reflect any revenue from such customer. As a result, our Recurring Revenue directly correlates with healthcare transaction, payment and reimbursement volumes in the United States. See “Risk Factors—Risks Related to Our Business and Industry—Our revenue is highly dependent on transaction volumes in the U.S. healthcare industry, particularly payment and reimbursement transaction volumes, and any temporary or sustained decrease in healthcare transaction, payment or reimbursement volumes in the United States could have a material adverse impact on our business, results of operations or financial condition.”

The sums or percentages, as applicable, of certain tables included in this prospectus may not foot due to rounding.

 

 

Unless indicated otherwise, the information included in this prospectus assumes no exercise by the underwriters of their option to purchase up to an additional                 shares of common stock from us and that the shares of common stock to be sold in this offering are sold at $                per share of common stock, which is the midpoint of the price range set forth on the cover page of this prospectus.

 

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SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider before investing in shares of our common stock. You should read this entire prospectus carefully, including the section entitled “Risk Factors” and the financial statements and the related notes thereto included elsewhere in this prospectus, before you decide to invest in shares of our common stock.

Change Healthcare

We are a leading independent healthcare technology platform that provides data and analytics-driven solutions to improve clinical, financial and patient engagement outcomes in the U.S. healthcare system. We offer a comprehensive suite of software, analytics, technology-enabled services and network solutions that drive improved results in the complex workflows of healthcare system payers and providers. Our solutions are designed to improve clinical decision making, simplify billing, collection and payment processes and enable a better patient experience.

We offer comprehensive, end-to-end solutions with modular capabilities to address our customers’ needs. Working with our customers to analyze workflows before, during and after care has been delivered to patients, we design and commercialize innovative solutions for various points in the healthcare delivery timeline. Our offerings range from discrete data and analytics solutions to broad enterprise-wide solutions, which include workflow software and technology-enabled services that help our customers achieve their operational objectives. As payers and providers become larger and more sophisticated and manage increasingly complex workflows, we believe they will increasingly seek strategic partners with scale and comprehensive, high value solutions.

Our Intelligent Healthcare Network was created to facilitate the transfer of data among participants and is one of the largest clinical and financial healthcare networks in the United States. In the fiscal year ended March 31, 2018, we facilitated nearly 14 billion healthcare transactions and approximately $1 trillion in adjudicated claims or approximately one-third of all U.S. healthcare expenditures. We serve the vast majority of U.S. payers and providers. Our customer base includes approximately 2,200 government and commercial payer connections, 900,000 physicians, 118,000 dentists, 33,000 pharmacies, 5,500 hospitals and 600 laboratories. This network transacts clinical records for over 112 million unique patients, more than one-third of the estimated total U.S. population. With insights gained from our pervasive network, extensive applications and analytics portfolio and our services operations, we have designed analytics solutions that include industry-leading and trusted franchises supported by extensive intellectual property and regularly updated content.

In addition to the advantages of scale, we believe we offer the collaborative benefits of a mission-critical partner. We seek enduring relationships with each customer through solutions embedded in their complex daily workflows that deliver measurable results. Our customer retention rate for our top 50 provider and top 50 payer customers was 100% for the fiscal year ended March 31, 2019. We believe our size, scale, thought leadership and prevalence across the healthcare ecosystem help make us a preferred partner for innovative technology companies and industry associations focused on driving standardization and efficiencies in the healthcare industry.



 

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We believe that our solutions play a mission-critical role in the following important areas of the healthcare system:

 

 

LOGO

 

We seek to help healthcare system constituents address fundamental operating needs.

LOGO

 

Our analytically-driven solutions are designed to improve delivery of care through better clinical decision making and enhance and simplify billing and payment functions by reducing administrative errors and improving documentation. In addition, we seek to improve payers’ and providers’ relationships with consumers by offering solutions that enhance transparency and empower their decision making. We believe that our solutions enable our customers to operate more efficiently and thereby improve their competitive positioning. Our solutions have generated measurable financial and operational return on investment and improved quality of care and patient experience.

 

   

A provider was able to decrease accounts receivable from a major payer by 50% from September 2012 to August 2013 as a result of on-site assessment, identification and prioritization of key reimbursement issues, and the implementation of revenue cycle management solutions.



 

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A regional medical center achieved a 62% increase in month-to-month collections in just six months beginning in 2011 using one of our technology-enabled service solutions to validate patient identity, verify insurance eligibility and estimate patient financial responsibility.

 

   

A hospital customer achieved a 35% decrease in average turnaround times from 2014 to 2015 for CT, MRI and ultrasound readings using our imaging workflow and analytics solution.

 

   

Our analytics, workflow and reimbursement optimization services have facilitated approximately $3.3 billion in incremental net revenue for over 60 payer customers in the market for patients with dual eligibility under Medicaid and Medicare (“Dual Eligibles”) (from 2002 to 2018) by identifying members eligible for both Medicare and Medicaid benefits.

 

   

Since 2016, our clinically-based claims payment solution has supported over $4 billion in annual savings for payer customers, including leading health plans, through claims editing technology integrated with claims adjudication, which has improved payment accuracy while increasing provider satisfaction.

 

   

A large national payer realized $10 million in annual savings in 2017 through a 20% increase in electronic payment adoption from traditional paper-based processes, using Change Healthcare’s virtual credit card solutions.

We have a track record of innovation. Our pervasive network connectivity combined with our use of artificial intelligence (“AI”) and machine learning (“ML”) enables us to regularly improve our solutions and uncover new insights as our customers’ needs evolve. During 2019, we added a number of new solutions to our business platform through new product development. Our ability to innovate is supported by more than 1,800 technology professionals including PhDs, masters-level health policy experts, design professionals, data scientists, programmers and statisticians in our research & development centers located in key markets such as Silicon Valley, Seattle, Boston, Philadelphia, Nashville, Minneapolis and Tel Aviv. We believe that our deep reach across the healthcare ecosystem and our history of commercializing innovations position us to be a preferred partner for customers and leading healthcare and technology companies.

We believe we are well positioned for growth across the markets we serve. Our growth strategy is to increase the breadth and depth of our capabilities organically and through acquisitions. We continue to increase the business we do with our base of long-standing customers by expanding our enterprise relationships and positioning our customers for success in their markets. Our comprehensive end-to-end solutions can reduce the complexity of our customers’ environments, yet are modular to meet their specific needs. We seek to use our data products and analytics, pervasive connectivity and our position as a trusted partner to develop innovative ways to create high value clinical and administrative solutions. We believe we are in the early stages of growth related to these opportunities.

We believe our high customer retention and predictable revenue streams, together with a scalable and capital efficient operating model, provide visibility into our financial results. For the year ended March 31, 2019, the Joint Venture generated solutions revenue of $3.0 billion, of which 88% was Recurring Revenue, net income of $176.7 million, Adjusted EBITDA of $935.0 million and Adjusted Net Income of $478.7 million. For a discussion of Recurring Revenue, see “Method of Calculation” and for the definitions of Adjusted EBITDA and Adjusted Net Income, which are measures not presented in accordance with generally accepted accounting principles in the United States (“GAAP”), and reconciliations to their most directly comparable financial measure calculated and presented in accordance with GAAP, please read “—Summary Historical Financial and Other Data.”



 

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Our Solutions

Change Healthcare offers financial, clinical, and engagement solutions in three business segments—software and analytics, network solutions, and technology-enabled services—that help create a stronger, more collaborative healthcare system. Through our interconnected position at the center of healthcare, we utilize our broad portfolio of solutions to serve stakeholders across the healthcare system, including commercial and government payers, employers, hospitals and health systems, physicians and other providers, pharmacies, labs and consumers.

Software and Analytics

Our industry-leading software solutions seek to enable our customers to achieve financial performance, operational excellence, and payment and network optimization—ultimately helping them navigate the shift to value-based care. In the software and analytics segment, we provide solutions for revenue cycle management, provider network management, payment accuracy, value-based payments, clinical decision support, consumer engagement, risk adjustment and quality performance, and imaging and clinical workflow.

Network Solutions

We leverage our Intelligent Healthcare Network—with an industry-leading nearly 14 billion transactions and approximately $1 trillion in adjudicated claims—to enable and optimize connectivity and transactions among healthcare system participants and to generate insight using healthcare data to help meet their analytical needs. Through our network solutions segment, we provide solutions for financial, administrative and clinical transactions, electronic payments and aggregation and analytics of clinical and financial data.

Technology-enabled Services

We provide expertise, resources and scalability to allow our customers to streamline operations, optimize clinical and financial performance and focus on patient care. Through our technology-enabled services segment, we provide solutions for revenue cycle and practice management, value-based care enablement, communications and payments, pharmacy benefits administration and consulting.

Market Opportunity

We compete in the market for data and analytics-driven solutions that help ensure clinically appropriate care, increase efficiency and reduce waste in the healthcare industry. We believe the following trends impacting payers, providers and consumers represent a significant opportunity for us.

Wasteful spending amidst rising costs in U.S. healthcare system. Research cited by the National Academy of Medicine estimates that 30% of U.S. healthcare spending is wasteful, implying more than $1 trillion of wasteful healthcare spending in 2018. Examples of waste include failure to adhere to best care practices and lack of care coordination, which leads to unnecessary readmissions and inappropriate levels of care delivery. Wasteful spending includes significant variation among providers in the cost and quality of similar care from provider to provider and market to market that is not explained by geography alone and also includes overtreatment, which is testing and care that is not medically beneficial. Additionally, the healthcare system has many inefficient processes that are manual, complex, frequently changing and time consuming, are prone to error, costly and require undue amounts of clinicians’ and other professionals’ time. In addition, improper payments, according to the Office of Management and Budget, have represented approximately 10% of all Medicare and Medicaid payments since 2015. Such improper payments and fraudulent billing create costly and labor-intensive follow-up. According to the Center for Medicare & Medicaid Services (“CMS”), U.S. healthcare spending is expected to



 

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grow from $3.6 trillion in 2018, or 18% of U.S. gross domestic product, to $6.0 trillion, or approximately 19% of U.S. gross domestic product, in 2027. This implies that healthcare spending is increasing at a 5.6% annual growth rate, or 3.2% higher than expected inflation over the same period. Given the significant and lasting financial burden of ongoing rising costs and wasteful spending on society, both governmental and commercial payers and providers are increasingly focused on reducing costs attributable to administrative complexity and errors, excessive manual labor, and uncoordinated, unproductive, ineffective care whose value is not well determined or communicated.

Healthcare system exposure to growing chronically ill and higher risk populations. While the overall U.S. population is expected to increase 7% from 2017 to 2027, the population of adults age 65 and older is expected to increase 34% over the same period, according to the U.S. Census Bureau. This part of the population has the highest prevalence of chronic conditions, with average annual healthcare spending approximately three times higher than working adults and approximately five times higher than the under 18 year old demographic, according to CMS. As those older than 65 years of age access complex care at growing rates, they are also increasingly enrolling in managed care plans that bear the risk of healthcare utilization. For example, enrollment in Medicare Advantage (“MA”) is expected to increase to 45% of eligible lives by 2027, according to the Congressional Budget Office. Additionally, most Dual Eligibles, who are typically among the most chronically ill and disproportionately expensive beneficiaries for both programs, are not benefiting from any form of integrated care. Governmental agencies are seeking ways to more effectively service this group and promote avenues to access care in a more efficient and effective way. As the U.S. healthcare system increasingly serves more chronically ill and higher risk populations as the country’s elderly population continues to grow, providers and payers will need tools to onboard and manage these populations, including the ability to deliver appropriate care for medically-complex patients, and the ability to document risk and outcomes to attain the appropriate reimbursement rates associated with these populations.

Increasing prevalence of value-based care and reimbursement models. Both public and private sectors are shifting towards alternative payment models that are designed to incentivize value and quality throughout an “episode of care.” These payment models require a high level of documentation, robust data, sophisticated payment attribution capabilities and advanced analytics that can adapt to new rules and goals to ensure compliance. Many payers and providers are still building the capabilities, expertise and administrative processes to manage these changes adequately. They are increasingly partnering with third parties to demonstrate the achievement of the outcomes required under these value-based payment models, which requires a fundamentally different skillset than what they have deployed historically.

Increasing patient financial responsibility and consumerism in healthcare. As healthcare expenditures have continued to rise, employers and health plans have shifted costs to patients through increased adoption of high-deductible health plans. Increases in patient financial responsibility require providers to obtain payment from the patient before and after the point of care. As providers become more consumer-oriented and retail in nature, they require increasingly sophisticated, dynamic and personalized solutions, which generally necessitate scale to be implemented efficiently and cost effectively. As patients are required to pay more out of their own pockets for healthcare, they are demanding price transparency and decision support from their health plans. Health plans are consequently partnering with third parties to provide their members with tools to enable them to assess quality and cost based on individual plan benefits. At the same time, providers seek to effectively communicate the quality and value of their services, determine patients’ upfront insurance eligibility, coverage and ability to pay their portion of their healthcare bills, and simplify the payment process to improve patient experience and satisfaction.

Proliferation of healthcare data. The U.S. government funded almost $40 billion of incentive payments to healthcare providers between 2011 and 2017 to adopt electronic health record technology, which has resulted in 80% of physicians and 96% of hospitals in the United States having certified Electronic Health Record (“EHR”)



 

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systems as of 2017, according to the Office of the National Coordinator for Health Information Technology. These EHRs, other digitized healthcare data and the increasing amount of personal health data from smartphones, wearable and other devices have created unprecedented amounts of healthcare data in the United States, which is expected to grow to more than 2,300 exabytes by 2020, according to the 2014 EMC Digital Universe Study by International Data Corporation. However, healthcare data is often siloed and unstructured and has historically been difficult to understand and use by all constituents on a timely basis. Advancements in ML and AI are making it easier to cost effectively utilize data at scale in real time to identify actionable insights that help improve outcomes and decrease cost for healthcare constituents. As healthcare data can be used more effectively, we expect that leading technology companies will increasingly seek scaled partners like us to effectively develop new software and analytics solutions that help payers and providers improve workflows to deliver higher quality care at lower cost to consumers.

Our Strengths

Embedded in our customers’ end-to-end, mission-critical, daily workflows. Our solutions are embedded in our customers’ core business functions, including member enrollment patient access, treatment, documentation, reimbursement and payment, claims and financial management, and post-payment and communication. We believe our collaborative and comprehensive approach, combined with our modular capabilities, is important to our customers’ ability to operate efficiently and cost-effectively. We seek to earn the loyalty of our customers with solutions that we believe help them meet financial and operational objectives and improve their recurring and evolving processes.

Leading healthcare-specific technology infrastructure. We have developed industry-leading data and analytics franchises that deliver value to our customers. Our Intelligent Healthcare Platform (“IHP”) provides a cloud-based, robust, and agile platform for our solutions. The IHP enables us to innovate with our customers and partners and to anticipate and meet customer needs. We continue to employ advanced technology to support our expansive network. We utilize efficient processes such as blockchain and an open application program interface (“API”)-driven functionability to enhance and expedite our processes. We collaborated with Amazon Web Services (“AWS”) for our cloud-based network, in order to increase our efficiency, transparency and security. Our commitment to industry-leading infrastructure creates significant leverage and speed for each of our businesses, and we believe helps our customers innovate faster and more effectively.

Scale and reach make us well positioned and a preferred technology partner. The pervasive nature of our solutions and network in the workflows of our more than 30,000 customers and our breadth of industry relationships position us to introduce best-in-class technologies to the healthcare industry at scale. We provide solutions supporting approximately 2,200 government and commercial payer connections, 900,000 physicians, 118,000 dentists, 33,000 pharmacies, 5,500 hospitals and 600 laboratories. This network transacts clinical records for over 112 million unique patients, more than one-third of the estimated total U.S. population. Our customers increasingly want to leverage our industry-leading data and analytics-driven solutions while taking advantage of our innovations in AI, ML and robotic process automation to improve clinical, financial and patient engagement outcomes. We are working with industry-leading technology companies, including AWS, Google, Adobe and Microsoft, to help further broaden our scale and reach with new, innovative solutions.

Modular and flexible solution design to serve our diverse, extensive customer base. We deploy our solutions through a complementary software and analytics, technology-enabled services and network delivery model with the power to target broad organizational needs of customers such as improved revenue opportunities or reduction in operational costs. At the same time, our solutions are modular and flexible providing us with the ability to address a customer’s needs whether that is a point solution or an end-to-end comprehensive set of products and



 

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services. In addition, we have the ability to deliver integrated solutions throughout our business. For example, a medical network customer that utilizes our electronic data interchange (“EDI”) can also use our Coding Advisor solution that leverages medical network transactions to improve coding accuracy, or an electronic payment solution that leverages the customer’s medical network to deliver electronic remittance advice. For their MA members, a customer can use Dx Gap Advisor to improve the completeness of claims submissions and help ensure appropriate reimbursement. As the needs of our customers evolve, we believe the flexible architecture we have developed will enable us to offer scaled, comprehensive solutions and be a partner of choice.

Proven ability to serve the evolving needs of our customers with industry-leading solution franchises. During the first half of fiscal 2019, we have added a number of new solutions to our business platform through new product development. As of December 31, 2018, our payment accuracy solutions were embedded in the workflow of 19 of the 20 largest U.S. commercial payers based on covered lives, while our decision support solutions were used by over 4,600 hospitals and facilities, and used by health plans covering over 100 million members. As a long-time leader in healthcare data interoperability, we provide open APIs based on Fast Healthcare Interoperability Resources and other industry standards, which help us integrate and innovate with customers and partners across the industry.

Data stewardship and security. As the amount of data in healthcare grows and the ability to use that data becomes more essential to effective delivery, management and administration, we expect data security to become increasingly important for our customers. We believe our history of delivering solutions while prioritizing data security and fidelity enables us to be the platform of choice for large customers and partners. We have multiple certifications with respect to certain of our offerings, including HITRUST, HIPAA, PCI, FISMA, ISO 27001, SOC2, and EHNAC, and we implement security procedures and policies informed by applicable law and recommended practices. We also aim to drive industry maturity through appointed leadership roles with HITRUST Alliance and H-ISAC (Healthcare Information Security and Analysis Center). We believe our customers will increasingly consolidate solutions providers to a handful of entrusted parties that can address large-scale healthcare cost and quality issues securely. We believe our strong relationships with our existing customers position us to benefit from this expected trend.

Predictable revenue profile and attractive, scalable model. We believe we have an attractive operating profile given the predictable, recurring nature of a significant portion of our revenue combined with a scalable financial model. Our revenue is largely derived from recurring transactional, monthly-subscription and per-click formats, as well as contingency-based or long-term contracts. During the fiscal year ended March 31, 2019, 88% of the Joint Venture’s solutions revenue was Recurring Revenue. Our customer base is highly diversified as no customer represented more than 4% of the Joint Venture’s solutions revenue in the fiscal year ended March 31, 2019. Additionally, we benefit from high customer retention across a diversified customer base composed of approximately 61% providers and 39% payers based on solutions revenue for the fiscal year ended March 31, 2018. Our business model requires moderate capital spending to grow, with capital expenditures of 3.5% of the Joint Venture’s solutions revenue for the fiscal year ended March 31, 2019. We continue to streamline costs and have instituted cost improvement initiatives throughout the organization. We believe our Recurring Revenue, combined with the opportunities for continued operating improvement following the Transactions, will provide us with increasing flexibility to allocate and deploy our capital.

Growth Strategy

Develop, augment and commercialize capabilities at scale. We work closely with our customers to integrate our offerings into their workflows and business processes. We develop new products and services, partner with industry-leading companies and selectively acquire complementary technologies and businesses to enhance our



 

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offerings. We introduce solutions through one of three methods: internal development, commercial partnerships and acquisitions.

 

   

Internal development—We leverage feedback from our customers, our partners and the analytical capabilities of our platform and suite of solutions to drive commercial innovations. We utilize our decades of industry experience, technology and services capabilities to identify new insights along the administrative and clinical care continuum. Through dialogue with our customers and our position as a scaled partner to payers, providers and others, we target commercial opportunities where these insights can be applied. We have developed new solutions in response to our partners’ requests to improve workflows and reduce barriers to collaboration. These responsive solutions are some of the fastest growing areas of our business.

 

   

Commercial partnerships—We had approximately 700 channel partners as of March 31, 2018, including the major EHR providers supporting workflow integration, as well as go-to-market channel partners who expand the sales and distribution reach of our software, data, network and payment solutions. We believe that our industry-leading customer base and platform allow us to collaborate with other software and technology leaders to develop and rapidly deploy complementary software and services. These partnerships are expansive and flexible ranging from limited scope sales relationships to arrangements where we are a significant customer.

 

   

Acquisitions—We have acquired and expect to continue to acquire assets and businesses that strengthen the value we deliver to our customers. Over the past seven years we have completed and successfully integrated 15 acquisitions. We have a successful track record of identifying, integrating and scaling new and complementary capabilities. For example, our recent National Decision Support Company (“NDSC”) and HealthQX acquisitions resulted from long-term partnerships that we previously had with both organizations.

Maximize wallet share with customers through cross selling. We believe we have significant opportunities to expand the suite of services that our long tenured and highly loyal customer base purchases from us through focused cross selling. While we seek to continually improve our product and service offerings, our sales force is focused on expanding the scope and depth of our customer relationships. Our omni-channel sales force covers medium and larger customers with direct field sales teams and uses inside sales for direct coverage of smaller customers. In addition, our sales teams are focused on embedding our technology in our partners’ applications and solutions. We leverage our communication and feedback with our customers to identify and execute on opportunities to expand and deepen relationships while increasing the benefits for their organizations through our connectivity, software, analytics and services.

Deliver comprehensive, end-to-end and modular solutions to customers. Our solutions are comprehensive in that they meet a significant portion of our customers’ clinical and administrative needs and are integrated to improve functionality and usability, yet are modular to meet the specific needs of our customers. We believe the ability to be comprehensive and integrated, yet flexible, will be increasingly attractive as customers seek to consolidate outside vendor relationships and improve their return on investment. We believe that our ability to deliver technology-enabled services as part of our comprehensive offerings significantly increases growth opportunities with our software, analytics and network solutions customers. Our solutions also continue to evolve with new technologies. We aim to have our offerings be flexible enough to work with the legacy technologies still used by many of our customers, while also delivering more sophisticated and advanced solutions to customers as they upgrade their technology platforms.

Use our large and growing data assets to deliver tangible value to customers. We continue to develop data-driven solutions that can drive tangible returns for our customers. We use our pervasive network connectivity and position as a trusted partner to create clinical and administrative solutions that leverage a multiparty, independent, longitudinal perspective and integrated technology and service assets. Our position as a trusted partner before, during and after care enables us to view the healthcare system from a holistic standpoint and



 

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deliver solutions that we believe are difficult to replicate. We routinely take insights from our connectivity, software and services and integrate them into complementary products and workflows. Through our large and growing data assets and associated analytics, we have created personalized, episodic, and population-based solutions for our customers to deliver high quality, low cost solutions at scale. As payment and care models evolve, we believe scaled data assets and pervasive network connectivity across constituents will be essential to delivering meaningful and sustainable cost and care improvements.

Continue to capitalize on the benefits of our transformational joint venture. In March 2017, we completed the establishment of the Joint Venture by combining Core MTS and Legacy CHC. This transaction was a significant corporate milestone and positions us to capitalize on an expanded customer value proposition. We believe that the combination of industry-leading analytics franchises and a comprehensive suite of solutions continues to create significant new and expanded growth opportunities. Since creating the Joint Venture, we have identified and executed a number of initiatives to improve our operational efficiency and positively impact our operating margins while making significant investments to support our long-term growth. As part of our strategy, we are repositioning certain of our underperforming solutions to better address end market dynamics and to improve the long-term growth potential of these solutions. As we continue to orient our sales efforts to fully capitalize on our expanded customer value proposition and capture opportunities, we expect our revenue and earnings growth across our segments to accelerate.

McKesson

McKesson Corporation, currently ranked seventh on the Fortune 500, is a healthcare services and IT company dedicated to making the business of healthcare run better. McKesson partners with payers, hospitals, physician offices, pharmacies, pharmaceutical companies and others across the spectrum of care to build healthier organizations that deliver better care to patients in every setting. McKesson helps its customers improve their financial, operational and clinical performance with solutions that include pharmaceutical and medical-surgical supply management, healthcare IT and business and clinical services. McKesson’s common stock is publicly traded on the New York Stock Exchange under the symbol MCK.

Our Sponsors

Blackstone. Blackstone (NYSE: BX) is one of the world’s leading investment firms. Blackstone’s alternative asset management businesses include the management of corporate private equity funds, real estate funds, hedge fund solutions, credit-oriented funds and closed-end mutual funds. Through its different businesses, Blackstone had total assets under management over $511 billion as of March 31, 2019.

Hellman & Friedman. Hellman & Friedman is a leading private equity investment firm with offices in San Francisco, New York and London. Since its founding in 1984, Hellman & Friedman has raised over $50 billion of committed capital. The firm focuses on investing in outstanding business franchises and serving as a value-added partner to management in select industries including software, financial services, business & information services, healthcare, internet & media, retail & consumer, and industrials & energy.

Investment Risks

An investment in shares of our common stock involves substantial risks and uncertainties that may adversely affect our business, financial condition and results of operations and cash flows. Some of the more significant challenges and risks relating to an investment in our company include, among other things, the following:

 

   

Our business faces significant competition, which may harm our business, results of operations or financial condition.



 

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Competition between us and some of our customers, or decisions by our customers to perform internally some of the same solutions or services that we offer, could harm our business, results of operations or financial condition.

 

   

If we are unable to retain our existing customers or attract new customers, our business, financial condition or results of operations could suffer.

 

   

If we are unable to connect to a large number of payers and providers, our solutions would be limited and less desirable to our customers.

 

   

Failure to maintain our relationships with our channel partners or significant changes in the terms of the agreements we have with them may have an adverse effect on our ability to successfully market our solutions.

 

   

We have faced and will continue to face pressure to reduce our prices, which may reduce our margins, profitability and competitive position.

 

   

Our revenue is highly dependent on transaction volumes in the U.S. healthcare industry, particularly payment and reimbursement transaction volumes, and any temporary or sustained decrease in healthcare transaction, payment or reimbursement volumes in the United States could have a material adverse impact on our business, results of operations or financial condition.

 

   

An economic downturn or volatility could have a material adverse impact on our business, results of operations or financial condition.

 

   

Our ability to generate revenue could suffer if we do not continue to update and improve our existing solutions and develop new ones.

 

   

The Joint Venture’s substantial indebtedness could adversely affect its financial condition, adversely affect its ability to operate its business, adversely affect its ability to react to changes in the economy or its industry, adversely affect its ability to meet its obligations under its outstanding indebtedness and divert its cash flow from operations for debt payments. As of March 31, 2019, the Joint Venture had approximately $5.8 billion of total debt.

 

   

Poor service, system errors or failures of our solutions to conform to specifications could cause unforeseen liabilities or injury, harm our reputation and have a material adverse impact on our business, results of operations or financial condition.

 

   

Disruptions in service or damages to our data or other operation centers, or other software or systems failures, could have a material adverse impact on our business, results of operations or financial condition.

 

   

Breaches and failures of our IT systems and the security measures protecting them and the sensitive information we transmit, use and store expose us to potential liability and reputational harm.

 

   

The protection of our intellectual property requires substantial resources and protections of our proprietary rights may not be adequate.

 

   

Government regulation, industry standards and other requirements create risks and challenges with respect to our compliance efforts and our business strategies.

 

   

We are unable to predict what changes to laws, regulations and other requirements, including related contractual obligations, might be made in the future or how those changes could affect our business or the costs of compliance.

 

   

Certain of the Joint Venture’s debt agreements impose significant operating and financial restrictions on it and its subsidiaries, which may prevent us from capitalizing on business opportunities.



 

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Our pre-IPO owners will continue to control us and their interests may conflict with ours or yours in the future. Prior to this offering, McKesson directly holds approximately 70% of the outstanding LLC Units of the Joint Venture. Because it holds its ownership interest in our business directly in the Joint Venture, rather than through Change Healthcare Inc., McKesson may have conflicting interests with holders of shares of our common stock.

 

   

Following the expiration of the underwriter lock-up period in connection with this offering, on the terms and subject to the conditions provided in the LLC Agreement, McKesson may, at its election, initiate and complete a Qualified McKesson Exit as described herein.

Please see “Risk Factors” for a discussion of these and other factors you should consider before making an investment in shares of our common stock.

The Transactions

In June 2016, the Legacy CHC Stockholders entered into an Agreement of Contribution and Sale (the “Contribution Agreement”) with McKesson and the other parties thereto. Under the terms of the Contribution Agreement, the parties completed the establishment of the Joint Venture, a joint venture that combined the McKesson Technology Solutions businesses, excluding McKesson’s Enterprise Information Solutions business and RelayHealth Pharmacy Network (such contributed businesses, “Core MTS”), with Legacy CHC’s businesses, including substantially all of the assets and operations of Legacy CHC, but excluding Legacy CHC’s pharmacy claims switching and prescription routing businesses (such excluded business, the “eRx Network” and the businesses contributed by Legacy CHC, together with Core MTS, the “Contributed Businesses”). We refer to the establishment of the Joint Venture, including the contribution of the Contributed Businesses and related transactions, collectively as the “Transactions.” The Transactions closed on March 1, 2017. From the time of its formation in June 2016 until the consummation of the Transactions, the Joint Venture had no substantive assets or operations.

Pursuant to the terms of the Contribution Agreement, (i) the Legacy CHC Stockholders, directly and indirectly, transferred ownership of substantially all of Legacy CHC to the Joint Venture in consideration of (a) the payment at the closing of the Transactions by the Joint Venture to the Legacy CHC Stockholders and certain participants in the Legacy CHC Amended and Restated 2009 Equity Incentive Plan of approximately (A) $1.8 billion, (B) stock in eRx Network Holdings, Inc., and (C) the 2017 Tax Receivable Agreement (defined below) and (b) the issuance to Change Healthcare Inc. of membership interests in the Joint Venture; and (ii) McKesson caused Core MTS to be transferred to the Joint Venture in consideration of (a) the assumption and subsequent payment at the closing of the Transactions by the Joint Venture to McKesson of a promissory note in the amount of approximately $1.3 billion, (b) the issuance of membership interests in the Joint Venture and (c) an interest in a tax receivable agreement from the Joint Venture.

Organizational Structure

Change Healthcare Inc. is a holding company that was formed in connection with the Transactions and does not own any material assets or have any operations other than through its interest in the Joint Venture. Prior to and immediately following this offering, each of Change Healthcare Inc. and McKesson holds a 50% voting interest in the Joint Venture, with equal representation on the Joint Venture’s board of directors and with all major operating, investing and financial activities requiring the consent of both members. As a result, Change Healthcare Inc. does not consolidate the financial position and results of the Joint Venture. Instead, Change Healthcare Inc. accounts for its investment in the Joint Venture under the equity method of accounting.



 

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The limited liability company agreement of the Joint Venture (the “LLC Agreement”) provides for a single class of membership interests that we refer to as “LLC Units.” Prior to this offering, Change Healthcare Inc. holds approximately 30% of the issued and outstanding LLC Units and McKesson holds approximately 70% of the outstanding LLC Units.

Our post-offering organizational structure, as described above, is commonly referred to as an umbrella partnership-C-corporation (or UP-C) structure. This organizational structure will allow McKesson to retain its equity ownership in the Joint Venture, an entity that is classified as a partnership for U.S. federal income tax purposes, in the form of LLC Units. Investors in this offering, the Sponsors and management will, by contrast, hold their equity ownership in Change Healthcare Inc., a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes, in the form of shares of common stock. We believe that McKesson generally finds it advantageous, in periods prior to the Qualified McKesson Exit, to continue to hold its equity interests in an entity that is not taxable as a corporation for U.S. federal income tax purposes. We do not believe that our UP-C organizational structure will give rise to any significant business or strategic benefit or detriment to us. See “Organizational Structure” and “Risk Factors—Risks Related to Our Organizational Structure” for additional information about our organizational structure, including our tax receivable agreements.

Following the expiration of the underwriter lock-up period in connection with this offering, subject to the terms and subject to the conditions provided in the LLC Agreement, McKesson may, at its election, initiate and complete a spin-off or split-off transaction (or a combination of the foregoing) that would result, among other things, in the acquisition by Change Healthcare Inc. of all of McKesson’s LLC Units and the issuance by Change Healthcare Inc. to McKesson and/or McKesson’s securityholders of an equal number of shares of its common stock (such transactions, a “Qualified McKesson Exit”). See “Certain Relationships and Related Person Transactions—LLC Agreement of the Joint Venture—Transfers of LLC Units.” In connection with a Qualified McKesson Exit, McKesson would contribute the stock of McKesson subsidiaries that own all of McKesson’s interests in the Joint Venture to a Delaware corporation that is McKesson’s direct or indirect wholly-owned subsidiary (“SpinCo”) and then would either distribute stock of SpinCo to the stockholders of McKesson as a dividend in a spin-off, commence one or more exchange offers pursuant to which McKesson will exchange stock of SpinCo for stock of McKesson held by the stockholders of McKesson or consummate one or more exchanges of stock of SpinCo for debt securities of McKesson (or a combination of the foregoing). Immediately thereafter, SpinCo would merge with and into Change Healthcare Inc. (the “Merger”), pursuant to which the stockholders of SpinCo will be entitled to receive a number of shares of common stock of Change Healthcare Inc. equal to the number of LLC Units held by SpinCo at the effective time of the Merger. Following a Qualified McKesson Exit, Change Healthcare LLC is expected to become a consolidated subsidiary of Change Healthcare Inc. Change Healthcare Inc.’s stockholders and board of directors have already approved the Merger and the related Merger Agreement described herein.

McKesson would also enter into a customary Separation and Distribution Agreement with SpinCo (the “Separation and Distribution Agreement”) and other ancillary agreements prior to, and in connection with, a Qualified McKesson Exit. McKesson, SpinCo and Change Healthcare Inc. would also enter into a Tax Matters Agreement, which would govern the rights, responsibilities and obligations of McKesson and SpinCo after the Qualified McKesson Exit with respect to tax liabilities and benefits (including indemnification provisions in favor of McKesson in the event certain transactions related to the Qualified McKesson Exit do not qualify for tax-free treatment), tax attributes, tax contests and other tax sharing regarding U.S. federal, state and local, and non-U.S., taxes, other tax matters and related tax returns.

In addition, following this offering, on the terms and subject to the conditions provided in the LLC Agreement, McKesson (or certain permitted transferees) will have the right from time to time to exchange its LLC Units for shares of our common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. For a description of the LLC Agreement of the Joint Venture, please read “Certain Relationships and Related Person Transactions.”



 

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The simplified diagram below depicts our organizational structure immediately following this offering and the concurrent offering of the Units. For additional detail, see “Organizational Structure.”

 

 

LOGO

 

(1)

Immediately following this offering, our Sponsors, management and other pre-IPO owners will own     % of our outstanding common stock (or     % if the underwriters exercise in full their option to purchase additional shares of common stock) and public stockholders will own     % of our outstanding common stock (or     % if the underwriters exercise in full their option to purchase additional shares of common stock).

(2)

Immediately following this offering, McKesson and Change Healthcare Inc. will hold     % and     %, respectively, of the outstanding LLC Units of the Joint Venture. Prior to and immediately following this offering, each of Change Healthcare Inc. and McKesson holds a 50% voting interest in the Joint Venture, with equal representation on the Joint Venture’s board of directors and with all major operating, investing and financial activities requiring the consent of both members.

(3)

Following the expiration of the underwriter lock-up period in connection with this offering, on the terms and subject to the conditions provided in the LLC Agreement, McKesson may, at its election, initiate and complete a Qualified McKesson Exit. In addition, following this offering, on the terms and subject to the conditions provided in the LLC Agreement, McKesson (or certain permitted transferees) will have the right from time to time to exchange its LLC Units for shares of our common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. For a description of the LLC Agreement of the Joint Venture, please read “Certain Relationships and Related Person Transactions.”

(4)

Change Healthcare Inc. intends to invest an amount equal to the net proceeds from the sale of the Units (including from any exercise by the underwriters of their option to purchase additional Units) in the Joint Venture. The Joint Venture, in turn, will enter into arrangements (the “Mirror Arrangements”) with Change Healthcare Inc. on economic terms designed to materially mirror those of the Units. See “Organizational Structure—Offering Transactions.”



 

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The simplified diagram below depicts what our organizational structure would be immediately following a Qualified McKesson Exit if McKesson were to conduct a spin-off or split-off transaction of all of McKesson’s LLC Units immediately following this offering and the concurrent offering of the Units. For additional detail, see “Organizational Structure—Qualified McKesson Exit & Exchanges.” There is no assurance that McKesson will pursue a Qualified McKesson Exit.

 

 

LOGO

 

(1)

In the event that a Qualified McKesson Exit were to occur immediately following this offering, our Sponsors, management and other pre-IPO owners would own     % of our outstanding common stock (or     % if the underwriters exercise in full their option to purchase additional shares of common stock) and public stockholders (including the securityholders of McKesson who receive shares of our common stock in connection with the Qualified McKesson Exit) will own     % of our outstanding common stock (or     % if the underwriters exercise in full their option to purchase additional shares of common stock).

 

 

Change Healthcare Inc. was incorporated in Delaware on June 22, 2016 under the name HCIT Holdings, Inc. On October 26, 2018, we changed our name to Change Healthcare Inc. Our principal executive offices are located at 3055 Lebanon Pike, Suite 1000, Nashville, Tennessee 37214 and our telephone number is 615-932-3000.

Concurrent Offering

Concurrently with this offering, Change Healthcare Inc. is offering, by means of a separate prospectus,     % Tangible Equity Units (and, to the extent that the underwriters sell more than                 Units, up to an additional              Units that the underwriters in the concurrent offering have the option to purchase from Change Healthcare Inc. at the initial public offering price thereof less the underwriting discount, exercisable within 13 days beginning on, and including, the date of initial issuance of the Units), each with a stated amount of $50.00. We estimate that the net proceeds to Change Healthcare Inc. from the sale of Units in the concurrent offering, if completed, will be approximately $             million (or approximately $             million if the underwriters in the concurrent offering exercise in full their option to purchase additional Units), in each case after deducting estimated underwriting discounts and commissions. The Joint Venture will bear or reimburse Change Healthcare



 

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Inc. for all of the expenses payable by it in the concurrent offering. We estimate these offering expenses (excluding underwriting discounts and commissions), will be approximately $             million. The closing of this offering is not conditioned upon the closing of the concurrent offering, but the closing of the concurrent offering is conditioned upon the closing of this offering, and there can be no assurance that the concurrent offering will be completed on the terms described herein or at all. For additional information, see “Tangible Equity Units Offering.”



 

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Table of Contents

The Offering

 

Common stock offered by Change Healthcare Inc.

                shares (plus up to an additional                 shares at the option of the underwriters).

 

Common stock outstanding after giving effect to this offering

                     shares (or                 shares if the underwriters exercise in full their option to purchase additional shares of common stock).

 

Common stock outstanding after this offering assuming exchange of all LLC Units held by McKesson

                     shares (or                 shares if the underwriters exercise in full their option to purchase additional shares of common stock).

 

Use of proceeds

We estimate that the net proceeds to Change Healthcare Inc. from this offering, after deducting estimated underwriting discounts and commissions, will be approximately $                 million (or $                 million if the underwriters exercise in full their option to purchase additional shares of common stock). The Joint Venture will bear or reimburse Change Healthcare Inc. for all of the expenses payable by it in this offering. We estimate these offering expenses (excluding underwriting discounts and commissions) will be approximately $                 million.

 

  We estimate that the net proceeds to Change Healthcare Inc. from the concurrent offering of the Units, if completed, after deducting estimated underwriting discounts and commissions, will be approximately $                  million (or $                  million if the underwriters in the concurrent offering of Units exercise in full their option to purchase additional Units). The Joint Venture will bear or reimburse Change Healthcare Inc. for all of the expenses payable by it in the concurrent offering of the Units. We estimate these offering expenses (excluding underwriting discounts and commissions), will be approximately $                  million.

 

  Change Healthcare Inc. intends to use all of the net proceeds from this offering (including from any exercise by the underwriters of their option to purchase additional shares of common stock) to purchase a number of newly issued LLC Units from the Joint Venture that is equivalent to the number of shares of common stock that we offer and sell in this offering. Change Healthcare Inc. intends to invest an amount equal to the net proceeds from the sale of the Units in the concurrent offering of the Units (including from any exercise by the underwriters in the concurrent offering of the Units of their option to purchase additional Units) in the Joint Venture. The Joint Venture, in turn, will enter into the Mirror Arrangements with Change Healthcare Inc. on economic terms designed to materially mirror those of the Units. See “Organizational Structure—Offering Transactions.”


 

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  The Joint Venture, in turn, expects to use the proceeds from (i) this offering, together with cash on hand, to repay outstanding indebtedness under our senior secured term loan facility totaling approximately $                 million in aggregate principal amount (or $                 million in aggregate principal amount if the underwriters exercise in full their option to purchase additional shares of common stock) at an assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and for offering expenses and (ii) the concurrent offering of the Units, if completed, together with cash on hand, to repay outstanding indebtedness under our senior secured term loan facility totaling approximately $                  million in aggregate principal amount (or $                  million in aggregate principal amount if the underwriters in the concurrent offering of the Units exercise in full their option to purchase additional Units), and for offering expenses. See “Use of Proceeds.”

 

Voting rights

Each share of our common stock entitles its holder to one vote on all matters to be voted on by stockholders generally. See “Description of Capital Stock.” Prior to and immediately following this offering, each of Change Healthcare Inc. and McKesson holds a 50% voting interest in the Joint Venture, with equal representation on the Joint Venture’s board of directors and with all major operating, investing and financial activities requiring the consent of both members.

 

Dividend policy

The declaration, amount and payment of any future dividends will be at the sole discretion of our board of directors. Our board of directors may take into account general economic and business conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries (including the Joint Venture) to us, and such other factors as our board of directors may deem relevant.

 

  Change Healthcare Inc. is a holding company and has no material assets other than its interest in the Joint Venture. As a result, Change Healthcare Inc. will not be able to pay any dividend unless the Joint Venture makes a distribution to its members in an amount sufficient to cover the dividend declared by Change Healthcare Inc. The ability of the Joint Venture to make distributions to us is restricted, among other things, by the terms of its debt agreements. If the Joint Venture makes such distributions to Change Healthcare Inc., McKesson will be entitled to participate ratably in such distributions for so long as it continues to hold LLC units.

 

Exchange rights of McKesson

Following the expiration of the underwriter lock-up period in connection with this offering, on the terms and subject to the conditions provided in the LLC Agreement, McKesson may, at its election, initiate and complete a spin-off or split-off transaction that



 

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would result in the acquisition by Change Healthcare Inc. of all of McKesson’s LLC Units and the issuance by Change Healthcare Inc. to McKesson and/or McKesson’s securityholders of an equal number of shares of its common stock (such transactions, a “Qualified McKesson Exit”). In addition, following this offering, on the terms and subject to the conditions provided in the LLC Agreement, McKesson (or certain permitted transferees) will have the right from time to time to exchange its LLC Units for shares of our common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. For a description of the LLC Agreement of the Joint Venture, please read “Certain Relationships and Related Person Transactions.”

 

Risk factors

See “Risk Factors” for a discussion of risks you should carefully consider before deciding to invest in our common stock.

 

Directed share program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 2% of the shares of common stock offered by this prospectus for sale to our directors, officers and certain of our employees and other persons associated with us. The sales will be made by J.P. Morgan Securities LLC, an underwriter of this offering, through a directed share program. If these persons purchase common stock it will reduce the number of shares of common stock available for sale to the general public. Any reserved shares of common stock that are not purchased will be offered by the underwriters to the general public on the same terms as the other shares of common stock offered by this prospectus.

 

Certain United States federal income and estate tax consequences to non-U.S. holders

For a discussion of certain United States federal income and estate tax consequences that may be relevant to non-U.S. stockholders, see “Certain United States Federal Income and Estate Tax Consequences to Non-U.S. Holders.”

 

Proposed trading symbol

“CHNG”

 

Concurrent Tangible Equity Units Offering

Concurrently with this offering of common stock, Change Healthcare Inc. is making a public offering, by means of a separate prospectus, of                 Units, and Change Healthcare Inc. has granted the underwriters of that offering a 13-day option to purchase up to an additional                 Units, solely to cover over-allotments.

 

  We cannot assure you that the offering of Units will be completed or, if completed, on what terms it will be completed. The closing of this offering is not conditioned upon the closing of the offering of Units, but the closing of the offering of Units is conditioned upon the closing of this offering. See the section of this prospectus entitled “Tangible Equity Units Offering” for a summary of the terms of the Units and a further description of the concurrent offering.


 

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In this prospectus, unless otherwise indicated, the number of shares of common stock outstanding and the other information based thereon does not reflect:

 

   

             shares of common stock issuable upon exercise of the underwriters’ option to purchase additional shares of common stock from us;

 

   

            shares of common stock issuable upon exchange of                 LLC Units that will be held by McKesson immediately following this offering;

 

   

             shares of common stock that may be granted under the new or amended Change Healthcare Inc. Omnibus Incentive Plan (the “Omnibus Incentive Plan”). See “Management—Executive Compensation—Omnibus Incentive Plan;” or

 

   

up to              shares of common stock (or up to              shares if the underwriters in the concurrent offering of the Units exercise in full their option to purchase additional Units) issuable upon settlement of the purchase contracts that are a component of the Units being offered in the concurrent offering, in each case, at the rate of              shares of common stock per purchase contract assuming the maximum number of shares issuable upon automatic settlement of such purchase contracts, subject to certain anti-dilution adjustments, and the acquisition by Change Healthcare Inc. of a corresponding number of LLC Units.

Unless otherwise indicated or the context otherwise requires, all information in this prospectus reflects and assumes the completion of the concurrent offering of                  Units and assumes no exercise by the underwriters of the concurrent offering of their option to purchase additional Units.



 

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Table of Contents

Summary Historical Financial and Other Data

Summary Historical Financial Data of Change Healthcare Inc.

The following table sets forth the summary historical financial data of Change Healthcare Inc. for the periods ended and at the dates indicated below. The summary historical statements of operations data and the summary statements of cash flows data for the years ended March 31, 2019 and 2018 and the period from June 22, 2016 (inception) through March 31, 2017 and the summary balance sheet data as of March 31, 2019 and 2018 were derived from the audited financial statements of Change Healthcare Inc., included elsewhere in this prospectus. The summary balance sheet data as of March 31, 2017 was derived from the audited financial statements of Change Healthcare Inc., not included elsewhere in this prospectus.

Historical results are not necessarily indicative of the results expected for any future period. You should read the summary historical financial data below, together with the financial statements and related notes thereto appearing elsewhere in this prospectus, as well as “Organizational Structure,” “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Certain Indebtedness,” and the other information included elsewhere in this prospectus.

Change Healthcare Inc. is a holding company that was formed in connection with the Transactions and does not own any material assets or have any operations other than through its interest in the Joint Venture. Prior to and immediately following this offering, each of Change Healthcare Inc. and McKesson holds a 50% voting interest in the Joint Venture, with equal representation on the Joint Venture’s board of directors and with all major operating, investing and financial activities requiring the consent of both members. As a result, Change Healthcare Inc. does not consolidate the financial position and results of the Joint Venture. Instead, Change Healthcare Inc. accounts for its investment in the Joint Venture under the equity method of accounting.

For periods prior to March 1, 2017, this prospectus presents the financial position and results of Legacy CHC and Core MTS, the predecessors for accounting purposes to Change Healthcare Inc. In addition, this prospectus supplementally presents the consolidated financial position and results of the Joint Venture, the equity method investee of Change Healthcare Inc., in all periods since the Joint Venture’s inception.

 

     Change Healthcare Inc.  
     Year Ended
March 31,
2019
    Year Ended
March 31,
2018
    Period from
June 22, 2016
(inception) to
March 31,
2017
 
     (In millions)  

Summary Statement of Operations Data:

      

Revenue

   $ —       $ —       $ —    

Operating expenses:

      

General and administrative

     1.1       0.2       0.8  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     1.1       0.2       0.8  
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (1.1     (0.2     (0.8

Loss from Equity Method Investment in Joint Venture

     70.5       58.7       43.1  

(Gain) Loss on Sale of Interests in Joint Venture

     (0.7     —         —    

Management fee income

     (0.4     (0.2     (0.8
  

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision (benefit)

     (70.5     (58.7     (43.1

Income tax provision (benefit)

     (18.6     (119.6     (16.8
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (51.9   $ 61.0     $ (26.3
  

 

 

   

 

 

   

 

 

 


 

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     Change Healthcare Inc.  
     Year Ended
March 31,
2019
     Year Ended
March 31,
2018
    Period from
June 22, 2016
(inception) to
March 31,
2017
 
     (In millions)  

Summary Balance Sheet Data (at period end):

       

Cash and cash equivalents

   $ 3.4      $ —       $ —    

Total assets

   $ 1,298.8      $ 1,374.0     $ 1,389.4  

Total debt

   $ —        $ —       $ —    

Total stockholders’ equity

   $ 1,132.5      $ 1,176.6     $ 1,088.2  

Summary Statement Statements of Cash Flows Data:

       

Net cash provided by (used in) operating activities

   $ 3.4      $ —       $ —    

Net cash provided by (used in) investing activities

   $ 6.5      $ 0.2     $ —    

Net cash provided by (used in) financing activities

   $ (6.5)      $ (0.2   $ —    

Summary Historical Consolidated Financial Data of Change Healthcare LLC

The following table sets forth the summary historical consolidated financial and other data of Change Healthcare LLC, or the Joint Venture, for the periods ended and at the dates indicated below. The summary historical statements of operations data and the summary statements of cash flows data for the years ended March 31, 2019 and 2018 and the period from June 17, 2016 (inception) through March 31, 2017 and the summary balance sheet data as of March 31, 2019 and 2018 were derived from the audited consolidated financial statements of Change Healthcare LLC, included elsewhere in this prospectus. The summary balance sheet data as of March 31, 2017 was derived from the audited condensed consolidated financial statements of Change Healthcare LLC, not included elsewhere in this prospectus.

Historical results are not necessarily indicative of the results expected for any future period. You should read the summary historical consolidated financial data below, together with the consolidated financial statements and related notes thereto appearing elsewhere in this prospectus, as well as “Organizational Structure,” “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Certain Indebtedness,” and the other information included elsewhere in this prospectus.

 

     Change Healthcare LLC  
     Year Ended
March 31,

2019
     Year Ended
March 31,
2018
     Period from
June 17, 2016
(inception) to

March 31,
2017
 
 
     (In millions)  

Summary Statement of Operations Data:

        

Revenue:

        

Solutions revenue

   $ 3,043.1      $ 3,024.4      $ 283.5  

Postage revenue

     238.6        274.4        26.1  
  

 

 

    

 

 

    

 

 

 

Total Revenue

     3,281.7        3,298.8        309.6  


 

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     Change Healthcare LLC  
     Year Ended
March 31,

2019
    Year Ended
March 31,
2018
    Period from
June 17, 2016
(inception) to

March 31,
2017
 
     (In millions)  

Operating expenses:

      

Cost of operations (exclusive of depreciation and amortization below)

     1,354.7       1,407.9       133.7  

Research and development

     202.2       221.7       22.6  

Sales, marketing, general and administrative

     821.1       749.9       109.9  

Customer postage

     238.6       274.4       26.1  

Depreciation and amortization

     278.0       278.4       26.5  

Accretion and changes in estimate with related parties, net

     19.3       (50.0     (24.5

Gain on Sale of the Extended Care Business

     (111.4     —       —    

Impairment of long-lived assets and other exit related costs

     0.7     0.8       48.7  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     2,803.2       2,883.0       343.0  
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     478.5       415.8       (33.4

Interest expense, net

     325.4       292.5       22.4  

Loss on extinguishment of debt

     —       —         70.1  

Contingent consideration

     (0.8    

Other, net

     (18.3     (17.2     (1.3
  

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision (benefit)

     172.2       140.5       (124.6

Income tax provision (benefit)

     (4.5     (51.9     (41.0
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 176.7     $ 192.4     $ (83.6
  

 

 

   

 

 

   

 

 

 

Summary Balance Sheet Data (at period end):

      

Cash and cash equivalents

   $ 47.7     $ 48.9     $ 185.7  

Total assets

   $ 6,204.1     $ 6,200.9     $ 6,283.5  

Total debt

   $ 5,789.9     $ 5,920.9     $ 5,959.1  

Tax receivable obligations to related parties

   $ 212.7     $ 223.2     $ 298.1  

Members’ deficit

   $ (904.8   $ (1,066.2   $ (1,273.4

Summary Statement of Cash Flows Data:

      

Net cash provided by (used in) operating activities

   $ 287.7     $ 324.8     $ (40.7

Net cash provided by (used in) investing activities

   $ (105.7   $ (260.7   $ (11.2

Net cash provided by (used in) financing activities

   $ (182.1   $ (197.5   $ 240.1  

Summary Operational and Other Data(1):

      

Adjusted EBITDA(2)

   $ 935.0     $ 943.8     $ 82.1  

Adjusted Net Income(2)

   $ 478.7     $ 490.6     $ 28.6  

 

(1)

The Joint Venture uses a number of operational and other metrics in order to evaluate performance and make decisions about its business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Change Healthcare LLC—Key Performance Measures” for additional information regarding its use of these metrics.

(2)

The Joint Venture defines Adjusted EBITDA as net income (loss) before net interest expense, income tax provision (benefit), depreciation and amortization, as adjusted to exclude the impact of certain items that are not reflective of its core operations. The Joint Venture defines Adjusted Net Income as net income (loss) before amortization expense, as adjusted to exclude the impact of certain items that are not reflective of its core operations, and the tax effects of the foregoing adjustments.



 

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Management uses Adjusted EBITDA and Adjusted Net Income to facilitate a comparison of the Joint Venture’s operating performance on a consistent basis from period to period that, when viewed in combination with the Joint Venture’s results according to GAAP, management believes provides a more complete understanding of the factors and trends affecting the Joint Venture’s business than GAAP measures alone. Management believes these non-GAAP measures assist the Joint Venture’s board of directors, management, lenders and investors in comparing the Joint Venture’s operating performance on a consistent basis because they remove, where applicable, the impact of the Joint Venture’s capital structure, asset base, acquisition accounting and other items that are not reflective of its core operations. Additionally, management uses Adjusted EBITDA and Adjusted Net Income to evaluate the Joint Venture’s operational performance, as a basis for strategic planning and as a performance evaluation metric in determining achievement of certain executive and management incentive compensation programs.

Despite the importance of these measures in analyzing the Joint Venture’s business, measuring and determining incentive compensation and evaluating the Joint Venture’s operating performance, as well as the use of Adjusted EBITDA and Adjusted Net Income measures by securities analysts, lenders and others in their evaluation of companies, Adjusted EBITDA and Adjusted Net Income have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for net income (loss), cash flow or other methods of analyzing the Joint Venture’s results as reported under GAAP. The Joint Venture does not use or present Adjusted EBITDA or Adjusted Net Income as a measure of liquidity or cash flow. Some of the limitations of these measures are:

 

   

they do not reflect the Joint Venture’s cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

they do not reflect changes in, or cash requirements for, the Joint Venture’s working capital needs;

 

   

Adjusted EBITDA does not reflect the interest expense or the cash requirements to service interest or principal payments on the Joint Venture’s debt;

 

   

Adjusted EBITDA does not reflect income tax payments the Joint Venture is required to make;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future and Adjusted EBITDA and Adjusted Net Income do not reflect any cash requirements for such replacements; and

 

   

other companies in the Joint Venture’s industry may calculate these measures differently, limiting their usefulness as comparative measures. For example, our calculation of Adjusted Net Income excludes all amortization expense. As a result, our presentation of Adjusted Net Income is not comparable to that of companies that do not exclude such expense or only exclude a portion of it.

To properly and prudently evaluate the Joint Venture’s business, we encourage you to review the financial statements included elsewhere in this prospectus, and not rely on a single financial measure to evaluate the Joint Venture’s business. We also strongly urge you to review the reconciliations of net income (loss) to Adjusted EBITDA and Adjusted Net Income set forth below.



 

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The following table sets forth a reconciliation of net income (loss) to Adjusted EBITDA:

 

     Year Ended

March 31,

2019

     Year Ended
March 31,
2018
     Period from
June 17, 2016
(inception) to
March 31,
2017
 
 
            (In millions)         

Net income (loss)

   $ 176.7      $ 192.4      $ (83.6

Interest expense, net

     325.4        292.5        22.4  

Income tax provision (benefit)

     (4.5      (51.9      (41.0

Depreciation and amortization(a)

     278.0        278.4        26.5  

Amortization of capitalized software developed for sale

     14.7        18.3        1.5  
  

 

 

    

 

 

    

 

 

 

EBITDA

   $ 790.3      $ 729.7      $ (74.2

Adjustments to EBITDA:

        

Equity compensation(b)

     20.1        24.7        0.7  

Acquisition accounting adjustments(c)

     3.5        2.6        0.1  

Acquisition and divestiture-related costs(d)

     13.1        1.8        —    

Transaction-related costs(e)

     —          4.6        43.3  

Integration and related costs(f)

     114.5        107.2        8.8  

Management fees and related costs(g)

     10.5        11.5        0.9  

Implementation costs related to recently issued accounting standards(h)

     8.3        26.6        1.6  

Strategic initiative, duplicative and transition costs(i)

     27.3        12.3        0.9  

Severance costs(j)

     17.7        38.3        2.2  

Accretion and changes in estimate with related parties, net(k)

     19.3        (50.0      (24.5

Impairment of long-lived assets and other exit related costs(l)

     4.2        0.8        48.7  

Loss on extinguishment of debt(m)

     —          —          70.1  

Gain on Sale of the Extended Care Business(n)

     (111.4      —          —    

Contingent consideration(o)

     (0.8      —        —  

Other non-routine, net(p)

     18.4        33.8        3.5  
  

 

 

    

 

 

    

 

 

 

EBITDA Adjustments

     144.7        214.2        156.3  
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA(q)

   $ 935.0      $ 943.8      $ 82.1  
  

 

 

    

 

 

    

 

 

 

 

  (a)

Total depreciation and amortization includes $146.5 million, $174.1 million and $16.6 million of amortization of identifiable intangible assets for the years ended March 31, 2019 and 2018, and the period from June 17, 2016 (inception) to March 31, 2017, respectively, that arose from the application of acquisition method accounting following a business combination. Such amounts do not include amortization of software developed following business combinations.

  (b)

Represents non-cash equity-based compensation of Change Healthcare Inc. to employees and directors of the Joint Venture. The Joint Venture believes this adjustment allows it to compare operating performance without regard to the impact of equity-based compensation expense, which varies from period to period based on the timing of grants and value of the options.

  (c)

Represents adjustments that arose from acquisition method accounting following a business combination. These adjustments principally relate to the revaluation of deferred revenue to fair value and the subsequent reduction to recognized revenue. As the related revenue stream is an ongoing component of the Joint Venture’s business, the Joint Venture believes it is appropriate to consider these items in earnings in the period in which they would have been recognized absent the application of acquisition method accounting.

  (d)

Represents acquisition, divestiture and related costs charged to operations.



 

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  (e)

Represents costs associated with the Transactions following the close of the Transactions and unrelated to integration efforts.

  (f)

Represents incremental costs incurred in connection with the integration of Legacy CHC and Core MTS. Such costs include professional fees for consultants engaged in project management, process design, human resource policy harmonization and other integration costs.

  (g)

Represents management and advisory fees paid to McKesson and the Sponsors pursuant to a management services agreement. See “Certain Relationships and Related Person Transactions—Management Services Agreement.”

  (h)

Represents external costs related to upcoming changes in accounting standards regarding the recognition of revenue and leases.

  (i)

Represents adjustments for advisory and consulting fees incurred in connection with strategic initiatives and significant operations efficiency measures including the rebranding of the Joint Venture and other costs.

  (j)

Represents severance costs that primarily relate to operational efficiency measures.

  (k)

Represents accretion of certain of the Joint Venture’s tax receivable agreement obligations from their initial fair value to the total expected payments due under such agreements as well as changes in estimate related to other tax receivable agreements. Because the amortized costs of these agreements are directly attributable to the Sponsors and their affiliates, the Joint Venture does not believe they represent a routine ongoing cost of operations of a typical business.

  (l)

Represents impairment charges generally incurred in connection with the retirement of products or the abandonment of property and equipment, product development initiatives or executory contracts.

  (m)

Represents the loss on extinguishment of debt that resulted from the Transactions.

  (n)

Represents the gain recognized from the sale of the extended care solutions business, which the Joint Venture divested in July 2018.

  (o)

Represents contingent consideration adjustments related to business combinations.

  (p)

Represents other non-routine adjustments that management believes are not indicative of the Joint Venture’s ongoing operations. The following table shows a breakout of the components of Other non-routine, net:

 

    Year Ended
March 31,
2019
    Year Ended
March 31,
2018
    Period from
June 17, 2016
(inception) to
March 31,
2017
 
 
          (In millions)        

Other Adjustments to EBITDA:

     

Impairment of contract acquisition costs

  $ —     $ 5.2     $ —    

Non-routine litigation related expenses

    12.1       16.8       —    

ASC 450 contingencies

    —       2.7       —    

Other(i)

    6.3       9.1       3.5  
 

 

 

   

 

 

   

 

 

 

Total Other non-routine, net:

  $ 18.4     $ 33.8     $ 3.5  
 

 

 

   

 

 

   

 

 

 

 

  (i)

Represents other miscellaneous adjustments to exclude the impact of non-routine and other items not reflective of the Joint Venture’s core operations.

  (q)

Includes approximately $1.1 million, $15.7 million and $3.9 million of Adjusted EBITDA for the extended care solutions business, which the Joint Venture divested in July 2018, during the years ended March 31, 2019 and 2018, and the period from June 17, 2016 (inception) to March 31, 2017, respectively.



 

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The following table sets forth a reconciliation of net income (loss) to Adjusted Net Income:

     Year Ended
March 31, 2019
     Year Ended
March 31, 2018
     Period from
June 17, 2016
(inception) to
March 31, 2017
 
     (in millions)  

Net income (loss)

   $     176.7      $ 192.4      $ (83.6

Amortization expense(a)

     232.9            238.5        22.3  

EBITDA Adjustments(b)

     144.7        214.2            156.3  

Tax Effects of EBITDA Adjustments and amortization expense(c)

     (75.6      (154.5      (66.4
  

 

 

    

 

 

    

 

 

 

Adjusted Net Income

   $ 478.7      $ 490.6      $ 28.6  
  

 

 

    

 

 

    

 

 

 

 

  (a)

Represents amortization expense determined in accordance with generally accepted accounting principles. By excluding the impact of amortization expense, the Joint Venture believes that this adjustment and Adjusted Net Income, when considered together with its results of operations presented in accordance with GAAP, provide meaningful information about the performance of its core operations and foster comparability of the Joint Venture’s results. Despite the importance of the Adjusted Net Income measure, including this adjustment, in analyzing the Joint Venture’s business, it has limitations as an analytical tool, and you should not consider it in isolation, or as substitute for net income (loss), cash flow or other methods of analyzing the Joint Venture’s results as reported under GAAP. While amortization is a non-cash charge, the assets being amortized often will have to be replaced in the future and this adjustment does not reflect any cash requirements for replacements of such assets. Total amortization includes $146.5 million, $174.1 million and $16.6 million of amortization of identifiable intangible assets for the years ended March 31, 2019 and 2018, and the period from June 17, 2016 (inception) to March 31, 2017, respectively, that arose from the application of acquisition method accounting following a business combination.

  (b)

See the reconciliation of net income (loss) to Adjusted EBITDA above for additional information about these EBITDA adjustments.

  (c)

Represents the increase in the income tax provision resulting from the adjustments to EBITDA and amortization expense, taking into consideration the nature, affected consolidated subsidiary and relevant tax jurisdictions, incremental to the income tax provision (benefit) computed in accordance with GAAP. The increase in income tax provision relating only to EBITDA Adjustments and the elimination of the incremental amortization expense resulting from acquisition method adjustments was $53.8 million, $130.9 million and $64.1 million for the years ended March 31, 2019 and 2018, and the period from June 17, 2016 (inception) to March 31, 2017, respectively. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Change Healthcare LLC—Qualified McKesson Exit” for information on how income taxes would be affected following a Qualified McKesson Exit.

Summary Historical Consolidated Financial Data of Legacy CHC

The following table sets forth the summary historical consolidated financial and other data of Legacy CHC as of and for the periods indicated. The summary historical consolidated statements of operations and consolidated statements of cash flows data for the fiscal years ended December 31, 2016 and 2015 and for the period from January 1, 2017 through February 28, 2017 and the summary historical consolidated balance sheet data as of February 28, 2017, December 31, 2016 and December 31, 2015 have been derived from Legacy CHC’s historical audited consolidated financial statements included elsewhere in this prospectus.



 

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The summary historical financial data of Legacy CHC is qualified in its entirety by reference to, and should be read in conjunction with, the information contained in “Selected Historical Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the historical consolidated financial statements and related notes of Legacy CHC included elsewhere in this prospectus.

 

     Legacy CHC  
     Two Months
Ended

February 28,
2017
    Year Ended  
    December 31,
2016
    December 31,
2015
 
     (In millions)  

Summary Statement of Operations Data:

      

Revenue:

      

Solutions revenue

   $ 204.4     $ 1,252.2     $ 1,124.2  

Postage revenue

     46.7       305.0       352.9  
  

 

 

   

 

 

   

 

 

 

Total Revenue

     251.1       1,557.2       1,477.1  

Costs and expenses:

      

Cost of operations (exclusive of depreciation and amortization below)

     98.3       561.1       507.4  

Development and engineering

     14.2       60.0       45.5  

Sales, marketing, general and administrative

     77.9       278.6       217.6  

Customer postage

     46.7       305.0       352.9  

Depreciation and amortization

     43.3       252.3       342.3  

Accretion

     2.7       8.1       10.5  

Impairment of long-lived assets

     —         0.7       8.6  
  

 

 

   

 

 

   

 

 

 

Total costs and expenses

     283.1       1,465.8       1,484.8  
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (32.0     91.4       (7.7

Interest expense, net

     30.0       185.9       168.3  

Loss on extinguishment of debt

     —         —         —    

Contingent consideration

     —         —         (4.8

Other

     —         —         (0.8
  

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (62.0     (94.5     (170.4

Income tax provision

     (25.4     (19.1     (82.6
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (36.6   $ (75.4   $ (87.8
  

 

 

   

 

 

   

 

 

 

Summary Balance Sheet Data (at period end):

      

Cash and cash equivalents

   $ 136.7     $ 118.0     $ 66.7  

Total assets

   $ 4,378.0     $ 4,502.5     $ 4,557.2  

Total debt(1)

   $ 2,762.9     $ 2,761.0     $ 2,774.0  

Tax receivable obligations to related parties

   $ 183.3     $ 180.6     $ 173.5  

Total equity

   $ 953.0     $ 1,109.7     $ 1,175.1  

Summary Statement of Cash Flows Data:

      

Net cash provided by (used in) operating activities

   $ 31.1     $ 211.8     $ 166.8  

Net cash provided by (used in) investing activities

   $ (8.0   $ (123.0   $ (780.0

Net cash provided by (used in) financing activities

   $ (4.5   $ (37.4   $ 597.5  

Summary Operational and Other Data:

      

Legacy CHC Adjusted EBITDA(2)

   $ 69.9     $ 440.0     $ 403.6  

 

(1)

Total debt at February 28, 2017, December 31, 2016 and December 31, 2015 is reflected net of unamortized debt discount of approximately $32.7 million, $34.9 million and $47.8 million, respectively, related to original loan fees and original issue discount. Total debt at February 28, 2017, December 31, 2016 and December 31, 2015 also includes data sublicense and other financing arrangement obligations of $10.7 million, $10.9 million and $18.2 million, respectively.



 

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(2)

The following table sets forth a reconciliation of net income (loss) to Legacy CHC Adjusted EBITDA. All of the items included in the reconciliation from net income (loss) to Legacy CHC Adjusted EBITDA are items that management believes were not reflective of Legacy CHC’s core operations. See “—Summary Historical Consolidated Financial Data of Change Healthcare LLC” above for a discussion regarding the use of Adjusted EBITDA.

 

     Two Months
Ended
February 28,
2017
     Year Ended  
     December 31,
2016
     December 31,
2015
 
     (In millions)  

Net income (loss)

   $ (36.6    $ (75.3    $ (87.8

Interest expense, net

     30.0        185.9        168.3  

Income tax provision

     (25.4      (19.1      (82.6

Depreciation and amortization

     43.3        252.2        342.3  
  

 

 

    

 

 

    

 

 

 

Legacy CHC EBITDA

   $ 11.3      $ 343.7      $ 340.2  

Adjustments to EBITDA:

        

Equity compensation(a)

     26.4        10.1        9.3  

Acquisition accounting adjustments(b)

     0.1        1.1        1.8  

Acquisition-related cost(c)

     0.8        6.8        8.4  

Core MTS transaction-related costs(d)

     21.7        28.4        —    

Monitoring fees and related costs(e)

     1.0        6.4        6.7  

Strategic initiatives, duplicative and transition costs(f)

     2.9        19.1        10.9  

Severance costs(g)

     0.5        12.7        7.0  

Accretion and changes in estimate, net(h)

     2.7        8.1        10.5  

Impairment of long-lived assets(i)

     —            0.7        8.6  

Contingent Consideration(j)

     —            —            (4.8

Other non-routine, net(k)

     2.5        2.9        5.0  
  

 

 

    

 

 

    

 

 

 

EBITDA Adjustments

     58.6        96.3        63.4  
  

 

 

    

 

 

    

 

 

 

Legacy CHC Adjusted EBITDA

   $ 69.9      $ 440.0      $ 403.6  
  

 

 

    

 

 

    

 

 

 

 

  (a)

Represents non-cash equity-based compensation of Legacy CHC to its employees and directors. We believe excluding this adjustment allows us to compare operating performance without regard to the impact of equity-based compensation expense, which varies from period to period based on the timing of grants and value of the options.

  (b)

Represents adjustments that arose from acquisition method accounting following a business combination. These adjustments principally relate to the revaluation of deferred revenue to fair value and the subsequent reduction to recognized revenue. As the related revenue stream is ongoing, we believe it is appropriate to consider these items in earnings in the period in which they would have been recognized absent the application of acquisition method accounting.

  (c)

Represents acquisition, divestiture and related costs charged to operations (excluding costs included in the adjustment discussed in (d) directly below).

  (d)

Represents costs associated with the Transactions following the close of the Transactions and unrelated to integration efforts.

  (e)

Represents management and advisory fees paid to the Sponsors.

  (f)

Represents adjustments for advisory and consulting fees incurred in connection with strategic initiatives and significant operations efficiency measures including the rebranding of Legacy CHC and other costs.

  (g)

Represents severance costs which primarily relate to changes in executive leadership and operational efficiency measures.

  (h)

Represents accretion of certain tax receivable agreement obligations from their initial fair value to the total expected payments due under the agreement. Because the amortized costs of these agreements are



 

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  directly attributable to the Sponsors and their affiliates, we do not believe they represent a routine ongoing cost of operations of a typical business.
  (i)

Represents impairment charges generally incurred in connection with the retirement of products or the abandonment of property and equipment or product development initiatives.

  (j)

Represents changes in the fair value of contingent consideration (i.e. earn-out) obligations associated with prior acquisitions.

  (k)

Represents other non-routine adjustments that management believes are not indicative of ongoing operations.

Summary Historical Combined Financial Data of Core MTS

The following table sets forth the summary historical combined financial and other data of Core MTS as of and for the periods indicated. The summary historical combined balance sheet data as of February 28, 2017 and March 31, 2016 and the combined statements of operations and combined statements of cash flows data for the fiscal year ended March 31, 2016 and the period from April 1, 2016 to February 28, 2017 have been derived from Core MTS’ historical audited combined financial statements included elsewhere in this prospectus.



 

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The summary historical combined financial data of Core MTS is qualified in its entirety by reference to, and should be read in conjunction with, the information contained in “Selected Historical Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the historical combined financial statements and related notes of Core MTS included elsewhere in this prospectus.

 

     Core MTS  
     Eleven Months
Ended
February 28,
2017
    Year Ended
March 31,
2016
 
     (In millions)  

Summary Statement of Operations Data:

    

Revenue

   $ 1,712     $ 1,909  

Cost of Sales

     (848     (951
  

 

 

   

 

 

 

Gross Profit

     864       958  

Operating Expenses

    

Selling, distribution and administrative expenses

     (457     (448

Research and development

     (159     (197
  

 

 

   

 

 

 

Total operating expenses

     (616     (645
  

 

 

   

 

 

 

Operating income

     248       313  

Other income, net

     2       3  
  

 

 

   

 

 

 

Income before income taxes

     250       316  

Income tax expense

     (14     (26
  

 

 

   

 

 

 

Net income

     236       290  

Net income attributable to noncontrolling interests

     (1     (1
  

 

 

   

 

 

 

Net income attributable to Core MTS

   $ 235     $ 289  
  

 

 

   

 

 

 

Summary Balance Sheet Data (at period end):

    

Cash and cash equivalents

   $ 31     $ 46  

Total assets

   $ 2,002     $ 1,966  

Total equity

   $ 1,144     $ 1,029  

Summary Statement of Cash Flows Data:

    

Net cash provided by (used in) operating activities

   $ 180     $ 375  

Net cash provided by (used in) investing activities

   $ (80   $ 48  

Net cash provided by (used in) financing activities

   $ (116   $ (429

Summary Operational and Other Data:

    

Core MTS Adjusted EBITDA(1)

   $ 367     $ 374  


 

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(1)

The following table sets forth a reconciliation of net income to Core MTS Adjusted EBITDA. All of the items included in the reconciliation from net income to Core MTS Adjusted EBITDA are items that management believes were not reflective of Core MTS’s core operations. See “—Summary Historical Consolidated Financial Data of Change Healthcare LLC” above for a discussion regarding the use of Adjusted EBITDA.

 

     Eleven Months
Ended
February 28,
2017
     Year Ended
March 31,
2016
 
     (In millions)  

Net income attributable to Core MTS

   $ 235      $ 289  

Income tax expense

     14        26  

Depreciation and amortization

     51        60  
  

 

 

    

 

 

 

Core MTS EBITDA

   $ 300      $ 375  

Adjustments to EBITDA:

     

Equity compensation(a)

     24        27  

Severance and other restructuring costs(b)

     (3      28  

Implementation costs related to recently issued accounting standards(c)

     2        4  

Fixed asset (gain)/losses and gain on business sale(d)

     (0      (58

Asset impairments(e)

     15        11  

Other income(f)

     (2      (3

Foreign currency (gain)/loss(g)

     (0      (3

Transaction, integration and exit costs(h)

     52        —    

Noncontrolling interest(i)

     1        1  

Amortization of deferred costs(j)

     (1      (0

Strategic initiatives(k)

     0        2  

Divested and disposed businesses(l)

     (21      (10
  

 

 

    

 

 

 

EBITDA Adjustments

     67        (1
  

 

 

    

 

 

 

Core MTS Adjusted EBITDA

   $ 367      $ 374  
  

 

 

    

 

 

 

 

  (a)

Represents non-cash expense related to stock options and restricted stock unit awards allocated from McKesson.

  (b)

Represents severance and other restructuring expenses.

  (c)

Represents external costs related to upcoming changes in accounting standards regarding the recognition of revenue.

  (d)

Represents gains on sale of the nurse triage business within Connected Care and Analytics (“CCA”) and a portion of the ambulatory business within Business Performance Services (“BPS”).

  (e)

Represents the non-cash impact of asset impairments of capitalized assets on the balance sheet.

  (f)

Represents non-cash rental income from non-core assets that offsets depreciation expense and a portion of the gain on sale of the nurse triage business within CCA.

  (g)

Represents non-cash foreign currency translation income and gain on foreign currency hedge.

  (h)

Represents transaction costs related to the Transactions (including legal and consulting costs), in addition to integration costs.

  (i)

Represents income attributed to a non-controlling interest at BPS and a smaller amount related to a divested business.

  (j)

Represents amortization of set-up and implementation costs that are cash costs related to cost of operations and deducted in amortization above.

  (k)

Represents costs associated with a one-time IT project and non-recurring strategic initiatives.

  (l)

Deducts Adjusted EBITDA for divested businesses and certain discontinued services.



 

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RISK FACTORS

An investment in shares of our common stock involves risks. You should carefully consider the following information about these risks, together with the other information contained in this prospectus, before investing in shares of our common stock.

Risks Related to Our Business and Industry

Our business faces significant competition, which may harm our business, results of operations or financial condition.

We face substantial competition from many healthcare information systems companies and other information technology (“IT”) and other technology companies within the healthcare IT and services markets. We also compete with certain of our customers that provide internally some of the same solutions that we offer. The vigorous competition we face requires us to provide high quality, innovative products at a competitive price. These competitive threats will likely remain or expand in the future. Our key competitors include:

 

   

healthcare transaction processing companies, including those providing EDI services and/or internet-based services and those providing services through other means, such as paper and fax;

 

   

healthcare information system vendors that support providers or payers with their revenue and payment cycle management, imaging usage, retrieval and management, capacity and resource management, and clinical information exchange processes, including physician and dental practice management, hospital information, imaging and workflow solutions and EHR vendors;

 

   

IT and healthcare consulting service providers;

 

   

healthcare insurance companies, pharmacy benefit management and pharmacy benefit administrator companies, hospital management companies and pharmacies that provide or are developing electronic transaction and payment distribution services for use by providers and/or by their members and customers;

 

   

healthcare payments and communication solutions providers, including financial institutions and payment processors that have invested in healthcare data management assets, and print and mail vendors;

 

   

healthcare eligibility and enrollment services companies;

 

   

healthcare payment accuracy companies;

 

   

healthcare engagement and transparency companies;

 

   

healthcare billing and coding services companies;

 

   

providers of other data products and data analytics solutions, including healthcare risk adjustment, quality, economic statistics and other data; and

 

   

licensors of de-identified healthcare information.

In addition, the increasing standardization of certain healthcare IT products and services has made it easier for companies to enter these markets with competitive products and services. Many software, hardware, information systems and business process outsourcing companies, both with and without healthcare companies as their partners, offer or have announced their intention to offer products or services that are competitive with solutions that we offer. There have been a number of recent entrants that have successfully marketed competitive solutions and they may expand these offerings in the future. We cannot fully anticipate whether or when companies in adjacent or other product, service or technology areas may launch competitive products, and any such entry may lead to obsolescence of our products or loss of market share or erosion of the prices for our solutions, or both. The extent of this competition varies by the size of companies, geographical coverage and

 

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scope and breadth of products and services offered. Within certain of the markets in which we operate, our competitors are significantly larger and have greater financial or other resources than we do and have established reputations for success.

Additionally, the pace of change in the healthcare information systems market is rapid, and there are frequent new solution introductions, solution enhancements and evolving industry standards and requirements. We cannot guarantee that we will be able to upgrade our existing solutions or services, or introduce new solutions or services at the same rate as our competitors, or at all, nor can we guarantee that such upgrades or new solutions or services will achieve market acceptance over or among competitive offerings, or at all. Our competitors may also commercialize products, services or technologies that render our solutions obsolete or less marketable.

These competitive pressures could have a material adverse impact on our business, results of operations or financial condition.

Competition between us and some of our customers, or decisions by our customers to perform internally some of the same solutions or services that we offer, could harm our business, results of operations or financial condition.

Some of our existing customers compete with us, or may do so in the future, and some of our existing customers belong to alliances that compete with us, or may do so in the future, either with respect to the solutions or services we provide to them or with respect to some of our other lines of business. For example, some of our payer customers currently offer—through affiliated clearinghouses, web portals and other means—electronic data transmission services to providers that allow the provider to bypass third-party EDI service providers such as us, and additional payers may do so in the future. The ability of payers to replicate our solutions and the ability of providers to connect directly with payers may adversely affect the terms and conditions we are able to negotiate in our agreements with payers and our transaction volume with them, which directly relates to our revenue. In addition, to the extent that our customers elect to perform internally any of the business processes our solutions address, either because they believe they can provide such processes more efficiently internally or otherwise, we may lose such customers, or the volume of our business with such customers may be reduced, which could harm our business, results of operations or financial condition.

In recent years, the healthcare industry has been subject to increasing consolidation. Many healthcare organizations, including a number of our customers, have consolidated to create larger enterprises with greater market power. This consolidation trend could give the resulting enterprises greater bargaining power, which may lead to downward price pressure on our solutions or services, or less demand for them, or both. In addition, when our customers combine, they often consolidate infrastructure including IT systems, which in turn may erode the diversity of our customer and revenue base. Any of these effects could harm our business, results of operations or financial condition.

If we are unable to retain our existing customers or attract new customers, our business, financial condition or results of operations could suffer.

Our success depends substantially upon the retention of our existing customers and attracting new customers. We may not be able to retain our existing customers or attract new customers if we are unable to provide solutions or services that our existing or prospective payer customers believe enable them to achieve improved efficiencies and cost-effectiveness, and that our existing or prospective provider customers believe allow them to more effectively manage their revenue cycle, increase reimbursement rates and improve cash flows.

Our success in retaining and attracting customers will also depend, in part, on our ability to innovate successfully and be responsive to technological developments, pricing pressures and changing business models.

 

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To remain competitive in the evolving healthcare IT markets, we must continuously upgrade our existing solutions, and develop and introduce new solutions on a timely basis. Future advances in healthcare IT could lead to new technologies, products or services that are competitive with our solutions, resulting in pricing pressure or rendering our solutions obsolete or not competitive. In addition, because we deliver enterprise-wide and single entity clinical, patient care, financial, imaging, supply chain and strategic management software solutions to payers, hospitals, physicians and other providers, our ability to integrate these software solutions could be challenged, which may impair our ability to retain customers and harm our reputation with existing and prospective customers. We also may not be able to retain or attract customers if our solutions contain errors or otherwise fail to perform properly, if our pricing structure is not competitive or if we are unable to renegotiate our customer contracts upon expiration.

Our revenue depends in part upon maintaining high customer retention rates and our future growth depends on attracting new customers. If we are unable to maintain our customer retention rates, or if we are unable to attract new customers, our business, results of operations or financial condition could be adversely impacted.

If we are unable to connect to a large number of payers and providers, our solutions would be limited and less desirable to our customers.

Our business largely depends upon our ability to connect electronically to a substantial number of payers, such as insurance companies, Medicare and Medicaid agencies and pharmacy benefit managers and administrators, and providers, such as hospitals, physicians, clinics, dentists, laboratories and pharmacies. The attractiveness of some of the solutions we offer to providers, such as our claims management and submission services, depends in part on our ability to connect to a large number of payers, which allows us to streamline and simplify workflows for providers. These connections may be made either directly or through a clearinghouse. We may not be able to maintain our connections with a large number of payers on satisfactory terms and we may not be able to develop new connections, either directly or through other clearinghouses, on satisfactory terms. The failure to maintain these connections could cause our solutions to be less attractive to our provider customers. In addition, our payer customers view our relationships with providers as desirable in allowing them to receive a high volume of transactions electronically and realize the resulting cost efficiencies through the use of our solutions. Competing EDI service providers can easily establish connections with payers and providers and thereby may replicate the solutions we provide. Our failure to maintain existing connections with payers, providers and other clearinghouses or to develop new connections as circumstances warrant, or an increase in the utilization of direct links between payers and providers, could cause our electronic transaction processing systems to be less desirable to healthcare constituents, which would reduce the number of transactions that we process, which would reduce our revenue and could have a material adverse impact on our business, results of operations or financial condition.

If our solutions do not interoperate with our customers’ or their vendors’ networks and infrastructures, or if our customers or their vendors implement new system updates that are incompatible with our solutions, sales of our solutions could be adversely affected.

Our solutions must interoperate with our customers’ and their vendors’ existing infrastructures, which often have different specifications, rapidly evolve, utilize multiple protocol standards, deploy products and applications from multiple vendors, and contain multiple generations of products that have been added to that infrastructure over time. Some of the technologies supporting our customers and their vendors are changing rapidly and we must continue to adapt to these changes in a timely and effective manner at an acceptable cost. In addition, our customers and their vendors may implement new technologies into their existing networks and systems infrastructures that may not immediately interoperate with our solutions. Our continued success will depend on our ability to adapt to changing technologies, manage and process ever-increasing amounts of data and information and improve the performance, features and reliability of our services in response to changing customer and industry demands. If we encounter complications related to network configurations or settings, we may have to modify our solutions to enable them to interoperate with our customers’ and their vendors’ networks

 

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and can manage our customers’ transactions in the manner intended. For example, if our customers or their vendors implement new encryption protocols, it may be necessary for us to obtain a license to implement or interoperate with such protocols, and there can be no assurance that we will be able to obtain such a license on acceptable terms, if at all. These difficulties, and other difficulties we may experience, could delay or prevent the successful design, development, testing, introduction or marketing of our solutions. As a consequence of any of the foregoing, our ability to sell our solutions may be impaired, which could have a material adverse impact on our business, results of operations or financial condition.

Failure to maintain our relationships with our channel partners or significant changes in the terms of the agreements we have with them may have an adverse effect on our ability to successfully market our solutions.

We have entered into contracts with our channel partners to market and sell some of our solutions. Most of these contracts are on a non-exclusive basis. However, under contracts with some of our channel partners, we may be bound by provisions that restrict our ability to market and sell our solutions to potential customers. Our arrangements with some of these channel partners involve negotiated payments to them based on percentages of revenue they generate. If the payments prove to be too high, we may be unable to realize acceptable margins, but if the payments prove to be too low, our channel partners may not be motivated to produce a sufficient volume of revenue. The success of these partnerships will depend in part upon the channel partners’ own competitive, marketing and strategic considerations, including the relative advantages of using alternative solutions being developed and marketed by them or our competitors. If any of these channel partners is unsuccessful in marketing our solutions or seeks to amend the financial or other terms of the contracts we have with them, we may need to broaden our marketing efforts to increase focus on the solutions they sell and alter our distribution strategy, which may divert our planned efforts and resources from other projects and increase our costs generally. In addition, as part of the packages these channel partners sell, they may offer a choice to their customers between solutions that we supply and similar solutions offered by our competitors or by the channel partners directly. If our solutions are not chosen for inclusion in these packages, the revenue we earn from our channel partner relationships will decrease. Lastly, we could be subject to claims and liability as a result of the activities, products or services of these channel partners or other resellers of our solutions. Even if these claims do not result in liability to us, investigating and defending these claims could be expensive, time-consuming and result in adverse publicity that could have a material adverse impact on our business, results of operations or financial condition.

Our business strategy and future success depend on our ability to cross-sell our solutions.

Our ability to generate revenue and growth partly depends on our ability to cross-sell our solutions to our existing customers and new customers. We have identified our ability to successfully cross-sell our solutions as a key part of our business strategy and therefore one of the most significant factors influencing our growth. We may not be successful in cross-selling our solutions because our customers may find our additional solutions unnecessary, unattractive or cost-ineffective. Our failure to sell additional solutions to our existing and new customers could negatively affect our ability to grow our business.

If we are unable to successfully expand our sales force productivity, sales of our solutions and the growth of our business and financial performance could be harmed.

We continue to invest significantly in our sales force to obtain new customers and increase sales to existing customers. There is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth and profitably will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our sales efforts. A portion of our current sales personnel are new to our company. New hires require significant training and may require a lengthy onboarding process before they achieve full productivity. Our recent hires and planned hires may not

 

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become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. If we are unable to recruit, train and retain a sufficient number of productive sales personnel, sales of our solutions and the growth of our business could be harmed. Additionally, if our efforts to improve sales force productivity do not result in increased revenue, our operating results could be negatively impacted due to increased operating expenses associated with these efforts.

We have faced and will continue to face pressure to reduce our prices, which may reduce our margins, profitability and competitive position.

As electronic transaction processing has further penetrated the healthcare market and has become highly standardized, competition among revenue cycle management software and EDI providers is increasingly focused on providing value added services and capabilities to customers. This competition has placed pressure, and could place further pressure, on us to add functionality and keep our prices competitive in order to retain market share. Likewise, as a result of Medicare or Medicaid payment reductions and other reimbursement changes, our provider customers have sought, and may attempt in the future to seek, price concessions from us. If we are unable to reduce our costs sufficiently to offset declines in our prices, or if we are unable to introduce new, innovative offerings with higher margins, it could have a material adverse impact on our business, results of operations or financial condition.

In addition, many healthcare industry constituents are consolidating to create integrated healthcare delivery systems with greater market power. As provider networks, such as hospitals, and payer organizations, such as private insurance companies, consolidate, competition to provide the types of solutions we provide may become more intense and the importance of establishing and maintaining relationships with key healthcare industry constituents could increase. These healthcare industry constituents have used in the past, and likely will try to use in the future, their market power—particularly where it has been increased following mergers and consolidations—to negotiate price reductions for our solutions. If we are forced to further reduce prices, our margins will decrease and our results of operations could deteriorate, unless we are able to achieve corresponding reductions in expenses.

Our revenue is highly dependent on transaction volumes in the U.S. healthcare industry, particularly payment and reimbursement transaction volumes, and any temporary or sustained decrease in healthcare transaction, payment or reimbursement volumes in the United States could have a material adverse impact on our business, results of operations or financial condition.

While we characterized 88% of the Joint Venture’s solutions revenue for the fiscal year ended March 31, 2019 as Recurring Revenue, a significant portion of such Recurring Revenue was earned on a per transaction basis (or was derived from transaction-related services) and, as a result, even our Recurring Revenue is tied to our customer’s transaction, payment and reimbursement volumes (see “Method of Calculation” for our definition of Recurring Revenue) and generally is not contractually required to be paid in the absence of the occurrence of healthcare transactions, which themselves are not subject to any minimum or other similar volume requirements under contracts with our customers. In addition, some of our contracts with our customers generally can be terminated or not renewed without penalty and on little or no advance notice. As a result, our Recurring Revenue is highly dependent on maintaining our customer base as well as on the transaction volume generally in the U.S. healthcare industry since such revenue directly correlates with healthcare transaction, payment and reimbursement volumes in the United States. For example, in the United States our revenue can be adversely affected by the impact of lower healthcare utilization trends driven by higher unemployment or other economic factors. Further, weakened economic conditions or a recession could reduce the amounts that patients are willing or able to spend on healthcare services. As a result, patients may elect to delay or forgo seeking healthcare services and increases in unemployment rates could cause commercial payer membership to decline, which could further reduce healthcare utilization and our transaction volumes. In addition, such events could decrease payer or provider demand for our solutions, which could further adversely impact our revenue, including our Recurring Revenue.

 

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Various factors may cause temporary or sustained disruption to U.S. healthcare transaction volumes. The impact such disruptions would have on our business will depend upon the magnitude and duration of any such disruption. These factors include, among others:

 

   

the financial stability of our customers and the U.S. healthcare industry generally, and the impact of any fundamental corporate changes to healthcare providers and payers, such as hospital and insurance consolidations, on the cost and availability of, and the rate of reimbursement for, healthcare services;

 

   

political, legislative, regulatory and other changes in how healthcare services are covered, delivered and reimbursed, including any future changes to the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”), Medicare, Medicaid and other federal, state and local healthcare regulations;

 

   

factors that may affect demand for healthcare services, such as rising healthcare costs, increased copayment requirements and unemployment; and

 

   

general economic conditions.

Any temporary or sustained decrease in healthcare transaction, payment or reimbursement volumes in the United States could have a material adverse impact on our business, results of operations or financial condition.

An economic downturn or volatility could have a material adverse impact on our business, results of operations or financial condition.

The United States and world economies have experienced significant economic uncertainty and volatility during recent years. A weakening of economic conditions could lead to reductions in demand for our solutions. As a result of volatile or uncertain economic conditions, we may experience the negative effects of increased financial pressures on our payer and provider customers. For instance, our business could be negatively impacted by increased competitive pricing pressure and a decline in our customers’ creditworthiness, which could result in us incurring increased bad debt expense. Additionally, volatile or uncertain economic conditions in the United States and other parts of world could lead our government customers to terminate, or elect not to renew, existing contracts with us, or not enter into new contracts with us. If we are not able to timely and appropriately adapt to changes resulting from a weak economic environment, it could have a material adverse impact on our business, results of operations or financial condition.

Our ability to generate revenue could suffer if we do not continue to update and improve our existing solutions and develop new ones.

We must continually improve the functionality of our existing solutions in a timely manner and introduce new and valuable healthcare IT and service solutions in order to respond to technological and regulatory developments and customer demands and, thereby, retain existing customers and attract new ones. For example, from time to time, government agencies may alter format and data code requirements applicable to electronic transactions. In addition, our customers may request that our solutions be customized to satisfy particular security protocols, modifications and other contractual terms in excess of industry norms and our standard configurations. We may not be successful in responding to technological and regulatory developments or changing customer needs. In addition, these regulatory or customer-imposed requirements may impact the profitability of particular solutions and customer engagements. The pace of change in the markets we serve is rapid, and there are frequent new product and service introductions by our competitors and channel partners who use our solutions in their offerings. If we do not respond successfully to technological and regulatory changes, as well as evolving industry standards and customer demands, our solutions may become obsolete. Technological changes also may result in the offering of competitive solutions at lower prices than we are charging for our solutions, which could result in our losing sales unless we lower the prices we charge or provide additional efficiencies or capabilities to the customer. If we lower our prices on some of our solutions, we will need to increase our margins on other solutions in order to maintain our overall profitability.

 

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Achieving market acceptance of new or updated solutions is necessary in order for them to become profitable and will likely require significant efforts and expenditures.

Our future financial results will depend in part on whether our new or updated solutions receive sufficient customer acceptance. Achieving market acceptance for new or updated solutions is likely to require substantial marketing efforts and expenditure of significant funds to create awareness and demand by our existing or prospective customers. In addition, deployment of new or updated solutions may require the use of additional resources for training our existing sales force and customer service personnel and for hiring and training additional salespersons and customer service personnel. Failure to achieve broad penetration in target markets with respect to new or updated solutions could have a material adverse impact on our business, results of operations or financial condition.

There are increased risks of performance problems and breaches during times when we are making significant changes to our solutions or to systems we use to provide our solutions. In addition, changes to our solutions or systems, including cost savings initiatives, may cost more than anticipated, may not provide the benefits expected, may take longer than anticipated to develop and implement or may increase the risk of performance problems.

In order to respond to technological changes, such as continuing development in the areas of data analytics, ML, AI and blockchain, among others, as well as regulatory changes and evolving security risks and industry standards, our solutions and the software and systems we use to provide our solutions must be continually updated and enhanced. Because some of the software and systems that we use to provide solutions to customers are inherently complex, changing, updating, enhancing and creating new versions of our solutions or the software or systems we use to provide our solutions create a risk of errors or performance problems, despite testing and quality control. We cannot be certain that errors will not arise in connection with any such changes, updates, enhancements or new versions, especially when first introduced. Even if our new, updated or enhanced solutions do not have performance problems, our technical and customer service personnel may have difficulties installing them or providing any necessary training and support to customers, and our customers may not follow our guidance on appropriate training, support and implementation for such new, updated or enhanced solutions. In addition, changes in our technology and systems may not provide the additional functionality or other benefits that were expected.

Implementation of changes in our technology and systems may cost more or take longer than originally expected and may require more testing than initially anticipated. While new, updated or enhanced solutions will be tested before they are used in production, we cannot be sure that the testing will uncover all problems that may occur in actual use.

We also periodically implement efficiency measures and other cost-saving initiatives to improve our operating performance. These efficiency measures and other cost-saving initiatives may not provide the benefits anticipated or do so in the expected time frame. Implementation of these measures may also increase the risk of performance issues due to unforeseen impacts on our organization, systems and processes.

If significant problems occur as a result of these changes, we may fail to meet our contractual obligations to customers, which could result in claims being made against us or in the loss of customer relationships.

Our business will suffer if we fail to successfully integrate acquired businesses and technologies or to appropriately assess the risks in particular transactions.

We historically have acquired, and in the future may acquire, businesses, technologies, services, product lines and other assets. The successful integration of any businesses and assets we have acquired or may acquire can be critical to our future performance. The amount and timing of the expected benefits of any acquisition,

 

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including potential synergies, are subject to risks and uncertainties. These risks and uncertainties include, but are not limited to, those relating to:

 

   

our ability to maintain relationships with the customers and suppliers of the acquired business;

 

   

our ability to cross-sell solutions to customers with which we have established relationships and those with which the acquired businesses have established relationships;

 

   

our ability to retain or replace key personnel of the acquired business;

 

   

potential conflicts in payer, provider, vendor or marketing relationships;

 

   

our ability to coordinate organizations that are geographically diverse and may have different business cultures;

 

   

the diversion of management’s attention to the integration of the operations of businesses or other assets we have acquired;

 

   

the continued coordination and cooperation with sellers pursuant to transition services agreements;

 

   

difficulties in the integration or migration of IT systems, including secure data sharing across networks securely and maintaining the security of the IT systems; and

 

   

compliance with regulatory, contracting and other requirements, including internal control over contracting and financial reporting.

We cannot guarantee that any acquired businesses, technologies, services, product lines or other assets will be successfully integrated with our operations in a timely or cost-effective manner, or at all. Failure to successfully integrate acquired businesses or to achieve anticipated operating synergies, revenue enhancements or cost savings could have a material adverse impact on our business, results of operations or financial condition.

Although our management attempts to evaluate the risks inherent in each transaction and to evaluate acquisition candidates appropriately, we may not properly ascertain all such risks and the acquired businesses or other assets may not perform as we expect or enhance the value of the Company as a whole. Acquired companies or businesses also may have larger than expected liabilities that are not covered by the indemnification, if any, that we are able to obtain from the sellers. Furthermore, the historical financial statements of the companies we have acquired or may acquire in the future are prepared by management of such companies and are not independently verified by our management. In addition, any pro forma financial statements prepared by us to give effect to such acquisitions may not accurately reflect the results of operations of such companies that would have been achieved had the acquisition of such entities been completed at the beginning of the applicable periods. There are also no assurances that we will continue to acquire businesses at valuations consistent with our prior acquisitions or that we will complete acquisitions at all. If we are unable to successfully complete and integrate strategic acquisitions in a timely manner, our business and growth strategies could be negatively affected.

We may not realize the anticipated benefits of divestitures.

From time to time we may divest assets or businesses. We may encounter difficulty in finding or completing divestiture opportunities or alternative exit strategies on acceptable terms or in a timely manner. These circumstances could delay the achievement of our strategic objectives or cause us to incur additional expenses with respect to assets or a business that we want to dispose of, or we may dispose of assets or a business at a price or on terms that are less favorable than we had anticipated. Additionally, such dispositions could result in disruption to other parts of our business, potential loss of employees or customers, exposure to unanticipated liabilities or result in ongoing obligations and liabilities to us following any such divestiture. For example, in connection with a disposition, we may be contractually obligated with respect to certain continuing obligations to customers, vendors, or other third parties and we may also have continuing indemnities and obligations for pre-existing liabilities related to the assets or businesses. Such obligations could have a material adverse impact on our business, results of operations or financial condition.

 

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Our business would be adversely affected if we cannot obtain, process or distribute the highly regulated data we require to provide our solutions.

Our business relies on our ability to obtain, process, monetize and distribute highly regulated data in the healthcare industry and in other industries, in a manner that complies with applicable law, regulation and contractual and technological restrictions. The failure of either us or our data suppliers and processors to obtain such data in a compliant manner could have a harmful effect on our ability to use and disclose such data which in turn could impair our functions and operations, including our ability to share such data with third parties or incorporate it into our services and offerings. In addition to complying with requirements in obtaining the data, the use, processing and distribution of such data may require us or our data suppliers and processors to obtain consent from third parties or follow additional laws, regulations or contractual and technological restrictions that apply to the healthcare industry and other industries. These requirements could interfere with or prevent creation or use of rules and analyses or limit other data-driven activities that benefit us. Moreover, we may be subject to claims or liability for use or disclosure of information by reason of lack of valid notice, permission, or waiver. We have policies and procedures in place addressing the proper handling and use of data, but could face claims that our data practices may occur in a manner not permitted under applicable laws or the Company’s agreement with or obligations to data providers, individuals or other third parties, as more specifically described below. These claims or liabilities and other failures to comply with applicable requirements could subject us to unexpected costs and adversely affect our operating results.

Poor service, system errors or failures of our solutions to conform to specifications could cause unforeseen liabilities or injury, harm our reputation and have a material adverse impact on our business, results of operations or financial condition.

We must meet our customers’ service level expectations and our contractual obligations with respect to our solutions. Failure to do so could subject us to liability or cause us to lose customers. In some cases, we rely upon third-party contractors (which, along with suppliers and other third-party vendors, we also refer to as “vendors”) to assist us in providing our solutions. Our ability to meet our contractual obligations and customer expectations thus may be impacted by the performance of our vendors and their ability to comply with applicable laws and regulations. For example, our electronic payment and remittance solutions depend in part on the ability of our vendors to comply with applicable banking, financial service and payment card industry requirements and their failure to do so could cause an interruption in the solutions we provide or require us to seek alternative solutions or relationships. We likely will incur increased development costs to upgrade our software to be in compliance with changing and evolving standards, and delays may result in connection therewith. If our solutions are not in compliance with these evolving standards, our market position and sales could be adversely affected and we may have to invest significantly in changes and updates to our solutions, which could materially and adversely impact our financial condition and operating results.

Some of our solutions are intended to provide information to healthcare professionals in the course of delivering patient care. Although our contracts disclaim liability for medical decisions and responsibility for patient care, if use of or inability to use our solutions leads to faulty clinical decisions or injury to patients, such disclaimers may be unenforceable and we could be subject to claims or litigation, including product liability and warranty claims, by healthcare professionals, their patients or our customers. Product liability and warranty claims often involve very large or indeterminate amounts, including punitive damages. The magnitude of potential losses from product liability lawsuits may remain unknown for substantial periods of time, and the related legal defense costs may be significant. We could experience material warranty or product liability losses in the future and incur significant costs to defend these claims. In addition, if any of our products or services are, or are alleged to be, defective, we may voluntarily participate, or be required by regulatory authorities to participate, in a recall of that product or service. In the event of a recall, we may lose sales and be exposed to individual or class-action litigation claims. Further, negative publicity regarding a quality or safety issue, whether accurate or inaccurate, could harm our reputation, decrease demand for our solutions, lead to withdrawals of our solutions or impair our ability to successfully launch and market our solutions in the future. Product liability,

 

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warranty and recall costs may have a material adverse effect on our business, financial condition, results of operations and cash flows.

Some of the software and systems that we use to provide our solutions are inherently complex. Errors or downtime in the software and systems we use to provide our solutions could negatively impact our customers. For example, because of the large amount of data we collect and manage, it is possible that hardware failures and errors in our systems could result in data loss or corruption or cause the information that we collect to be incomplete or contain inaccuracies that our customers could regard as significant. In addition, errors in our transaction processing systems could result in payers paying the wrong amount, making payments to the wrong payee or delayed payments. Although we seek to address any errors or downtime with updates to the software and systems, if we are unable to promptly remedy any errors or our customers do not implement system updates, the software and systems could be compromised or our customers could experience prolonged downtimes relating to the software and systems. If problems occur or persist, our customers may seek compensation from us, seek to terminate their contracts with us, withhold payments to us, seek refunds from us of part or all of the fees charged under our contracts, ask us to reconstruct lost or corrupted data at our expense, request a loan or advancement of funds or initiate litigation or other dispute resolution procedures. We also may be subject to claims against us by others affected by any such problems. Further, some of our existing and prospective customers may be reluctant or unwilling to use cloud-based services, because they have concerns regarding the risks associated with the security and reliability of the technology delivery model associated with these services. If our existing or prospective customers do not perceive the benefits of our services, then the market for these solutions may not expand as much or develop as quickly as we expect, either of which would adversely affect our business, financial condition, or operating results.

We attempt to limit, by contract, our liability for damages arising from our negligence, errors, mistakes or security breaches. However, contractual limitations on liability may not be accepted by our customers, may not be enforceable or may otherwise not provide sufficient protection to us from liability for damages. We maintain liability insurance coverage, including coverage for errors and omissions and cyber-liability. It is possible, however, that claims could be denied or exceed the amount of our applicable insurance coverage, if any, or that this coverage may not continue to be available on acceptable terms or in sufficient amounts. Even if these claims do not result in liability to us, investigating and defending against them could be expensive and time consuming and could divert management’s attention away from our operations. In addition, negative publicity caused by these events may negatively impact our customer relationships, market acceptance of our solutions, including unrelated solutions, or may harm our reputation and our business.

Disruptions in service or damages to our data or other operation centers, or other software or systems failures, could have a material adverse impact on our business, results of operations or financial condition.

Our data and network operations centers are essential to our business. Our business operations depend on our ability to maintain and protect our network and computer systems, many of which are located in our primary data and operations centers that we own and operate and some of which are outsourced to certain third-party hosting providers. We have consolidated several satellite data centers and plan to continue such consolidation. We also provide remote and cloud hosting services that involve operating both our software and the software of vendors for our customers. The ability to access the systems, applications, and data that we host and support on demand is important to our customers.

Our operations and facilities are vulnerable to interruption and/or damage from a number of sources, many of which are beyond our control, including, without limitation: (1) power loss and telecommunications failures; (2) fire, flood, hurricane and other natural disasters; (3) software and hardware errors, failures or crashes; and (4) cyber and ransomware attacks, computer viruses, hacking, break-ins, sabotage, intentional acts of vandalism and other similar disruptive problems. The occurrence of any of these events could result in interruptions, delays or cessations in service to users of our solutions, which could impair or prohibit our ability to provide our solutions, reduce the attractiveness of our solutions to our customers and could have a material adverse impact on

 

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our business, results of operations or financial condition. If customers’ access to our solutions is interrupted because of problems in the operation of our or their facilities, we could be in breach of our agreements with customers and/or exposed to significant claims, particularly if the access interruption is associated with problems in the timely delivery of medical care.

We attempt to mitigate these risks through various means including disaster recovery and business continuity plans, penetration testing, vulnerability scans, patching and other information security procedures and cybersecurity and ransomware measures, insurance against fires, floods, other natural disasters, cyber-liability and general business interruptions, and customer and employee training and awareness, but our precautions cannot protect against all risks. Any significant instances of system downtime could negatively affect our reputation and ability to provide our solutions or remote hosting services, which could have a material adverse impact on our business, results of operations or financial condition.

We also rely on a number of vendors, such as cloud service providers, to provide us with a variety of solutions and services, including cloud-based data hosting, telecommunications and data processing services necessary for our transaction services and processing functions and software developers for the development and maintenance of certain software products we use to provide our solutions. As a result, our disaster recovery and business continuity plans may rely, in part, upon vendors of related services. If these vendors do not fulfill their contractual obligations, have system failures or choose to discontinue their products or services, our business and operations could be disrupted, our brand and reputation could be harmed and our financial condition or operating results could be adversely affected.

Breaches and failures of our IT systems and the security measures protecting them, and the sensitive information we transmit, use and store, expose us to potential liability and reputational harm.

Our business relies on sophisticated information systems to obtain, rapidly process, analyze, and manage data, affecting our ability to manufacture, purchase, distribute, and process products and services. To the extent our IT systems are not successfully implemented or fail, our business and results of operations may be adversely affected. Our business and results of operations may also be adversely affected if a vendor servicing our IT systems does not perform satisfactorily, or if the IT systems are interrupted or damaged by unforeseen events, including the actions of third parties. Further, our business relies to a significant degree upon the secure transmission, use and storage of sensitive information, including protected health information and other personally identifiable information, financial information and other confidential information and data within these systems.

To protect this information, we seek to implement commercially reasonable security measures and maintain information security policies and procedures informed by requirements under applicable law and recommended practices, in each case, as applicable to the data collected, hosted and processed. Despite our security management efforts with respect to physical and technological infrastructure, employee training, vendor (and sub-vendor) controls and contractual relationships, our infrastructure, data or other operation centers and systems used in connection with our business operations, including the internet and related systems of our vendors (including vendors to which we outsource data hosting, storage and processing functions) are vulnerable to, and from time to time experience, unauthorized access to data and/or breaches of confidential information due to criminal conduct, physical break-ins, hackers, employee or insider malfeasance and/or improper employee or contractor access, computer viruses, programming errors, denial-of-service attacks, ransomware events, phishing schemes, fraud, terrorist attacks, human error or other breaches by insiders or third parties or similar disruptive problems. It is not possible to prevent all security threats to our systems and data. Techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and may be difficult to detect for long periods of time. Further, defects in the design or manufacture of the hardware, software or applications we develop or procure from third parties could compromise our IT systems. These events, including unauthorized access, misappropriation, disclosure or loss of sensitive information (including financial or personal health information) or a significant disruption of our network, expose us to risks including risks to our ability to provide our solutions

 

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and fulfill contractual demands, management distraction and the obligation to devote significant financial and other resources to mitigate such problems and increases to our future information security costs, including through organizational changes, deploying additional personnel and protection technologies, further training of employees, changing vendor (and sub-vendor) control practices, and engaging third-party experts and consultants. Moreover, unauthorized access, use or disclosure of certain sensitive information in our possession or our failure to satisfy legal requirements, including requirements relating to safeguarding protected health information under the Health Insurance Portability and Accountability Act (“HIPAA”) and personal information under the European Union (“EU”)’s General Data Protection Regulations (“GDPR”) or state data privacy laws, as discussed further below, could result in civil and criminal liability and regulatory action, which could result in potential fines and penalties, as well as costs relating to investigation of an incident or breach, corrective actions, required notifications to regulatory agencies and customers, credit monitoring services and other necessary expenses. In addition, actual or perceived breaches of our security management efforts can cause existing customers to terminate their relationship with us and deter existing or prospective customers from using or purchasing our solutions in the future. These events can have a material adverse impact on our business, results of operations, financial condition and reputation.

Because our products and services involve the storage, use and transmission of personal information of consumers, we and other industry participants have been and expect to routinely be the target of attempted cyber and other security threats by outside third parties, including technically sophisticated and well-resourced bad actors attempting to access or steal the data we store. Vendor, insider or employee cyber and security threats also occur and are a significant concern for all companies, including ours. Recently, there have been a number of high profile security breaches involving the improper dissemination of personal information of individuals both within and outside of the healthcare industry. These breaches have resulted in lawsuits and governmental enforcement actions that have sought or obtained significant fines and penalties, and have required companies to enter into agreements with government regulators that impose ongoing obligations and requirements, including internal and external (third party) monitorships for five years or more. While we maintain liability insurance coverage including coverage for errors and omissions and cyber-liability, claims may not be covered or could exceed the amount of our applicable insurance coverage, if any, or such coverage may not continue to be available on acceptable terms or in sufficient amounts.

We rely on internet infrastructure, bandwidth providers, data center providers, other third parties and our own systems in providing certain of our solutions to our customers, and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation and negatively impact our relationships with customers, adversely affecting our brand and our business.

Our ability to deliver our solutions is dependent on the development and maintenance of the infrastructure of the Internet and other telecommunications services by third parties. This includes maintenance of a reliable network connection with the necessary speed, data capacity and security for providing reliable Internet access and services and reliable telephone and facsimile services. As a result, our information systems require an ongoing commitment of significant resources to maintain and enhance existing systems and develop new systems in order to keep pace with continuing changes in information technology, emerging cybersecurity risks and threats, evolving industry and regulatory standards and changing preferences of our customers.

Our solutions are designed to operate without interruption in accordance with our service level commitments. However, we have experienced limited interruptions in these systems in the past, including server failures that temporarily slow down the performance of our solutions, and we may experience more significant interruptions in the future. We rely on internal systems as well as vendors, including bandwidth and telecommunications equipment providers, to provide our solutions. We do not maintain redundant systems or facilities for some of these services. Interruptions in these systems, whether due to system failures, computer viruses, physical or electronic break-ins or other catastrophic events, could affect the security or availability of our solutions and prevent or inhibit the ability of our customers to access our solutions.

 

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If a catastrophic event were to occur with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could result in substantial costs to remedy those problems or negatively impact our relationship with our partners, our business, results of operations and financial condition. To operate without interruption, both we and our vendors must guard against:

 

   

damage from fire, power loss and other natural disasters;

 

   

telecommunications failures;

 

   

software and hardware errors, failures and crashes;

 

   

security breaches, computer viruses and similar disruptive problems; and

 

   

other potential interruptions.

Any disruption in the network access, telecommunications or co-location services provided by vendors, or any failure of or by vendors’ systems or our own systems to handle current or higher volume of use could significantly harm our business. We exercise limited control over these vendors, which increases our vulnerability to problems with services they provide. Any errors, failures, interruptions or delays experienced in connection with these vendor technologies and information services or our own systems could negatively impact our relationships with partners and adversely affect our business and could expose us to liabilities. Although we maintain insurance for our business, the coverage under our policies may not be adequate to compensate us for all losses that may occur. In addition, we cannot provide assurance that we will continue to be able to obtain adequate insurance coverage at an acceptable cost.

The reliability and performance of our internet connection may be harmed by increased usage or by denial-of-service attacks. The internet has experienced a variety of outages and other delays as a result of damages to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage as well as the availability of the internet to us for delivery of our internet-based solutions.

As a result of the complexity of the issues facing healthcare providers and payers and the inherent complexity of our solutions to such issues, our customers depend on our support organization to resolve any technical issues relating to our offerings. In addition, our sales process is highly dependent on the quality of our offerings, our business reputation and on strong recommendations from our existing customers. Any failure to maintain high-quality and highly responsive technical support, or a market perception that we do not maintain high-quality and highly responsive support, could harm our reputation, adversely affect our ability to sell our offering to existing and prospective customers, and harm our business, operating results and financial condition.

We offer technical support services with our offerings and we may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services, particularly as we increase the size of our customer base. We also may be unable to modify the format of our support services to compete with changes in support services provided by our competitors. It is difficult to predict customer demand for technical support services and if customer demand increases significantly, we may be unable to provide satisfactory support services to our customers and their constituents. Additionally, increased customer demand for these services, without corresponding revenue, could increase costs and adversely affect our operating results.

Recent and future developments in the healthcare industry could have a material adverse impact on our business, results of operations or financial condition.

Almost all of our revenue is derived from the healthcare industry, which is highly regulated and subject to changing political, legislative, regulatory and other influences. For example, the ACA, changes how healthcare services are covered, delivered and reimbursed. The ACA mandates that substantially all U.S. citizens maintain health insurance coverage, expands health insurance coverage through a combination of public program

 

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expansion and private sector reforms, reduces Medicare program spending and promotes value-based purchasing. However, efforts by the current presidential administration and certain members of Congress to repeal or make significant changes to the ACA, its implementation and/or its interpretation have cast uncertainty onto the future of the law. For example, in December 2017, tax reform legislation was enacted that, effective January 2019, eliminates the financial penalty for individuals who fail to maintain health insurance coverage, a change that may result in fewer individuals electing to purchase health insurance. Further, the Centers for Medicare & Medicaid Services (“CMS”) has indicated that it intends to increase flexibility in state Medicaid programs, including by expanding the scope of waivers under which states may implement Medicaid expansion provisions, imposing different eligibility or enrollment restrictions, or otherwise implementing programs that vary from federal standards. At the same time, members of Congress have proposed measures that would expand the role of government-sponsored coverage, including single payer or so-called “Medicare-for-All” proposals, which could have far-reaching implications for the healthcare industry if enacted.

We are unable to predict the full impact of the ACA and other health reform initiatives on our operations in light of the uncertainty regarding whether, when and how the ACA will be further changed, what alternative reforms (including single payer proposals), if any, may be enacted, the timing of enactment and implementation of alternative provisions and the impact of alternative provisions on various healthcare industry participants. In particular, because many of our solutions designed to assist customers in effectively navigating the shift to value-based healthcare, the elimination of, or significant revisions to, various value-based healthcare initiatives may adversely impact our business.

While many of the provisions of the ACA and other health reform initiatives may not be directly applicable to us, such initiatives affect the businesses of our customers and the Medicaid programs of the states with which we have contracts. For example, as a result of Medicare payment reductions and other reimbursement changes mandated under the ACA, our customers may attempt to seek price concessions from us or reduce their use of our solutions, especially if provisions expanding coverage are repealed without eliminating the payment reductions or other reimbursement changes. Thus, the ACA may result in a reduction of expenditures by customers or potential customers in the healthcare industry, which could have a material adverse impact on our business, results of operations or financial condition. In addition, certain government programs, such as the Bundled Payments for Care Improvement initiative and the Accountable Care Organization Shared Savings Program, may impact reimbursement to our customers, which could have a material adverse impact on our business, results of operations or financial condition. Further, the general uncertainty of healthcare reform efforts, particularly if Congress repeals provisions of the ACA but delays the implementation date of repeal or fails to enact replacement provisions at the time of repeal, may negatively impact purchase decisions or demand for our solutions.

Moreover, there are currently numerous federal, state and private initiatives seeking to increase the use of IT in healthcare as a means of improving care and reducing costs. For example, the Health Information Technology for Economic and Clinical Health (“HITECH”) Act, which was enacted in 2009, and the 21st Century Cures Act (the “Cures Act”), which was enacted in 2016, contain incentives and penalties to promote the use of Electronic Health Records (“EHR”) technology and the efficient exchange of health information electronically. Further, the Cures Act provides for penalties to be imposed on IT developers, health information exchanges or networks and health providers that are found to improperly block the exchange of health information. These and other initiatives may result in additional or costly legal or regulatory requirements that are applicable to us and our customers, may encourage more companies to enter our markets, may provide advantages to our competitors and may result in the development of technology solutions that compete with ours. Any such initiatives also may result in a reduction of expenditures by existing or potential customers, which could have a material adverse impact on our business, results of operations or financial condition.

In addition, other general reductions in expenditures by healthcare industry constituents could result from, among other things, government regulation or private initiatives that affect the manner in which providers interact with patients, payers or other healthcare industry constituents, including changes in pricing or means of delivery of healthcare solutions. In addition, cost containment efforts at the federal and state levels may affect

 

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industry expenditures. For example, the Budget Control Act of 2011 requires automatic spending reductions to reduce the federal deficit. CMS began imposing a 2% reduction on payments of Medicare claims in 2013. These reductions have been extended through 2027.

Even if general expenditures by healthcare industry constituents remain the same or increase, other developments in the healthcare industry may result in reduced spending on healthcare IT and services or in some or all of the specific markets we serve or are planning to serve. In addition, our customers’ expectations regarding pending or potential healthcare industry developments also may affect their budgeting processes and spending plans with respect to the types of solutions we provide. For example, use of our solutions could be affected by:

 

   

changes in the billing patterns of providers;

 

   

changes in the design of health insurance plans;

 

   

changes in the contracting methods payers use in their relationships with providers;

 

   

decreases in marketing expenditures by pharmaceutical companies or medical device manufacturers, as a result of governmental regulation or private initiatives that discourage or prohibit promotional activities by pharmaceutical or medical device companies or other factors; and

 

   

implementation of government programs that streamline and standardize eligibility enrollment processes, which could result in decreased pricing or demand for our eligibility and enrollment solutions.

The healthcare industry has changed significantly in recent years, and we expect that significant changes will continue to occur. The timing and impact of developments in the healthcare industry are difficult to predict. We cannot be sure that the markets for our solutions will continue to exist at their current levels, will not change in ways that adversely affect us or that we will have adequate technical, financial and marketing resources to react to changes in those markets.

Government regulation, industry standards and other requirements create risks and challenges with respect to our compliance efforts and our business strategies.

The healthcare industry is highly regulated and subject to frequently changing laws, regulations, industry standards and other requirements. Many healthcare laws and regulations are complex, and their application to specific solutions, services and relationships may not be clear. Because our customers are subject to various requirements, we may be impacted as a result of our contractual obligations even when we are not directly subject to such requirements. In particular, many existing healthcare laws and regulations, when enacted, did not anticipate the healthcare IT solutions and services that we provide, and these laws and regulations may be applied to our solutions in ways that we do not anticipate. The ACA, efforts to repeal or materially change the ACA, and other federal and state efforts to reform or revise aspects of the healthcare industry or to revise or create additional legal or and regulatory requirements could impact our operations, the use of our solutions and our ability to market new solutions, or could create unexpected liabilities for us.

We also may be impacted by non-healthcare laws, industry standards and other requirements. For example, laws, regulations and industry standards regulating the banking and financial services industry may impact our operations as a result of the payment and remittance services we offer directly or through vendors. Additionally, laws and regulations governing how we communicate with our customers and our customers’ patients may impact our operations and, if not followed, would result in fines, penalties and other liabilities and adverse publicity and injury to our reputation.

 

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We are unable to predict what changes to laws, regulations and other requirements, including related contractual obligations, might be made in the future or how those changes could affect our business or the costs of compliance.

As noted above, the ACA, efforts to repeal or materially change the ACA, and other federal and state efforts to reform or revise aspects of the healthcare industry or to revise or create additional legal or regulatory requirements could impact our operations, the use of our solutions and our ability to market new solutions, or could create unexpected liabilities for us. We have attempted to structure our operations to comply with laws, regulations and other requirements applicable to us directly and to our customers and contractors, but there can be no assurance that our operations will not be challenged or impacted by enforcement initiatives. We have been, and in the future may become, involved in governmental investigations, audits, reviews and assessments. Certain of our businesses have been reviewed or are currently under review, including for compliance with various legal, regulatory or other requirements. Any determination by a court or agency that our solutions violate, or cause our customers to violate, applicable laws, regulations or other requirements could subject us or our customers to civil or criminal penalties. Such a determination also could require us to change or terminate portions of our business, disqualify us from serving customers that 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, regulations or other requirements 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 and other authorities or private whistleblowers could be expensive and time-consuming, 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, regulations and other requirements impacting our operations include the following:

HIPAA Privacy and Security Requirements. There are numerous federal and state laws and regulations related to the privacy and security of health information. In particular, regulations promulgated pursuant to HIPAA establish privacy and security standards that limit the use and disclosure of certain individually identifiable health information (known as “protected health information”) and require the implementation of administrative, physical and technological safeguards to protect the privacy of protected health information and ensure the confidentiality, integrity and availability of electronic protected health information. The privacy regulations established under HIPAA also provide patients with rights related to understanding and controlling how their protected health information is used and disclosed. As a provider of services to entities subject to HIPAA, we are directly subject to certain provisions of the regulations as a “Business Associate.” We are also directly subject to the HIPAA privacy and security regulations as a “Covered Entity” with respect to our operations as a healthcare clearinghouse and with respect to our clinical care visit services.

When acting as a Business Associate under HIPAA, to the extent permitted by applicable privacy regulations and contracts and associated Business Associate Agreements with our customers, we are permitted to use and disclose protected health information to perform our solutions and for other limited purposes, but other uses and disclosures, such as marketing communications, require written authorization from the patient or must meet an exception specified under the privacy regulations. To the extent we are permitted to de-identify protected health information and use de-identified information for our purposes, determining whether such protected health information has been sufficiently de-identified to comply with the HIPAA privacy standards and our contractual obligations may require complex factual and statistical analyses and may be subject to interpretation.

If we are unable to properly protect the privacy and security of protected health information entrusted to us, we could be found to have breached our contracts with our customers and be subject to investigation by the U.S. Department of Health and Human Services (“HHS”) Office for Civil Rights (“OCR”). In the event OCR finds that we have failed to comply with applicable HIPAA privacy and security standards, we could face civil and criminal penalties. In addition, OCR performs compliance audits of Covered Entities and Business Associates in order to proactively enforce the HIPAA privacy and security standards. OCR has become an increasingly active regulator and has signaled its intention to continue this trend. OCR has the discretion to impose penalties without being required to attempt to resolve violations through informal

 

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means; further OCR may require companies to enter into resolution agreements and corrective action plans which impose ongoing compliance requirements. OCR enforcement activity can result in financial liability and reputational harm, and responses to such enforcement activity can consume significant internal resources. In addition to enforcement by OCR, state attorneys general are authorized to bring civil actions under either HIPAA or relevant state laws seeking either injunctions or damages in response to violations that threaten the privacy of state residents. Although we have implemented and maintain policies, processes and compliance program infrastructure (e.g., a Privacy Office) to assist us in complying with these laws and regulations and our contractual obligations, we cannot provide assurance regarding how these laws and regulations will be interpreted, enforced or applied to our operations. In addition to the risks associated with enforcement activities and potential contractual liabilities, our ongoing efforts to comply with evolving laws and regulations at the federal and state levels also might require us to make costly system purchases and/or modifications or otherwise divert significant resources to HIPAA compliance initiatives from time to time.

Other Privacy and Security Requirements. In addition to HIPAA, numerous other U.S. federal and state laws govern the collection, dissemination, use, access to and confidentiality of personal information. Certain federal and state laws protect types of personal information that may be viewed as particularly sensitive. For example, the Confidentiality of Substance Use Disorder Patient Records (42 C.F.R. Part 2) is a federal law that protects information that would reveal if an individual has or had a substance abuse disorder. Similarly, New York’s Public Health Law, Article 27-F protects information that could reveal confidential HIV-related information about an individual. Some states have enacted or are considering new laws and regulations that would further protect this information, such as the California Consumer Privacy Act of 2018, which builds upon and is more stringent in many respects than other state laws currently in effect in the United States. In many cases, state laws are more restrictive than, and not preempted by, HIPAA, and may allow personal rights of action with respect to privacy or security breaches, as well as fines. State laws are contributing to increased enforcement activity and may also be subject to interpretation by various courts and other governmental authorities. Further, Congress and a number of states have considered prohibitions or limitations on the disclosure of personal and other information to individuals or entities located outside of the United States. The U.S. Congress is also currently considering a generally applicable national privacy law that may supplant California’s and other states’ privacy laws.

There also are numerous international privacy and security laws that govern the collection, dissemination, use, access, retention, protection, transfer and confidentiality of personal information. For example, GDPR, which became effective on May 25, 2018 is more stringent than laws and regulations governing personal information in the United States. Certain of our solutions involve the transmission and storage of customer data in various jurisdictions, which subjects the operation of that service to privacy or data protection laws and regulations in those jurisdictions. While we believe these solutions comply with current regulatory and security requirements in the jurisdictions in which we provide these solutions, there can be no assurance that such requirements will not change or that we will not otherwise be subject to legal or regulatory actions. These laws and regulations are rapidly evolving and changing, and could have an adverse impact on our operations. These laws and regulations are subject to uncertainty in how they may be interpreted and enforced by government authorities and regulators. The costs of compliance with, and the other burdens imposed by, these and other laws or regulatory actions may increase our operational costs, prevent us from providing our solutions, and/or impact our ability to invest in or jointly develop our solutions. We also may face audits or investigations by one or more domestic or foreign government agencies relating to our compliance with these laws and regulations. An adverse outcome under any such investigation or audit could result in fines, penalties, other liability, or could result in adverse publicity or a loss of reputation, and adversely affect our business. Any failure or perceived failure by us or by our solutions to comply with these laws and regulations may subject us to legal or regulatory actions, damage our reputation or adversely affect our ability to provide our solutions in the jurisdiction that has enacted the applicable law or regulation. Moreover, if these laws and regulations change, or are interpreted and applied in a manner that is inconsistent with our policies and processes or the operation of our solutions, we may need to expend resources in order to change our business operations, policies and processes or the manner in which we provide our solutions. This could adversely affect our business, financial condition and results of operations.

 

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Data Protection and Breaches. In recent years, there have been a number of well-publicized data breaches involving the improper dissemination of personal information of individuals both within and outside of the healthcare industry. Most states require 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 or the state’s attorney general. In some states, these laws are limited to electronic data, but states increasingly are enacting or considering stricter and broader requirements. Additionally, under HIPAA, Covered Entities must report breaches of unsecured protected health information to affected individuals without unreasonable delay, not to exceed 60 days following discovery of the breach by a Covered Entity or its agents. Notification also must be made to OCR and, in certain circumstances involving large breaches, to the media. Business Associates must report breaches of unsecured protected health information to Covered Entities within 60 days of discovery of the breach by the Business Associate or its agents. A non-permitted use or disclosure of protected health information is presumed to be a breach under HIPAA unless the Covered Entity or Business Associate establishes that there is a low probability the information has been compromised consistent with requirements enumerated in HIPAA.

Further, the FTC has prosecuted certain data breach cases as unfair and deceptive acts or practices under the Federal Trade Commission Act. In addition, by regulation, the FTC requires creditors, which may include some of our customers, to implement identity theft prevention programs to detect, prevent and mitigate identity theft in connection with customer accounts. Although Congress passed legislation that restricts the definition of “creditor” and exempts many healthcare providers from complying with this identity theft prevention rule, we may be required to apply additional resources to our existing processes to assist our affected customers in complying with this rule.

Despite our security management efforts with respect to physical and technological infrastructure, employee training, vendor (and sub-vendor) controls and contractual relationships, our infrastructure, data or other operation centers and systems used in our business operations, including the internet and related systems of our vendors (including vendors to whom we outsource data hosting, storage and processing functions) are vulnerable to, and from time to time experience, unauthorized access to data and/or breaches of confidential information due to criminal conduct, physical break-ins, hackers, employee or insider malfeasance and/or improper employee or contractor access, computer viruses, programming errors, denial-of-service attacks, ransomware events, phishing schemes, fraud, terrorist attacks, human error or other breaches by insiders or third parties or similar disruptive problems. It is not possible to prevent all security threats to our systems and data. See “—Breaches and failures of our IT systems and the security measures protecting them and the sensitive information we transmit, use and store expose us to potential liability and reputational harm.”

HIPAA Transaction and Identifier Standards. HIPAA and its implementing regulations mandate format and data content standards and provider identifier standards (known as the National Provider Identifier) that must be used in certain electronic transactions, such as claims, payment advice and eligibility inquiries. HHS has established standards that health plans must use for electronic fund transfers with providers, has established operating rules for certain transactions, and is in the process of establishing operating rules to promote uniformity in the implementation of the remaining types of covered transactions. The ACA also requires HHS to establish standards for health claims attachment transactions. HHS has modified the standards for electronic healthcare transactions (e.g., eligibility, claims submission and payment and electronic remittance) from Version 4010/4010A to Version 5010. Further, as of 2015, HHS requires the use of updated standard code sets for diagnoses and procedures known as the ICD-10 code sets. Enforcement of compliance with these standards falls under HHS and is carried out by CMS.

In the event new requirements are imposed, we will be required to modify our systems and processes to accommodate these changes. We will seek to modify our systems and processes as needed to prepare for and implement changes to the transaction standards, code sets operating rules and identifier requirements; however, we may not be successful in responding to these changes, and any responsive changes we make to our systems and processes may result in errors or otherwise negatively impact our service levels. In addition, the compliance dates for new or modified transaction standards, operating rules and identifiers may overlap, which may further burden our resources.

 

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We also may experience complications related to supporting customers that are not fully compliant with the revised requirements as of the applicable compliance or enforcement date. Some payers and healthcare clearinghouses with which we conduct business interpret HIPAA transaction requirements differently than we do or may require us to use legacy formats or include legacy identifiers as they transition to full compliance with the revised requirements. For example, we continue to process transactions using legacy identifiers for non-Medicare claims that are sent to us to the extent that the intended recipients have not instructed us to suppress those legacy identifiers. Where payers or healthcare clearinghouses require conformity with their interpretations or require us to accommodate legacy transactions or identifiers as a condition of successful transactions, we seek to comply with their requirements. We continue to work with payers, providers, practice management system vendors and other healthcare industry constituents to implement the transaction standards and identifier standards. However, we cannot provide assurances regarding how CMS will enforce the transaction and identifier standards or how CMS will view our practice of accommodating requests to process transactions that include legacy formats or identifiers for non-Medicare claims. It is possible that we, or our customers, could be subject to enforcement actions as a result of these accommodations. Any regulatory change, clarification or enforcement action by CMS that prohibited the processing by healthcare clearinghouses or private payers of transactions containing legacy formats or identifiers could have a material adverse impact on our business, results of operations or financial condition.

Anti-Kickback Laws and Anti-Referral 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 (“AKS”).” The AKS 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. Courts have interpreted the law to provide that a financial arrangement may violate this law if any one of the purposes of an arrangement is to encourage patient referrals or other federal healthcare program business, regardless of whether there are other legitimate purposes for the arrangement. Violation of the AKS is a felony, and penalties for AKS violations can be severe, and include imprisonment, criminal fines, civil penalties with treble damages (when the federal False Claims Act (“FCA”) is implicated) and exclusion from participation in federal healthcare programs. The ACA broadened the reach of the AKS by amending the intent requirement, such that a person or entity no longer needs to have actual knowledge of the AKS or specific intent to violate it in order to have committed a violation. In addition, as further discussed below, the ACA provided that the government may assert that a claim which includes items or services resulting from a violation of the AKS constitutes a false or fraudulent claim for purposes of the FCA, as well as restrictions contained in amendments to the Social Security Act, commonly known as the federal Civil Monetary Penalties Law (“CMP”). The AKS contains a limited number of exceptions, and the Office of the Inspector General (“OIG”) of HHS has created regulatory safe harbors to the AKS. Activities that comply with a safe harbor are deemed protected from prosecution under the AKS. Failure to meet a safe harbor does not automatically render an arrangement illegal under the AKS. The arrangement, however, does risk increased scrutiny by government enforcement authorities, based on its particular facts and circumstances. Our contracts and other arrangements may not meet an exception or a safe harbor. Additionally, many states have similar anti-kickback laws that are not necessarily limited to items or services for which payment is made by a federal healthcare program. In addition, federal laws restricting certain physician self-referrals (also known as the “Stark Law”), as well as state counterparts, may prohibit payment for patient referrals, patient brokering, remuneration of patients, or billing based on referrals between individuals or entities that have various financial, ownership, or other business relationships with physicians or other healthcare providers. The Stark Law is very complex, and state anti-referral laws vary widely. As noted below, to the extent we undertake billing and coding for designated health services, such activities may be subject to the Stark Law and may result in allegations that claims that we have processed or forwarded are improper.

The laws and regulations in this area are both broad and vague and judicial interpretation can also be inconsistent. We review our practices with regulatory experts in an effort to comply with all applicable laws

 

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and regulatory requirements. However, we are unable to predict how these laws and regulations will be interpreted or the full extent of their application, particularly to services that are not directly reimbursed by federal healthcare programs, such as transaction processing services. Any determination by a federal or state regulatory authority that any of our activities or those of our customers or vendors violate any of these laws or regulations could: (i) subject us to civil or criminal penalties, (ii) require us to enter into corporate integrity agreements or similar agreements with government regulators to meet ongoing compliance obligations, (iii) require us to change or terminate some portions of our business, (iv) require us to refund a portion of our service fees, (v) disqualify us from providing services to customers that are, or do business with, government programs and/or (vi) have a material adverse impact on our business, results of operations or financial condition. Even an unsuccessful challenge by a regulatory authority of our activities could result in adverse publicity and could require a costly response from us.

False or Fraudulent Claim Laws; Medical Billing and Coding. Medical billing, coding and collection activities are governed by numerous federal and state civil and criminal laws, regulations, and sub-regulatory guidance. We provide billing and coding services, claims processing and other solutions to providers that relate to, or directly involve, the reimbursement of health services covered by Medicare, Medicaid, other federal and state healthcare programs and private payers. In addition, as part of our data transmission and claims submission services, we may employ certain edits, using logic, mapping and defaults, when submitting claims to third-party payers. Such edits are utilized when the information received from providers is insufficient to complete individual data elements requested by payers. We also provide solutions including risk analytics, chart reviews, clinical care visits, payment accuracy, audit functions and enrollment and eligibility, to Medicaid and Medicare managed care plans, commercial plans and other entities. These solutions, which include identifying diagnosis codes with respect to hierarchical condition categories, impact the amounts paid by Medicare and Medicaid to managed care plans. In addition, solutions we offer to customers that enable customers to certify to compliance with certain requirements and standards, such as EHR Meaningful Use requirements. We rely on our customers to provide us with accurate and complete information and to appropriately use analytics, codes, reports and other information in connection with the solutions we provide to them, but they may not always do so.

As a result of these aspects of our business, we may be subject to, or contractually required to comply with, numerous federal and state laws that prohibit false or fraudulent claims including but not limited to the FCA, the CMP, and state equivalents. For example, errors or the unintended consequences of data manipulations by us or our systems with respect to the entry, formatting, preparation or transmission of claims, coding, audit, eligibility and other information, may result in allegations of false or fraudulent claims. False or fraudulent claims under the FCA and other laws include, but are not limited to, billing for services not rendered, making or causing to be made or used a false record or statement that is material to a false claim, failing to refund known overpayments, misrepresenting actual services rendered, improper coding and billing for medically unnecessary items or services. Some of these laws, including CMP, require a lower burden of proof than other fraud, waste and abuse laws. Federal and state authorities increasingly assert liability under CMP, especially where they believe they cannot meet the higher burden of proof requirements under the various criminal healthcare fraud provisions. Current penalties under CMP are significant, up to $100,000 per prohibited kickback and assessments of up to three times the amount claimed or received. Further, violations of the FCA are punishable by treble damages and penalties of up to $22,363 per false claim, and whistleblowers may receive a share of amounts recovered. Civil monetary penalties, including those imposed under the AKS and the FCA, are updated annually based on changes to the consumer price index.

In addition, the FCA prohibits the knowing submission of false claims or statements to the federal government, including to the Medicare and Medicaid programs. The FCA also contains qui tam, or whistleblower provisions, which allow private individuals to sue on behalf of the federal government alleging that the defendant has defrauded the federal government. Although simple negligence will not give rise to liability under the FCA, “knowingly” is defined broadly by the FCA and submitting a claim with reckless disregard to its truth or falsity can constitute “knowingly” submitting a false claim and may result

 

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in liability. Civil penalties also may be imposed for the failure to report and return an overpayment made by the federal government within 60 days of identifying the overpayment and also may result in liability under the FCA. The ACA provides that submission of a claim for an item or service generated in violation of the AKS constitutes a false or fraudulent claim under the FCA. Whistleblowers and federal authorities have taken the position, and some courts have held, that providers who allegedly violated other statutes, such as Stark Law, have thereby submitted false claims under the FCA. Several states, including states in which we operate, have adopted their own false claims provisions and their own whistleblower provisions whereby a private individual may file a civil lawsuit in state court. Although we believe our processes are consistent with applicable reimbursement rules and industry practice, a court, government authority or whistleblower could challenge these processes. In addition, we cannot guarantee that federal and state authorities will regard any billing and coding errors we process or make as inadvertent or will not hold us responsible for any compliance issues related to claims, reports and other information we handle on behalf of providers and payers. We cannot predict the impact of any enforcement actions under the various false claims and fraud, waste and abuse laws applicable to our operations. Even an unsuccessful challenge of our practices could cause us to incur adverse publicity and significant legal and related costs.

Exclusion from participation in government healthcare programs. We also are subject to the exclusion rules of the OIG of HHS whereby OIG may or must exclude individuals and entities convicted of program-related crimes from participation in the Medicare and Medicaid programs. A company that employs or contracts with an OIG-excluded individual and submits a claim for reimbursement to a federal healthcare program, or causes such a claim to be submitted, may itself be excluded or may be subject to significant penalties under the CMP, plus treble damages, for each item or service furnished during the period in which the individual or entity was excluded. A company contracting with providers has an affirmative duty to check the exclusion status of individuals and entities prior to entering into employment or contractual relationships and periodically re-check thereafter, or run the risk of liability under the CMP. We regularly screen for excluded individuals as part of our initial hiring and continued employment as well as excluded individuals and entities as part of our contractor practices, but we may not always identify all excluded individuals and entities.

FDA and International Regulation of Medical Software. Certain of our products are classified as medical devices and are subject to regulation by the Food and Drug Administration (the “FDA”) and numerous other federal, state and foreign governmental authorities. In the United States, the FDA permits commercial distribution of a new medical device after the device has received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act (the “FDCA”), or is the subject of an approved premarket approval application, unless the device is specifically exempt from those requirements. Moreover, the FDA has increasingly focused on the regulation of medical software and health information technology products as medical devices under the FDCA. For example, in February 2015, the FDA issued guidance to inform manufacturers and distributors of medical device data systems that it did not intend to enforce compliance with regulatory controls that apply to medical device data systems, medical image storage devices, and medical image communication devices. The Cures Act, enacted in December 2016, builds on the FDA’s efforts to limit the regulation of low-risk medical devices by exempting certain categories of software functions from the definition of “medical device” under the FDCA, including software functions intended for administrative support of a healthcare facility and certain functions related to the exchange and use of electronic medical records. However, a software function may not be excluded from the device definition if the FDA determines that use of the software function would be reasonably likely to have serious adverse health consequences. If the FDA chooses to regulate more of our solutions as medical devices, or subsequently changes or reverses its guidance regarding not enforcing certain regulatory controls, we may be obligated to comply with extensive requirements. Any additional FDA regulations governing healthcare software products may increase the cost and time-to-market of new or existing solutions or may prevent us from marketing our solutions. If we fail to maintain regulatory approvals and clearances, or are unable to obtain, or experience significant delays in obtaining, FDA clearances or approvals for our future products or product enhancements, our ability to commercially distribute and market these products could suffer.

 

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Modifications to our medical device products may require new regulatory approvals or clearances, including 510(k) or de novo clearances or premarket approvals, or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained.

Once a device is on the market, we must comply with numerous additional regulations which may require us to file adverse event reports and recalls as well as manufacture the software in accordance with a quality management system. Compliance with applicable regulatory requirements is subject to continual review and is monitored through periodic inspections by the FDA. In addition, we must comply with requirements and restrictions related to advertising, marketing and promotion of FDA-approved medical devices, as well as more stringent requirements applicable to medical devices that are pending FDA approval. If we fail to comply with regulatory requirements in the United States or experience delays in obtaining necessary regulatory approvals or clearances, this could delay production of our medical device products and lead to fines, difficulties in obtaining regulatory approvals or clearances, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, which could, in turn, have an adverse effect on our financial condition or results of operations.

Foreign governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent and, where we sell our medical device solutions internationally, we are subject to international regulation regarding these medical device solutions. For example, in May 2017, the EU Medical Devices Regulation (“MDR”) (Regulation 2017/745) was adopted. The MDR repeals and replaces the EU Medical Devices Directive. Unlike directives, which must be implemented into the national laws of the EU Member States, the MDR will be directly applicable in the EU Member States and on the basis of the European Economic Area (“EEA”) agreement in Iceland, Lichtenstein and Norway. The MDR, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices and ensure a high level of safety and health while supporting innovation. The MDR will apply from May 26, 2020. Once applicable, the MDR will among other things:

 

   

Strengthen the clinical data requirements related to medical devices;

 

   

Impose additional scrutiny during the conformity assessment procedure for high risk medical devices;

 

   

Impose on manufacturers and authorized representative the obligation to have a person responsible for regulatory compliance continuously at their disposal;

 

   

Require that authorized representatives be held legally responsible and liable for defective products placed on the EEA market jointly with the device manufacturers;

 

   

Reinforce post market surveillance requirements applicable to CE marked medical devices;

 

   

Improve the traceability of medical devices throughout the supply chain to the end-user or patient through a Unique Device Identification System;

 

   

Increase transparency. Information from several databases concerning economic operators, CE Certificates of Conformity, conformity assessment, clinical investigations, the Unique Device Identification system, adverse event reporting and market surveillance will be available to the public.

Once applicable, the MDR will impose increased compliance obligations for us to access the EU market.

Interoperability Requirements. There is increasing demand among customers, industry groups and government authorities that healthcare IT products provided by various vendors be compatible with each other and allow for the efficient exchange of EHR information. In 2013, in order to address this demand for interoperability, a number of other healthcare IT companies co-founded the CommonWell Health Alliance with the aim of developing a standard for data sharing among physicians, hospitals, clinics and pharmacies. Certain federal and state agencies also are developing standards that could eventually become mandatory for software and systems purchased by these agencies, or used by our customers. For example, under the Cures

 

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Act, the Office of the National Coordinator for Health Information Technology (“ONC”) within HHS is required to develop a “trusted exchange framework” and common agreement for the secure exchange of health information between networks. Although the Cures Act does not make implementation of the trusted exchange framework mandatory, the Cures Act encourages its adoption through the establishment of a publicly available directory of networks that are capable of trusted exchange and by permitting federal agencies to require implementation of the trusted exchange framework by network contractors as the contractors update their health IT or operational practices.

The Cures Act also encourages interoperability through changes to EHR certification standards implemented as part of HHS’s programs to promote interoperability. In particular, the amended EHR certification standards will require developers (i) to publish application programming interfaces that permit exchange of EHR and other health information among different health IT systems, (ii) to successfully test the “real world use” of interoperability technology, and (iii) to attest that they will not engage in “information blocking” or otherwise inhibit the appropriate exchange, access, and use of electronic health information. Health IT developers, exchanges, or networks that do engage in such information blocking by knowingly adopting practices that are likely to interfere with, prevent, or materially discourage the access, exchange, or use of electronic health information, may be subject to civil monetary penalties of up to $1 million per violation.

Although several of our healthcare IT solutions have received certification, rules regarding interoperability and certification standards are subject to regular revision and updates. The Office of Management and Budget is currently considering rules proposed by ONC and CMS concerning interoperability. The rule proposed by ONC would address, among other things, the kinds of industry behaviors that do and do not constitute information blocking under the Cures Act. The rule proposed by CMS may, among other things, effectively mandate interoperability as a condition for participating in Medicare. It is too early to tell in what form these rules may be adopted or the impact the final rules, if adopted, would have on our business. In October 2016, HHS published rules establishing processes to facilitate ONC’s direct review and evaluation of the performance of certified health IT in certain circumstances, including in response to problems or issues that could pose serious risks to public health or safety. As a result of changing requirements, we may incur increased development costs and delays in receiving certification for our solutions, and changing or supplementing rules also may lengthen our sales and implementation cycle. We also may incur costs in periods prior to the corresponding recognition of revenue. To the extent these requirements subsequently are changed or supplemented, or our prior certifications are no longer valid, or we are delayed in receiving new certifications for our solutions, customers may postpone or cancel their decisions to purchase or implement these solutions.

Restrictions on Communications. Communications with our customers and our customers’ patients increasingly are scrutinized under laws and regulations governing communications. For example, the Telephone Consumer Protection Act of 1991 (the “TCPA”) subjects us and our vendors to various rules regarding contacting our customers and our customers’ patients via telephone, fax or text message and may impact our operations. In the last few years, there has been a significant increase in class action lawsuits brought under the TCPA. This increase has been driven, in part, by more expansive interpretations of the activity subject to regulation under the TCPA by some courts and by the Federal Communications Commission (“FCC”), as well as by the significant statutory damages that are potentially available to successful plaintiffs. Because our solutions need and rely upon various messaging components to achieve successful outcomes for us and our customers, our ability to communicate with our customers and their patients may be affected by the TCPA, its implementing regulations and litigation pursuant to the TCPA. In addition, because of the scope and interpretation of the TCPA is continuing to evolve and develop, we inadvertently could fail to comply or be alleged to have failed to comply with the TCPA, and consequently be subject to significant statutory damages and negative publicity associated with class action litigation and/or costs associated with modifying our solutions and business strategies. Furthering the compliance challenges posed by the TCPA is the fact that the FCC continues to review dozens of petitions from parties in various industries that seek interpretation of the TCPA’s various regulations. To the extent the FCC issues

 

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an order that alters current understanding and accepted interpretation of the TCPA’s regulations, we may be required to modify our solutions in ways that may make them less attractive to our customers and/or require us to alter our business strategies and incur increased costs. In addition, we also may be subject to claims alleging failure to comply with email and marketing regulations under the CAN-SPAM Act, and additional fax regulations under the Junk Fax Act and data privacy rules under the California Consumer Privacy Act of 2018, as well as potentially under non-U.S. laws that regulate communications and messaging and that affect our operations, such as Canada’s Anti-Spam Law (“CASL”), GDPR, and the European Union’s e-Privacy Directive and implementing member state laws (and any subsequent changes to such laws). We also use email and social medial platforms as marketing tools. For example, we maintain social media accounts and may occasionally email customers offers and promotions. As laws and regulations, including FTC enforcement, rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely impact our business, financial condition and results of operations or subject us to fines or other penalties.

Financial Services Related Laws, Regulations and Industry Standards. Financial services and electronic payment processing services are subject to numerous laws, regulations and industry standards. These laws may subject us, our vendors and our customers to liability as a result of our communication and payment solutions. Although we do not act as a bank, we offer solutions that involve banks, or vendors who contract with banks and other regulated providers of financial services. We rely on relationships with such banks, vendors and providers. If we fail to maintain these relationships or if we maintain them under new terms that are less favorable to us, our business, results of operations or financial condition could suffer. The various payment modalities that we offer our customers directly and through banks, vendors, or other regulated providers may be deemed regulated activity at the federal or state level, and, as a result, we may be affected by banking and financial services industry laws, regulations and standards, such as licensing requirements, solvency standards, reporting and disclosure obligations and requirements to maintain the privacy and security of nonpublic personal financial information. In addition, our communication and payment solutions may be affected by payment card industry operating rules and security standards, certification requirements, state prompt payment laws and other rules governing electronic funds transfers. If we fail to comply with any applicable communication and payment rules or requirements, we may be subject to fines and changes in transaction fees and may lose our ability to process payment transactions or facilitate other types of billing and payment solutions. Moreover, in addition to regulatory requirements related to electronic funds transfers, payment transactions processed using the Automated Clearing House Network are subject to network operating rules promulgated by the National Automated Clearing House Association, and these rules may affect our payment practices. Certain payment transactions may be subject to card association and network rules and standards. Failure to comply with such rules or standards could subject us to fines or penalties imposed by such card associations and networks. If any changes in such rules or standards increase the cost of doing business or limit our ability to provide our solutions, our business, results of operations or financial condition could suffer. Further, our communication and payment solutions may impact the ability of our payer customers to comply with state prompt payment laws. These laws require payers to pay healthcare claims meeting the statutory or regulatory definition of a “clean claim” within a specified time frame. Finally, as we expand our financial services offerings we may be subject to additional laws and regulations, including certain consumer protection laws such as the Fair Debt Collections Practices Act (the “FDCPA”), the Fair Credit Reporting Act (the “FCRA”) and various other state laws implicated by such financial services.

Foreign Corrupt Practices Act and Bribery Laws. The U.S. Foreign Corrupt Practices Act (“FCPA”) and similar international bribery laws make it unlawful for entities to make payments to foreign government officials to assist in obtaining and maintaining business. Specifically, the anti-bribery provisions of the FCPA prohibit any offer, payment, promise to pay, or authorizing the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to do or omit to do an act in violation of his or her duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or

 

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with, or directing business, to any person. In addition to the anti-bribery provisions of the FCPA, the statute also contains accounting requirements designed to operate in tandem with the anti-bribery provisions. Covered companies are required to make and keep books and records that accurately and fairly reflect the transactions of the company and devise and maintain an adequate system of internal accounting controls. With our international businesses, we could incur significant fines and penalties, as well as criminal liability, if we fail to comply with either the anti-bribery or accounting requirements of the FCPA, or similar international bribery laws. Even an unsuccessful challenge of our compliance with these laws could cause us to incur adverse publicity and significant legal and related costs.

Physician Payments Sunshine Act. The Physician Payments Sunshine Act of 2010 (the “Sunshine Act”) requires manufacturers of medical devices covered by Medicare, Medicaid, and the Children’s Health Insurance Program to collect and track all financial relationships with physicians and teaching hospitals and to report annually such data to CMS. Medical device manufacturers must report to CMS payments or “transfers of value” made to physicians, including meals, travel reimbursement, consulting fees and research payments. In addition, several states and the District of Columbia have passed laws requiring that medical device manufacturers report various details of their financial relationships with physicians. The Sunshine Act authorizes significant civil monetary penalties for each payment or transfer of value not accurately or completely reported. Although we have processes in place to track and timely report such financial relationships, we inadvertently may fail to track and report all such financial relationships and thus may be subject to penalties for such non-compliance.

United States Postal Service Laws and Regulations. Our communication and payment solutions provide mailing services primarily delivered by the United States Postal Service (“USPS” or the “Postal Service”). Postage is the most significant cost incurred in the delivery of our communication and payment solutions. Although we generally pass increases in postage costs through to our customers, in some circumstances we may be unable to do so, or the resulting increases in our charges could cause our customers to reduce the volume of our services. While we cannot predict the magnitude of these effects, they could have a material effect on our business, operating results or financial condition if large enough.

First, the Postal Service could increase the rates of postage that we must pay. Most of the mail that we send uses market-dominant mail products, whose postal rates are subject to maximum rate regulation. Current regulatory rules generally limit the average rate increase for each class of market-dominant mail to the rate of increase of the Consumer Price Index (“CPI”). The Postal Service, however, has argued for eliminating or loosening this restriction, and the Postal Regulatory Commission is now considering proposed rule changes that would have this effect. It is also possible that Congress could eliminate or loosen the restriction on postal rate increases through legislation, particularly if the Postal Service continues to report financial losses.

Second, even under current regulatory standards, the Postal Service has broad flexibility to raise rates on individual rate categories within a class of mail faster than the CPI, as long as the average rates for the affected mail class as a whole do not increase than the CPI-based rate cap.

Third, most of the postal rates that we pay reflect significant discounts from the basic USPS postage rate structure. These discounts could be changed or discontinued at any time on short notice. The Postal Service also could require more costly or difficult mail preparation (e.g., presorting, barcoding, bundling or destination entry) requirements as a condition for continuing to use the discounted rates. More onerous preparation requirements could force us to incur substantial additional mail preparation costs or pay higher rates of postage.

Fourth, it is possible that the Postal Service, the Postal Inspection Service, or other law enforcement officials could allege that we did not prepare past mailings as required to qualify for the discounted rates at which the mailings were mailed, and that we now owe additional postage. Further, if the government concludes that the noncompliance was intentional or reckless, the government could seek to recover treble damages and civil penalties of up to $22,363 per false claim (adjusted annually to reflect changes in the

 

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Consumer Price Index). If the volume of mail subject to these allegations is large enough, the recovery sought could have a material effect on our business, operating results, or financial condition.

Payment Card Industry Standards. We accept credit card, eCheck, ACH Payments, and payments via online portal, phone/ Interactive Voice Response system or by mail. We also enable payers to collect member premium payments. These transactions are regulated at the federal, state and international levels as well as by certain industry groups, such as the Payment Card Industry Security Standards Council, the National Automated Clearing House Association and individual credit card issuers. Federal, state, international and industry groups also may consider and implement from time to time new privacy and security requirements that apply to our business. Compliance with contractual obligations and evolving privacy and security laws, requirements and regulations may result in cost increases due to necessary systems changes, new limitations or constraints on our business and the development of new administrative processes. If we fail to adequately control fraudulent ACH, credit card and debit card transactions, we may face civil liability, diminished public perception of our security measures and significantly higher ACH, credit card and debit card related costs, each of which could adversely affect our business, financial condition and results of operations. The termination of our ability to process payments through ACH transactions or on any major credit or debit card would adversely affect our ability to operate its business.

Other State Healthcare Laws. Most states have a variety of laws that potentially impact our operations and business practices. For example, many states in which we provide clinical care in-home assessment services prohibit corporations and other non-licensed entities from practicing medicine, nursing and other licensed professions by employing physicians and certain non-physician practitioners. These prohibitions on the corporate practice of medicine, nursing and other licensed professions impact how we structure our relationships with physicians and other affected non-physician practitioners. In addition, some states have restrictions on physicians and other healthcare practitioners splitting fees with non-practitioners or restrict the ability of practitioners to assign claims for reimbursement from government healthcare programs. Some states have interpreted these laws to prevent business service providers from charging their physician clients on the basis of a percentage of collections or charges. If our arrangements with physicians or other practitioners were found to violate a corporate practice of medicine, nursing and other licensed professions prohibition or fee-splitting prohibition, we may be subject to civil or criminal penalties, be required to terminate or make changes to our contractual arrangements with practitioners in such states or to our business generally, or be required to remit portions of our services fees to practitioners, which, in turn, may adversely affect both our operations and profitability. Further, we could face sanctions for aiding and abetting the violation of the state’s professional licensure statutes. In addition, we hold certain state licenses and enrollments in government healthcare programs which subject us to additional requirements and scrutiny by government regulators. Failure to comply with requirements and obligations imposed by such licensure and enrollments may result in civil and criminal penalties and may otherwise adversely affect our business. We continually monitor legislative, regulatory and judicial developments related to licensure and engagement arrangements with professionals; however, new agency interpretations, federal or state legislation or regulations, or judicial decisions could require us to change how we operate, may increase our costs of services and could have a material adverse impact on our business, results of operations or financial condition.

Legislative changes and contractual limitations may impede our ability to utilize our offshore service capabilities.

In our operations, we have contractors and employees located outside of the United States who may have access to personal information, including protected health information in order to assist us in performing services for our customers. From time to time, Congress considers legislation that would restrict the transmission of personal information regarding a United States resident to any foreign affiliate, subcontractor or unaffiliated third party without adequate privacy protections or without providing notice to the identifiable individual of the transmission and an opportunity to opt out. Some of the proposals considered would have required patient consent and imposed liability on healthcare businesses arising from the improper sharing or other misuse of personal information. Congress also has considered creating a private civil cause of action that would allow an

 

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injured party to recover damages sustained as a result of a violation of these proposed restrictions. Furthermore, a number of states have considered prohibitions or limitations on the disclosure of personal information to individuals or entities located outside of the United States. If legislation of this type is enacted, our ability to utilize offshore resources may be impeded, and we may be subject to sanctions for failure to comply with the new mandates of the legislation. In addition, the enactment of such legislation could result in such work being performed at a lower margin of profitability, or even at a loss. In addition, CMS requires that some of our customers, including Medicare Advantage organizations and Medicare Part D prescription drug plans and their subcontractors, submit certain information regarding their offshore subcontractors and attest that measures have been taken to mitigate risk associated with sharing personal information with such offshore subcontractors. As a result, we may be required to submit information or an attestation and may be impacted by our customer’s failure to submit accurate and complete information or attestations. Further, as a result of concerns regarding the possible misuse of personal information, some of our customers have contractually limited or may seek to limit our ability to use our offshore resources which may increase our costs. Use of offshore resources may increase our risk of violating our contractual obligations to our customers to protect the privacy and security of personal information provided to us, which could adversely impact our reputation and our business. In addition, depending on the location of contractors and employees accessing personal information outside of the United States, we may have additional compliance obligations under non-U.S. laws applicable to accessing, using, or otherwise processing personal information and transmitting that information back to the U.S.

We are subject to risks associated with our international operations.

We market, sell and support our solutions internationally. We plan to continue to expand our non-U.S. operations and continue to focus on developing successful direct and indirect non-U.S. sales and support channels. Non-U.S. operations are subject to inherent risks, and our business, results of operations and financial condition, including our revenue growth and profitability, could be adversely affected by a variety of uncontrollable and changing factors. These include, but are not limited to:

 

   

greater difficulty in collecting accounts receivable and longer collection periods;

 

   

difficulties and costs of staffing and managing non-U.S. operations;

 

   

the impact of global economic and political market conditions;

 

   

effects of sovereign debt conditions, including budgetary constraints;

 

   

unfavorable or volatile foreign currency exchange rates;

 

   

legal compliance costs or business risks associated with our global operations where: i) local laws and customs differ from, or are more stringent than those in the United States, such as those relating to data privacy and data security, or ii) risk is heightened with the FCPA, the U.K. Anti-Bribery Act and similar laws and regulations in foreign jurisdictions;

 

   

certification, licensing, or regulatory requirements, including obligations imposed on manufacturers and distributors of medical devices by non-U.S. regulatory agencies, and unexpected changes to those requirements;

 

   

changes to or reduced protection of intellectual property rights in certain countries;

 

   

greater difficulty in protecting, maintaining and obtaining registered intellectual property, such as patents and trademarks;

 

   

potentially adverse tax consequences as a result of changes in tax laws or otherwise, and difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner;

 

   

different or additional functionality requirements or preferences;

 

   

trade protection measures;

 

   

economic sanctions;

 

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export control regulations;

 

   

disruption of, or loss of access to, regional information technology or telecommunication networks;

 

   

health service provider or government spending patterns or government-imposed austerity measures;

 

   

natural disasters, war or terrorist acts; and

 

   

labor disruptions that may occur in a country.

We rely on vendors and other third parties including vendors outside the U.S., for some of our information technology infrastructure, development and maintenance, quality assurance, operations, and customer support.

We currently depend on various vendors and other third parties for substantial business functions, including with respect to our IT systems (including infrastructure, application development, purchase and distribution, payment processing, manufacturing, and maintenance), business process outsourcing, call center services, customer support and similar services. Specifically, we outsource some of our software development and design, quality assurance, and operations activities to third-party vendors that have employees and consultants located outside the United States. In February 2018, the Joint Venture entered into a ten-year contract with Wipro in which it committed to purchase from Wipro at least $1.0 billion in outsourced professional services over the ten-year term of the contract. If the Joint Venture fails to meet this minimum commitment, it may be forced to pay to Wipro 25% of the shortfall relative to the minimum commitment at the end of the term, thus increasing its costs without a commensurate increase in services provided to its business. If the Joint Venture had terminated the Wipro contract on March 31, 2019, it estimates that the termination fee would have been approximately $244.8 million, which represents the greater of (i) a termination fee equal to 25% of the remaining unspent minimum commitment and (ii) the remaining unrecovered costs incurred by Wipro in connection with its performance under the agreement. In addition, the Joint Venture’s dependence on Wipro and our dependence on other third-party vendors creates a number of business risks—in particular, the risk that we may not maintain service quality, control or effective management with respect to these outsourcing arrangements of our business operations and that we cannot control the information systems, facilities or networks of such vendors.

Our results of operations could be adversely affected if the information systems, facilities or networks of a third party vendor are disrupted (including disruption of access), are damaged or fail, whether due to physical disruptions, such as fire, natural disaster, pandemic or power outage, or due to cyber-security incidents, ransomware or other actions of vendors, including labor strikes, political unrest and terrorist attacks. Moreover, because certain of our third-party vendors conduct operations for us outside the United States, the political and military events in foreign jurisdictions could have an adverse impact on our outsourced operations. If we experience problems with our third-party vendors, if the costs charged by our third-party vendors increase or if our agreements with our third-party vendors are terminated, we may not be able to develop new solutions, enhance or operate existing solutions, or provide customer support in an alternate manner that is equally or more efficient and cost-effective.

Failure by our customers to obtain proper permissions or provide us with accurate and appropriate information may result in claims against us or may limit or prevent our use of information, which could harm our business. Additionally, privacy concerns relating to our business could damage our reputation and deter current and potential customers from using our solutions.

To the extent we are not otherwise permitted to use and/or disclose customer information, we require our customers to provide necessary notices and obtain necessary permissions for the use and disclosure of the information that we receive from our member engagement, member eligibility, billing and coding and other solutions. If they do not provide necessary notices or obtain necessary permissions, then our use and disclosure of information that we receive from them or on their behalf may be limited or prohibited by federal or state privacy or other laws. Such failures by our customers could impair our functions, processes and databases that reflect, contain or are based upon such information. For example, as part of our claims submission services, we

 

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rely on our customers to provide us with accurate and appropriate information and directives for our actions. While we have implemented features and safeguards relating to the accuracy and completeness of claims content, these features and safeguards may not be sufficient to prevent inaccurate claims data from being submitted to payers. In addition, such failures by our customers could interfere with or prevent creation or use of rules, analyses or other data-driven activities that benefit us, or make our solutions less useful. Accordingly, we may be subject to claims or liability for inaccurate claims data submitted to payers or for use or disclosure of information by reason of lack of valid notice or permission. As another example, we rely on our customers to provide us with accurate and appropriate billing and coding information, including provider enrollment information and medical necessity information. While we have implemented features and safeguards relating to provider enrollment and medical necessity requirements, these features and safeguards may not be sufficient to prevent inaccurate or incomplete billing and coding claims from being submitted to payers. Accordingly, we may be subject to claims or liability for inaccurate or incomplete billing and coding claims. These claims or liabilities could damage our reputation, subject us to unexpected costs and could have a material adverse impact on our business, results of operations or financial condition.

Additionally, in recent years, consumer advocates, media and elected officials increasingly and publicly have criticized companies in data focused industries regarding the collection, storage and use of personal data, including the licensing of de-identified data, by such companies. Concerns about our practices with regard to the collection, use, disclosure or security of personal information, the licensing of de-identified data, or other privacy related matters, even if unfounded, could damage our reputation and adversely affect our business, results of operations or financial condition.

Certain of our solutions present the potential for embezzlement, identity theft or other similar illegal behavior by our employees or vendors and a failure of our employees or vendors to observe quality standards or adhere to environmental, social and governance standards could damage our reputation.

Among other things, our solutions include printing and mailing checks and/or facilitating electronic funds transfers for our payer customers and handling mail and payments from payers and from patients for many of our provider customers. These services frequently include handling original checks, payment card information, banking account information and may include currency. Even in those cases in which we do not facilitate payments or handle original documents or mail, our services also involve the use and disclosure of personal and business information that could be used to impersonate third parties or otherwise gain access to their data or funds. If any of our employees or vendors or other bad actors takes, converts or misuses such funds, documents or information, or we experience a data breach creating a risk of identity theft, we could be liable for damages, and our reputation could be damaged or destroyed. In addition, we could be perceived to have facilitated or participated in illegal misappropriation of funds, documents or data and, therefore, be subject to civil or criminal liability. Federal and state regulators may take the position that a data breach or misdirection of data constitutes an unfair or deceptive act or trade practice. We also may be required to notify individuals affected by any data breaches. Further, a data breach or similar incident could impact the ability of our customers that are creditors to comply with the federal “red flags” rules, which require the implementation of identity theft prevention programs to detect, prevent and mitigate identity theft in connection with customer accounts.

Many of our licensees, as well as vendors are subject to specified product quality standards and other requirements pursuant to the related licensing or supply agreements. The non-compliance by these entities with the terms and conditions of their respective contracts that pertain to health and safety standards, quality control, product consistency, compliance with law, or proper marketing or other business practices, may adversely impact the goodwill of our business. We may not be able to adequately prevent such practices, which could harm the value of our business, result in the abandonment, dilution or invalidity of trademarks associated with our business and adversely affect our results of operations or financial condition. In addition, such licensees and suppliers could violate environmental, social and governance standards or engage in unethical conduct. Further, despite our policies to the contrary, we may not be able to control the conduct of every individual actor, and our employees and personnel may violate environmental, social or governance standards or engage in other unethical conduct. These acts could adversely impact the reputation of our business.

 

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Contractual relationships with customers that are governmental agencies or are funded by government programs may impose special burdens on us and provide special benefits to those customers.

A portion of our revenue comes from customers that are governmental agencies or are funded by government programs. Our contracts and subcontracts may be subject to some or all of the following:

 

   

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 completion of the full contract term, as well as 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, information security, subcontracting requirements, equal employment opportunity, affirmative action for veterans and workers with disabilities and accessibility for the disabled;

 

   

broad audit rights;

 

   

ownership of inventions made with federal funding under the Bayh-Dole Act; and

 

   

specialized remedies for breach and default, including setoff rights, risk allocation, retroactive price adjustments and civil or criminal fraud penalties, re-procurement expenses, as well as mandatory administrative dispute resolution procedures instead of state contract law remedies.

In addition, certain violations of federal and state law may result in termination of our contracts and subcontracts, and under certain circumstances, suspension and/or debarment from future government contracts. We also are subject to conflict-of-interest rules that may affect our eligibility for some federal, state and local government contracts and subcontracts, including rules applicable to all United States government contracts and subcontracts, as well as rules applicable to the specific agencies with which we have contracts or with which we may seek to enter into contracts.

The protection of our intellectual property requires substantial resources and protections of our proprietary rights may not be adequate.

We rely upon a combination of trade secret, copyright and trademark laws, patents, license agreements, confidentiality procedures, nondisclosure agreements and technical measures designed to protect the intellectual property used in our business. The steps we have taken to protect and enforce our proprietary rights and intellectual property may not be adequate. For instance, we may not be able to secure trademark or service mark registrations for marks in the United States or in foreign countries or take similar steps to secure patents for our proprietary processes, methods and technologies. Even if we are successful in obtaining patent and/or trademark registrations, these registrations may be opposed or invalidated by a third party. In addition, our agreements with employees, consultants and others who develop intellectual property for or on behalf of the Company could be breached and could result in our trade secrets and confidential information being publicly disclosed. We may not have adequate remedies for any such breach. Third parties also may infringe upon or misappropriate our copyrights, trademarks, service marks, patents and other intellectual property rights. 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. Even if we establish infringement, a court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may or may not be an adequate remedy. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of shares of our common stock. Moreover, there can be no assurance

 

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that we will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded. Even if we ultimately prevail in such claims, the monetary cost of such litigation and the diversion of the attention of our management and scientific personnel could outweigh any benefit we receive as a result of the proceedings. As a result, if we fail to maintain adequate intellectual property protection or if a third party infringes or misappropriates our intellectual property, it may have a material adverse impact on our business, results of operations or financial condition. Our currently pending or future patent applications may not result in issued patents, or be approved on a timely basis, if at all. Similarly, any term extensions that we seek may not be approved on a timely basis, if at all. In addition, our issued patents, or any patents that may issue in the future, may not contain claims sufficiently broad to protect us against third parties with similar technologies or products or provide us with any competitive advantage, including exclusivity in a particular product area. The validity and scope of our patent claims also may vary between countries, as individual countries have their own patent laws. The validity, enforceability, scope and effective term of patents can be highly uncertain and often involve complex legal and factual questions and proceedings that vary based on the local law of the relevant jurisdiction. Our ability to enforce our patents also depends on the laws of individual countries and each country’s practice with respect to enforcement of intellectual property rights. Patent protection must be obtained on a jurisdiction-by-jurisdiction basis, and we only pursue patent protection in countries where we think it makes commercial sense for the given product. In addition, if we are unable to maintain our existing license agreements or other agreements pursuant to which third parties grant us rights to intellectual property, including because such agreements terminate, our financial condition and results of operations could be materially adversely affected.

Patent law reform in the U.S. and other countries may also weaken our ability to enforce our patent rights, or make such enforcement financially unattractive. For instance, in September 2011, the U.S. enacted the America Invents Act, which permits enhanced third-party actions for challenging patents and implements a first-to-invent system. These reforms could result in increased costs to protect our intellectual property or limit our ability to obtain and maintain patent protection for our products in these jurisdictions. Additionally, certain foreign governments have indicated that compulsory licenses to patents may be granted in the case of national emergencies, which could diminish or eliminate sales and profits from those regions and materially adversely affect our financial condition and results of operations.

Our trademarks, logos, and brands may provide us with a competitive advantage in the market as they may be known or trusted by consumers. In order to maintain the value of such brands, we must be able to enforce and defend our trademarks. We have pursued and will pursue the registration of trademarks, logos and service marks in the U.S. and internationally; however, enforcing rights against those who knowingly or unknowingly dilute or infringe our brands can be difficult. Effective trademark, service mark, trade dress or related protections may not be available in every country in which our solutions are available. Enforcement is especially difficult in first-to-file countries where ‘‘trademark squatters’’ can prevent us from obtaining adequate protections for our brands. There can be no assurance that the steps we have taken and will take to protect our proprietary rights in our brands and trademarks will be adequate or that third parties will not infringe, dilute or misappropriate our brands, trademarks, trade dress or other similar proprietary rights.

Many of our products are based on or incorporate proprietary information. We actively seek to protect our proprietary information, including our trade secrets and proprietary know-how, by generally requiring our employees, consultants, other advisors and other third parties to execute proprietary information and confidentiality agreements upon the commencement of their employment, engagement or other relationship. Despite these efforts and precautions, we may be unable to prevent a third party from copying or otherwise obtaining and using our trade secrets or our other intellectual property without authorization and legal remedies may not adequately compensate us for the damages caused by such unauthorized use.

In addition, there can be no assurance that our competitors will not independently develop products or services that are equivalent or superior to our solutions.

 

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We may not be able to protect our intellectual property rights throughout the world.

Third parties may attempt to commercialize competitive products or services in foreign countries where we do not have any patents or patent applications and where legal recourse may be limited. This may have a significant commercial impact on our foreign business operations.

Filing, prosecuting and defending patents on our solutions in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States may be less extensive than those in the United States. The requirements for patentability may differ in certain countries, particularly developing countries. For example, Europe has a heightened requirement for patentability of software inventions. Thus, even in countries where we do pursue patent protection, there can be no assurance that any patents will issue with claims that cover our solutions. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and services and further, may export otherwise infringing products and services to territories where we have patent protection, but enforcement on infringing activities is inadequate. These products or services may compete with ours, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. In addition, certain countries in Europe and certain developing countries, including India and China, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, we may have limited remedies if our patents are infringed or if we are compelled to grant a license to our patents to a third party, which could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we own or license. Finally, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in foreign intellectual property laws.

Third parties may claim that we or our distributors or licensors are infringing their intellectual property, and we could suffer significant litigation or licensing expenses or be prevented from selling certain solutions.

We or our distributors and licensors could be subject to claims that we are misappropriating or infringing intellectual property (including patents, trademarks, trade dress, copyrights, trade secrets, domain names) or other proprietary rights of others. We may become subject to preliminary or provisional rulings in the course of any such litigation, including potential preliminary injunctions requiring us to cease some or all of our operations. Similarly, if any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that may not be reversed upon appeal. These claims, even if not meritorious, could be expensive to defend and divert management’s attention from our operations and even if we believe we do not infringe a validly existing third-party right we may choose to license such rights. If we or our distributors or licensors become liable to third parties for infringing these rights, we could be required to pay a substantial damage award, including treble damages in some cases, and to develop non-infringing technology, obtain a license, which may not be available on commercially reasonable terms, or stop activities or services that use or contain the infringing

 

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intellectual property, which could include a recall or cessation of sales in the future. We may also decide to settle such matters on terms that are unfavorable to us. We may be unable to develop non-infringing solutions or obtain a license on commercially reasonable terms, or at all. We also may 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.

The intellectual property positions of pharmaceutical and health IT services frequently involve complex legal and factual questions. For example, while we generally enter into proprietary information agreements with our employees and third parties which assign intellectual property rights to us, these agreements may not be honored or may not effectively assign intellectual property rights to us under the local laws of some countries or jurisdictions. We cannot be certain that a competitor or other third party does not have or will not obtain rights to intellectual property that may prevent us from manufacturing, developing or marketing certain of our products, regardless of whether we believe such intellectual property rights are valid and enforceable or we believe we would otherwise be able to develop a more commercially successful product, which may materially adversely affect our business, financial condition and results of operations.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

We have received confidential and proprietary information from third parties. In addition, we may employ individuals who were previously employed at other healthcare companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise improperly used or disclosed confidential information of these third parties or our employees’ former employers. Further, we may be subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants or others who are involved in developing our solutions. We may also be subject to claims that former employees, consultants, independent contractors or other third parties have an ownership interest in our patents or other intellectual property. Litigation may be necessary to defend against these and other claims challenging our right to and use of confidential and proprietary information. In addition to paying monetary damages, if we fail in defending against any such claims we may lose our rights therein, which could have a material adverse effect on our business. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.

Our solutions depend, in part, on intellectual property and technology licensed from third parties.

Much of our business and many of our solutions rely on key technologies or content developed or licensed by third parties. For example, many of our software offerings are developed using software components or other intellectual property licensed from third parties, including both proprietary and open source licenses. These third-party software components may become obsolete, defective or incompatible with future versions of our solutions, or our relationship with the third party licensor may deteriorate, or our contracts with the third party licensor may expire or be terminated. In addition, like most other service providers in the healthcare industry, many of our products rely on proprietary healthcare codes, descriptive terms and other content, such as Current Procedural Terminology codes (“CPT” codes), that third parties, such as the American Medical Association (“AMA”) develop and license for the purpose of maintaining standard language and coding throughout the healthcare industry. Because CPT codes are licensed by the AMA on reasonable and non-discriminatory terms, we anticipate the continued availability of such content; however, if we are unable to maintain an ongoing license for such content, certain of our products may become partially or entirely incompatible with the healthcare industry. We may also face legal or business disputes with licensors that may threaten or lead to the disruption of inbound licensing relationships. In order to remain in compliance with the terms of our licenses, we must carefully monitor and manage our use of third-party software components, including both proprietary and open source license terms that may require the licensing or public disclosure of our intellectual property without compensation or on undesirable terms. Because the availability and cost of licenses from third parties depends upon the willingness of third parties to deal with us on the terms we request, there is a risk that third parties who

 

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license to our competitors either will refuse to license us at all, or refuse to license us on terms equally favorable to those granted to our competitors. Consequently, we may lose a competitive advantage with respect to these intellectual property rights or we may be required to enter into costly arrangements in order to terminate or limit these rights. Additionally, some of these licenses may not be available to us in the future on terms that are acceptable or that allow our solutions to remain competitive. Our inability to obtain licenses or rights on favorable terms could have a material effect on our business, including our financial condition and results of operations. In addition, it is possible that as a consequence of a merger or acquisition, third parties may obtain licenses to some of our intellectual property rights or our business may be subject to certain restrictions that were not in place prior to such transaction. Because the availability and cost of licenses from third parties depends upon the willingness of third parties to deal with us on the terms we request, there is a risk that third parties who license to our competitors either will refuse to license us at all, or refuse to license us on terms equally favorable to those granted to our competitors. Consequently, we may lose a competitive advantage with respect to these intellectual property rights or we may be required to enter into costly arrangements in order to terminate or limit these rights.

Our use of open source technology could impose limitations on our ability to commercialize our solutions.

Our solutions incorporate open source software components that are licensed to us under various public domain licenses. Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software or make available any derivative works of the open source code on unfavorable terms or at no cost. There is little or no legal precedent governing the interpretation of many of these licenses and therefore the potential impact of such licenses on our business is not fully known or predictable. There is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our solutions.

While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose our source code or that would otherwise breach the terms of an open source license, such use could inadvertently occur and we may be required to release our proprietary source code, pay damages for breach of contract, re-code or engineer one or more of our offerings, discontinue sales of one or more of our solutions in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could cause us to breach obligations to our customers, harm our reputation, result in customer losses or claims, increase our costs or otherwise adversely affect our business and operating results.

Recently enacted U.S. federal tax reform could adversely affect our results of operations.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law, which made significant changes to the U.S. Internal Revenue Code of 1986, as amended (the “Code”). Among other changes, Section 163(j) of the Code was amended to limit the deductibility of net interest expense paid or accrued on debt properly allocable to a trade or business to 30% of “adjusted taxable income,” subject to certain exceptions. Any deduction in excess of the limitation is carried forward and may be used in a subsequent year, subject to the 30% limitation. Adjusted taxable income is determined without regard to certain deductions, including those for net interest expense, net operating loss carryforwards and, for taxable years beginning before January 1, 2022, depreciation, amortization and depletion. While the impact of this rule is not completely clear and could change due to the issuance of additional interpretive guidance or changes in the Company’s level of indebtedness, the Company expects these rules will limit the amount of net interest expense that the Company, the Joint Venture and the subsidiaries of the Joint Venture can use as a deduction against taxable income and, as a result, may negatively impact the financial condition and results of operations of the Company.

 

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A write-off or acceleration of amortization of all or a part of our long-lived assets (including identifiable intangible assets and goodwill) would adversely affect our operating results and reduce our net worth.

We have significant long-lived assets which include property and equipment, identifiable intangible assets, other noncurrent assets and goodwill. As of March 31, 2019, we had $197.3 million of property and equipment, $1,320.2 million of identifiable intangible assets, $422.0 million of other noncurrent assets and $3,284.3 million of goodwill on our balance sheet, which collectively represented in excess of 84% of our total assets. We amortize property and equipment, identifiable intangible assets and relevant other noncurrent assets over their estimated useful lives. Though we are not permitted to amortize goodwill under GAAP, we evaluate our goodwill for impairment at least annually. In the event of anticipated obsolescence or impairment of our long-lived assets, we may write-off all or part of the affected assets or accelerate the related amortization of these assets. A write-off or acceleration of amortization in the future would result in an immediate one-time charge to earnings in the event of an impairment of assets and, in the event of anticipated obsolescence of assets that do not reach the level of an impairment, regular reductions to earnings over the remaining lives of the affected assets. Although it would not affect our cash flow, a write-off or acceleration of amortization in future periods of all or a part of these long-lived assets would adversely affect our financial condition and operating results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Change Healthcare LLC—Critical Accounting Estimates—Goodwill and Intangible Assets” of this prospectus.

Our success depends in part on our ability to identify, recruit and retain skilled management and technical personnel. If we fail to recruit and retain suitable candidates or if our relationship with our employees changes or deteriorates, there could be a material adverse impact on our business, results of operations or financial condition.

Our future success depends upon our continuing ability to identify, attract, hire and retain highly qualified personnel, including skilled management, product, technology, sales and marketing personnel, all of whom are in high demand and are often subject to competing offers. Competition for qualified personnel in the healthcare IT industry is intense, and we may not be able to hire or retain a sufficient number of qualified personnel to meet our requirements, or be able to do so at salary, benefit and other compensation costs that are acceptable to us. A loss of a substantial number of qualified employees, or an inability to attract, retain and motivate additional highly skilled employees required for expansion of our business, could have a material adverse impact on our business, results of operations or financial condition. In addition, while none of our employees currently are unionized, unionization of our employees is possible in the future. Such unionizing activities could be costly to address and, if successful, likely would adversely impact our operations.

Lengthy sales, installation and implementation cycles for some of our solutions may result in delays or an inability to generate revenue from these solutions.

Some of our solutions have long sales, installation and implementation cycles, which could range from a few months to years or more from initial contact with the customer to completion of implementation and generation of revenue. How and when to implement, replace, or expand an information system, or modify or add business processes, are important decisions for healthcare organizations, and some customers may be reluctant to change or modify existing systems or processes. Some of the solutions we provide require significant capital expenditures and time commitments by our customers. Sales may be subject to delays due to customers’ internal procedures for deploying new systems and processes, and implementation may be subject to delays based on the availability of the internal customer resources needed. We may be unable to control many of the factors that will influence the timing of the buying decisions of existing or prospective customers or the pace at which installation and training may occur, including decisions by our customers to delay or cancel implementations. If we experience longer sales, installation and implementation cycles for our solutions, we may experience delays in generating, or a decreased ability to generate, revenue from these solutions, which could have a material adverse impact on our business, results of operations or financial condition. Furthermore, significant delays or failures to meet milestones established in our customer contracts may result in breach of contract, termination of the contract, damages and/or penalties as well as a reduction in our margins or a delay in our ability to recognize revenue.

 

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We may be a party to legal, regulatory and other proceedings that could result in unexpected adverse outcomes.

From time to time, we have been, are and may in the future be, a party to legal and regulatory proceedings and investigations, including matters involving governmental agencies and entities with which we do business and other proceedings and investigations arising in the ordinary course of business, as described in more detail above. In addition, there are an increasing number of, and we may be subject to, investigations and proceedings in the healthcare industry generally that seek recovery under HIPAA, AKS, the FCA, the CMP, the Stark Law, the Sunshine Act, state laws and other statutes and regulations applicable to our business as described in more detail above. For example, we are currently subject to two overlapping putative class action complaints in Wisconsin federal court, alleging that we charged a fee to obtain certified healthcare bills for patients provided in the ordinary course of business in excess of Wisconsin state statutory limits. These and other similar statutory requirements impose statutory penalties for proven violations, which could become significant. While we intend to vigorously defend ourselves, the ultimate outcome and potential financial impact to us is not determinable at this time given the preliminary stage of these proceedings. We also may be subject to legal proceedings under non-healthcare federal, state and international laws affecting our business, such as the TCPA, FDCPA, FCRA, CAN-SPAM Act, Junk Fax Act, FCPA, the California Consumer Privacy Act of 2018, GDPR, employment, banking and financial services and USPS laws and regulations, as further detailed above. Such proceedings are inherently unpredictable, and the outcome can result in verdicts and/or injunctive relief that may affect how we operate our business or we may enter into settlements of claims for monetary payments. In some cases, substantial non-economic remedies or punitive damages may be sought. Governmental investigations, audits and other reviews could also result in criminal penalties or other sanctions, including restrictions, changes in the way we conduct business or exclusion from participation in government programs. We evaluate our exposure to these legal and regulatory proceedings and establish reserves for the estimated liabilities in accordance with GAAP. Assessing and predicting the outcome of these matters involves substantial uncertainties. Unexpected outcomes in these legal proceedings, or changes in management’s evaluations or predictions and accompanying changes in established reserves, could have a material adverse impact on our business, results of operations or financial condition.

Litigation is costly, time-consuming and disruptive to normal business operations. The defense of these matters could also result in continued diversion of our management’s time and attention away from business operations, which could also harm our business. Even if these matters are resolved in our favor, the uncertainty and expense associated with unresolved legal proceedings could harm our business and reputation.

The failure to successfully implement a new enterprise resource planning system could adversely impact our business and results of operations.

We are in a multi-year process of implementing a new Enterprise Resource Planning (“ERP”) business solution to create a system of integrated applications to manage our businesses and automate many functions related to financial reporting, human resources and other services. It is our intent through this ERP to integrate the major facets of our organization in order to improve planning, development, processes, sales, human resources management and other applications as they affect our evolving business model. ERP implementations are complex and time-consuming projects that require transformations of business and financial processes in order to reap the benefits of the ERP system; any such transformation involves risk inherent in the conversion to a new computer system, including loss of information and potential disruption to normal operations. Additionally, if the ERP system is not effectively implemented as planned, or the system does not operate as intended, the effectiveness of our internal controls over financial reporting could be adversely affected or our ability to assess those controls adequately could be delayed. Any failure(s) during this continued implementation process to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results or cause us to fail to meet our reporting obligations. In addition, if we experience interruptions in service or operational difficulties and are unable to effectively manage our business during or following the implementation of the ERP, our business and results of operations could be harmed.

 

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Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies may adversely affect our financial statements.

Our financial statements are subject to the application of GAAP, which is periodically revised and/or expanded. From time to time, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies. It is possible that future accounting standards we are required to adopt, such as the amended guidance for revenue recognition and leases, may require changes to the current accounting treatment that we apply to our consolidated financial statements and may require us to make significant changes to our systems. Such changes could result in a material adverse impact on our financial position and results of operations.

Risks Related to Our Indebtedness

The Joint Venture’s substantial indebtedness could adversely affect its financial condition, adversely affect its ability to operate its business, adversely affect its ability to react to changes in the economy or its industry, adversely affect its ability to meet its obligations under its outstanding indebtedness and divert its cash flow from operations for debt payments.

The Joint Venture has a substantial amount of debt, which requires significant interest and principal payments. As of March 31, 2019, the Joint Venture had total indebtedness of approximately $5.8 billion. In addition, as of March 31, 2019, the Joint Venture had $495.1 million of availability to incur additional indebtedness under its senior secured revolving credit facility (the “Revolving Credit Facility”). Subject to the limits contained in the credit agreement (the “Credit Agreement”) that governs the Revolving Credit Facility and the Joint Venture’s senior secured term loan facility the (“Term Loan Facility” and, together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”) and the indenture that governs the Joint Venture’s senior notes (the “Senior Notes”), the Joint Venture 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 the Joint Venture does so, the risks related to its high level of debt could increase. Specifically, the Joint Venture’s high level of debt could have important consequences, including the following:

 

   

it may be difficult for the Joint Venture to satisfy its obligations, including debt service requirements under its outstanding debt;

 

   

the Joint Venture’s ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions or other general corporate purposes may be impaired;

 

   

a substantial portion of cash flow from operations are required to be dedicated to the payment of principal and interest on the Joint Venture’s indebtedness, therefore reducing its ability to use its cash flow to fund its operations, capital expenditures, future business opportunities and other purposes;

 

   

the Joint Venture could be more vulnerable to economic downturns and adverse industry conditions and its flexibility to plan for, or react to, changes in its business or industry is more limited;

 

   

the Joint Venture’s ability to capitalize on business opportunities and to react to competitive pressures, as compared to its competitors, may be compromised due to its high level of debt and the restrictive covenants in the Credit Agreement that governs its Senior Secured Credit Facilities and the indenture that governs its Senior Notes;

 

   

the Joint Venture’s ability to borrow additional funds or to refinance debt may be limited; and

 

   

the Joint Venture may cause potential or existing customers to not contract with it due to concerns over its ability to meet its financial obligations under such contracts.

The Joint Venture’s ability to make scheduled payments on and to refinance its indebtedness depends on and is subject to its financial and operating performance, which in turn is affected by general and regional economic, financial, competitive, business and other factors and reimbursement actions of governmental and commercial payers, all of which are beyond its control, including the availability of financing in the international

 

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banking and capital markets. We cannot assure you that the Joint Venture’s business will generate sufficient cash flow from operations or that future borrowings will be available to it in an amount sufficient to enable it to service its debt, to refinance its debt or to fund its other liquidity needs. Any refinancing or restructuring of the Joint Venture’s indebtedness could be at higher interest rates and may require it to comply with more onerous covenants that could further restrict its business operations. Moreover, in the event of a default, the holders of the Joint Venture’s indebtedness could elect to declare such indebtedness be due and payable and/or elect to exercise other rights, such as the lenders under its Revolving Credit Facility terminating their commitments thereunder and ceasing to make further loans or the lenders under its Senior Secured Credit Facilities instituting foreclosure proceedings against their collateral, any of which could materially adversely affect our results of operations and financial condition.

Furthermore, all of the debt under the Joint Venture’s Senior Secured Credit Facilities bears interest at variable rates. If interest rates increase, its debt service obligations on its Senior Secured Credit Facilities would increase even though the amount borrowed remained the same, and its net income and cash flows, including cash available for servicing its indebtedness, would correspondingly decrease.

Certain of the Joint Venture’s debt agreements impose significant operating and financial restrictions on it and its subsidiaries, which may prevent us from capitalizing on business opportunities.

The Credit Agreement that governs the Joint Venture’s Senior Secured Credit Facilities and the indenture that governs its Senior Notes each impose significant operating and financial restrictions on it. These restrictions will limit the Joint Venture’s ability and/or the ability of its subsidiaries to, among other things:

 

   

incur or guarantee additional debt or issue disqualified stock or preferred stock;

 

   

pay dividends and make other distributions on, or redeem or repurchase, capital stock;

 

   

make certain investments;

 

   

incur certain liens;

 

   

enter into transactions with affiliates;

 

   

merge or consolidate;

 

   

enter into agreements that restrict the ability of restricted subsidiaries to make dividends or other payments to Change Healthcare Inc., the Joint Venture or certain of its subsidiaries;

 

   

designate restricted subsidiaries as unrestricted subsidiaries; and

 

   

transfer or sell assets.

As a result of these restrictions, we will be limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that the Joint Venture will be able to maintain compliance with these covenants in the future and, if it fails to do so, that it will be able to obtain waivers from the lenders and/or amend the covenants. The Joint Venture’s failure to comply with the restrictive covenants described above as well as the terms of any future indebtedness could result in an event of default, which, if not cured or waived, could result in it being required to repay these borrowings before their due date. If the Joint Venture is forced to refinance these borrowings on less favorable terms or cannot refinance these borrowings, our results of operations and financial condition could be adversely affected.

 

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Risks Related to Our Organizational Structure

Change Healthcare Inc. is a holding company and its only material asset is its interest in the Joint Venture, and it is accordingly dependent upon distributions from the Joint Venture to pay taxes, pay dividends and to meet its debt obligations.

Change Healthcare Inc. is a holding company and has no material assets other than its ownership of LLC Units. Change Healthcare Inc. has no independent means of generating revenue. The Joint Venture intends to make distributions to its holders of LLC Units, including Change Healthcare Inc. and McKesson, in an amount sufficient to cover all applicable taxes at assumed tax rates and dividends, if any, declared by it. The LLC Agreement requires the Joint Venture to make quarterly distributions to each member of the Joint Venture, including Change Healthcare Inc., in amounts at least equal to the member’s tax liability in respect of the income of Change Healthcare Holdings, LLC, calculated using an assumed tax rate. Moreover, these tax distributions are required to be made pro rata to each equityholder’s percentage equity ownership interest in the Joint Venture, even though certain items of Change Healthcare LLC’s income, gain, deduction and loss will not be allocated to Joint Venture equityholders pro rata. The effect of this provision will be to “top up” tax distributions to any equityholder that receives disproportionately lower allocations of income and gain, so that the aggregate tax distributions payable by the Joint Venture to a particular member may significantly exceed the equityholder’s tax liability in respect of Change Healthcare Holdings, LLC’s income.

The Joint Venture is a separate and distinct legal entity that is not obligated to pay dividends or make loans or distributions to Change Healthcare Inc. (whether to enable Change Healthcare Inc. to pay dividends on its common stock, to pay principal and interest on its debt, to settle, repurchase or redeem its debt (including the amortizing notes that are components of the Units) or other securities (including the purchase contracts that are components of the Units), or to satisfy its other obligations). Deterioration in the financial condition, earnings or cash flow of the Joint Venture and its subsidiaries for any reason could limit or impair their ability to pay such distributions. Additionally, to the extent that Change Healthcare Inc. needs funds, and the Joint Venture is restricted from making such distributions under applicable law or regulation or under the terms of our financing arrangements, or is otherwise unable to provide such funds, it could materially adversely affect our liquidity and financial condition. As a result, Change Healthcare Inc. may not be able to cause the Joint Venture and other entities to distribute funds or provide loans sufficient to enable it to pay dividends and meet its debt and other obligations.

Payments of dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay dividends. Our existing Senior Secured Credit Facilities and Senior Notes include and any financing arrangement that we enter into in the future may include restrictive covenants that limit our ability to pay dividends. In addition, the Joint Venture is generally prohibited under Delaware law from making a distribution to a member to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of the Joint Venture (with certain exceptions) exceed the fair value of its assets. Subsidiaries of the Joint Venture are generally subject to similar legal limitations on their ability to make distributions to the Joint Venture.

The amounts we or the Joint Venture will be required to pay under our tax receivable agreements could be significant and, in certain circumstances, could differ significantly (in both timing and amount) from the underlying tax benefits we actually realize.

Change Healthcare Inc., the Joint Venture and Change Healthcare Performance, Inc. (collectively, the “TRA Affiliates”), are or may become a party to certain tax receivable agreements (collectively, the “tax receivable agreements”) and other similar agreements with our current and former owners. One of the existing tax receivable agreements (the “McKesson Tax Receivable Agreement”) generally provides for the payment by the Joint Venture to affiliates of McKesson (the “McKesson TRA Parties”) of 85% of certain cash tax savings realized (or, in certain circumstances, deemed to be realized) by Change Healthcare Inc. and its subsidiaries in

 

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certain periods ending on or after the date on which McKesson ceases to own at least 20% of the Joint Venture as a result of (i) certain amortizable tax basis in assets transferred to the Joint Venture at the consummation of the Transactions and (ii) imputed interest deductions and certain other tax attributes arising from payments under the McKesson Tax Receivable Agreement. Change Healthcare Inc., the Joint Venture, McKesson and certain of McKesson’s affiliates have also entered into an amended and restated letter agreement (the “Letter Agreement”) pursuant to which McKesson may choose to allocate an amount of deductions related to certain amortizable tax basis in assets transferred to the Joint Venture at the consummation of the Transactions to Change Healthcare Inc. in excess of a specified minimum threshold, in which case Change Healthcare Inc. may be required to make cash payments to McKesson equal to 100% of the tax savings of Change Healthcare Inc. attributable to such excess deductions for any tax period ending prior to the date on which McKesson ceases to own at least 20% of the Joint Venture.

Another existing tax receivable agreement (the “2017 Tax Receivable Agreement”) generally provides for the payment by Change Healthcare Performance, Inc. to affiliates of the Sponsors and certain other former stockholders of Change Healthcare Performance, Inc. (the “2017 TRA Parties”) of 85% of the net cash tax savings realized (or, in certain circumstances, deemed to be realized) by Change Healthcare Performance, Inc. and its subsidiaries in respect of periods ending on or after the Transactions as a result of certain net operating losses and certain other tax attributes of Change Healthcare Performance, Inc. as of the date of the Transactions.

A predecessor to Change Healthcare Performance, Inc. is party to certain tax receivable agreements (the “2009—2011 Tax Receivable Agreements,” and together with the 2017 Tax Receivable Agreement, the “Legacy CHC Tax Receivable Agreements”) which were assumed by the Joint Venture in connection with the Transactions and obligate the Joint Venture to make payments to certain of the former Legacy CHC Stockholders (the “2009—2011 CHC TRA Parties,” and collectively, with the McKesson TRA Parties and the 2017 TRA Parties, the “TRA Parties”), equal to 85% of the applicable cash savings that the Joint Venture realizes (or is deemed to realize) as a result of tax attributes arising from certain previous transactions. Because covered changes of control with respect to the 2009—2011 Tax Receivable Agreements previously occurred as a result of the Transactions and other previous reorganizations, payments the Joint Venture makes under the 2009—2011 Tax Receivable Agreements are calculated using certain valuation assumptions, including that the Joint Venture will have sufficient taxable income to use the applicable tax attributes and that certain of such tax attributes will be used by the Joint Venture on a pro rata basis from the date of the Transactions (or in certain cases from the date of certain previous transactions) through the expiration of the applicable tax attribute.

The payments the TRA Affiliates may be required to make under these tax receivable agreements could be substantial. The amount and timing of any payments under the tax receivable agreements will vary depending upon a number of factors, including the amount and timing of the taxable income we generate in the future, the tax rate then applicable and whether McKesson then owns at least 20% of the Joint Venture. We expect that, assuming no material changes in tax law and that the Joint Venture earns sufficient taxable income to realize the full potential tax benefit of the tax attributes in respect of which it is required to make payments under the Legacy CHC Tax Receivable Agreements, future payments under the Legacy CHC Tax Receivable Agreements will range from $11.2 million to $61.2 million per year over the next 11 years and from $0.0 million to $11.2 million per year over the following 10 years. As of March 31, 2019, we expect total remaining payments under the Legacy CHC Tax Receivable Agreements of approximately $339.8 million. See Note 19, Tax Receivable Agreement Obligations to Related Parties, within the Joint Venture’s consolidated financial statements appearing elsewhere in this prospectus for additional information about the obligations under the tax receivable agreements. Because payments under the Letter Agreement are contingent upon McKesson’s determination to allocate certain excess deductions to Change Healthcare Inc., and because the McKesson Tax Receivable Agreement will not begin until after McKesson ceases to own at least 20% of the Joint Venture, the amount of any payments under such agreements cannot be reliably estimated at this time.

Additionally, prior to the occurrence of the first exchange of LLC Units by McKesson (or its permitted transferees), if any, Change Healthcare Inc. has agreed to enter into an additional tax receivable agreement with the McK Members, pursuant to which Change Healthcare Inc. would be required to pay to the relevant McK

 

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Member 85% of the net cash tax savings, if any, arising from Change Healthcare Inc.’s utilization of (i) certain tax basis increases resulting from the relevant exchange of LLC Units by McKesson and payments under such additional tax receivable agreement and (ii) imputed interest deductions. Change Healthcare Inc. may also be required to enter into and make payments under an additional tax receivable agreement with McKesson in certain circumstances, as described below under “—If certain transactions in connection with a Qualified McKesson Exit do not qualify as tax-free transactions under Sections 368(a)(1)(D) and 355 of the U.S. Internal Revenue Code of 1986, as amended then McKesson may be required to pay substantial U.S. federal income taxes. We may be required to indemnify McKesson for all or part of any such tax liability in certain circumstances, which generally relate to certain actions taken by us that cause the Distribution to become taxable, and may be obligated to make payments to McKesson in respect of certain tax savings resulting to us.”

There may be circumstances in which the payments under the tax receivable agreements differ significantly (in both timing and amount) from the underlying tax benefits the TRA Affiliates actually realize. Pursuant to the tax receivable agreements, upon a covered change of control, the TRA Affiliates could be required to make payments that significantly exceed the actual cash tax savings from the tax benefits giving rise to such payments. As noted above, with respect to the 2009—2011 Tax Receivable Agreements, covered changes of control previously occurred as a result of the Transactions and other previous reorganizations. Moreover, in certain circumstances, the TRA Affiliates will have the option to terminate the tax receivable agreements in exchange for a lump-sum payment (based on an assumption that all expected potential tax benefits actually will be realized). In addition, under the tax receivable agreements, none of the TRA Parties will reimburse the TRA Affiliates for any payments previously made if such tax benefits are subsequently disallowed, except that excess payments made to a TRA Party will be netted against payments otherwise to be made, if any, after the determination of such excess. As a result, in such circumstances, the TRA Affiliates could make payments under the tax receivable agreements that are greater than the actual cash tax savings and may not be able to recoup those payments. Any difference between the payments the TRA Affiliates are required to make under the tax receivable agreements and the underlying tax benefits actually realized could adversely affect our business or financial condition. Furthermore, because certain of the TRA Affiliates are holding companies with no operations of their own, their ability to make payments under each relevant tax receivable agreement is substantially dependent on the ability of their subsidiaries to make distributions to them. To the extent that the TRA Affiliates are unable to make payments under the tax receivable agreements for any reason, such payments will be deferred and will accrue interest until paid.

If Change Healthcare Inc. were deemed an “investment company” under the Investment Company Act of 1940 (the “1940 Act”), applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.

A person will generally be deemed to be an “investment company” for purposes of the 1940 Act if:

 

   

it is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or

 

   

absent an applicable exemption, it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis.

We believe that we are engaged primarily in the business of providing healthcare technology services and not in the business of investing, reinvesting or trading in securities. Accordingly, we do not believe that Change Healthcare Inc. is, or following this offering will be, an “orthodox” investment company as defined in section 3(a)(1)(A) of the 1940 Act and described in the first bullet point above.

Further, Change Healthcare Inc. is, and will continue to be following this offering, actively engaged in the business of providing healthcare technology services through its participation in the Joint Venture. Accordingly, we do not believe the interests in the Joint Venture held by Change Healthcare Inc. are securities under the test set forth in Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293 (1946) because its active and

 

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equal participation in the operation of the Joint Venture demonstrate that Change Healthcare Inc.’s interests in the Joint Venture are not held with the expectation of receiving profits derived solely from the efforts of others. Moreover, even if the interests in the Joint Venture held by Change Healthcare Inc. were deemed to be securities, we believe they would not be deemed to be investment securities for purposes of section 3(a)(1)(C) of the 1940 Act and as described in the second bullet point above. Each of McKesson and Change Healthcare Inc. holds a 50% voting interest in the Joint Venture and has the right to designate an equal number of directors to the board of directors of the Joint Venture. Additionally, the LLC Agreement provides that all major operating, investing and financial activities require the written consent of both McKesson and Change Healthcare Inc. For these reasons, the Joint Venture should be considered a majority-owned subsidiary, as that term is defined in section 2(a)(24) of the 1940 Act. Given that securities issued by majority-owned subsidiaries are excluded from the definition of “investment securities” under section 3(a)(2) of the 1940 Act, Change Healthcare Inc.’s interests in the Joint Venture would not constitute investment securities. As Change Healthcare Inc. will have no material assets other than its interests in the Joint Venture, and those interests are not securities or investment securities, we do not believe Change Healthcare Inc. is, or will be following this offering, an “inadvertent” investment company under the 40% test described in the second bullet point above.

The 1940 Act and the rules thereunder contain detailed parameters for the organization and operation of investment companies. Among other things, the 1940 Act and the rules thereunder limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities, generally prohibit the issuance of options and impose certain governance requirements. We intend to conduct our operations so that Change Healthcare Inc. will not be deemed to be an investment company under the 1940 Act. If anything were to happen which would cause Change Healthcare Inc. to be deemed to be an investment company under the 1940 Act, requirements imposed by the 1940 Act, including limitations on our capital structure, ability to transact business with affiliates (including us) and ability to compensate key employees, could make it impractical for us to continue our business as currently conducted, impair the agreements and arrangements between and among Change Healthcare Inc., the Joint Venture and senior Change Healthcare professionals, or any combination thereof, and materially adversely affect our business, results of operations and financial condition.

Change Healthcare Inc. shares control of the Joint Venture, its primary operating subsidiary, with McKesson and disagreements may arise between McKesson and the Sponsors that could result in deadlocks and cause disruptions to the Joint Venture’s operations and the development or implementation of its strategies, any of which could have a material adverse impact on Change Healthcare Inc.’s or the Joint Venture’s business, results of operations or financial condition.

Change Healthcare Inc. is a holding company and does not own any material assets or have any operations other than through its interest in the Joint Venture. Prior to and immediately following this offering, each of Change Healthcare Inc. and McKesson holds a 50% voting interest in the Joint Venture, with equal representation on the Joint Venture’s board of directors and with all major operating, investing and financial activities requiring the consent of both members. Disagreements with respect to important strategic or operational decisions relating to our business may arise between McKesson and the Sponsors. Operating a business under the joint control of unaffiliated, controlling members could lead to conflicts of interest or deadlocks on important and time-sensitive operational, financial or strategic decisions, and requires additional organizational formalities as well as time-consuming procedures for sharing information and making decisions. This could have a negative impact on Change Healthcare Inc., given that its only material asset is its interest in the Joint Venture. Disagreements may also arise between the Joint Venture’s controlling members and management. Any disagreements between the Joint Venture’s controlling members, or between its controlling members and its management, could cause disruptions to our operations or the development or implementation of our strategies, and could result in significant distraction to our management, which could have a material adverse impact on the business, results of operations or financial condition of both Change Healthcare Inc. and the Joint Venture. For information concerning the arrangements with the Joint Venture’s controlling members, see “Management” and “Certain Relationships and Related Person Transactions.”

 

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We may be unable to integrate the Contributed Businesses successfully or realize the anticipated synergies and other benefits of the Transactions within the anticipated time frame, or at all.

The Transactions involved the combination of the Contributed Businesses that previously operated independently. The Company’s future success continues to depend on successful execution of previous transactions, including separating, transitioning and integrating the Contributed Businesses. Integrating these businesses continues to require significant management time, attention and resources. The combined business may fail to realize some or all of the anticipated benefits of the Transactions, including anticipated synergies, if the separation, transition and integration process is not successful, takes longer than expected or is more costly than expected. On a combined basis, we expect to benefit from operational synergies resulting from the consolidation of capabilities and elimination of redundancies, as well as greater efficiencies from our increased scale. However, this process may preclude or impede realization of the benefits expected from the Transactions and could adversely affect revenue and investments in future growth, which could have a material adverse impact on our business, results of operations or financial condition. We cannot be certain that we will not be required to implement further realignment activities, make additions or other changes to our workforce based on other cost reduction measures or changes in the markets and industry in which we compete. In addition, future business conditions and events may impact our ability to continue to realize any benefits of these initiatives. Moreover, disagreements could arise between our controlling members, or between our controlling members and our management, which could cause disruptions to our operations or the implementation of our strategies or result in significant distractions to our management. If we are not able to successfully achieve our objectives for one or more of these reasons, or for other reasons, the anticipated benefits of the Transactions may not be realized fully or at all or may take longer to realize than expected.

We rely on McKesson and its affiliates for certain transition services. The inability or unwillingness of McKesson or its affiliates to provide such services in a timely or effective manner could materially adversely affect our business, results of operations or financial condition.

We rely on McKesson and its affiliates to provide us with certain services for our business and customers pursuant to the terms of a transition services agreement (the “McKesson Transition Services Agreement”) for a specified transition period. Certain of these services are essential to the efficient operation of the Company. Once the transition period specified in the McKesson Transition Services Agreement has expired, we will be required to provide these services ourselves or to obtain substitute arrangements with third parties. After the transition period, we may be unable to provide these services internally because of financial or other constraints, and we may be unable to implement substitute arrangements on a timely and cost-effective basis on terms that are favorable to us, or at all. In addition, McKesson may fail to perform such transition services in a timely or effective manner, or at all, during the term of the McKesson Transition Services Agreement, either due to its inability or unwillingness to continue such services or for other reasons. If there is an interruption in such services prior to expiration of the McKesson Transition Services Agreement, or if such services are inadequate, we will be required to provide these services ourselves or to obtain substitute arrangements with third parties on a faster timeline than anticipated, which may be challenging without significant effort or expense. Any failure by McKesson to perform such transition services, or any failure by us to replace such transition services with acceptable arrangements when necessary, could have a material adverse impact on our business, results of operations or financial condition. See “Certain Relationships and Related Person Transactions—Transition Services Agreements.”

We are obligated to provide certain transition services to McKesson and its affiliates, and to the eRx Network. Our inability or unwillingness to provide such services in a timely or effective manner, including at a reasonable cost, could materially adversely impact our business, results of operations or financial condition.

We are obligated to provide certain services to (i) McKesson and its affiliates, pursuant to the McKesson Transition Services Agreement, and (ii) the eRx Network, pursuant to the terms of a separate transition services agreement (the “Legacy CHC Transition Services Agreement” and, collectively with the McKesson Transition

 

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Services Agreement, the “Transition Services Agreements”), for a specified transition period. Once the transition period specified in each of the Transition Services Agreements has expired, McKesson and its affiliates, and the eRx Network, as applicable, will be required to provide these services themselves or to obtain substitute arrangements with third parties. We may fail to perform such transition services in a timely or effective manner, or at all, during the term of each respective Transition Services Agreement, either due to our inability or unwillingness to continue such services, our inability to provide such services at reasonable costs or for other reasons. Any such inability or other reasons could lead to unforeseen liabilities under the terms of the Transition Services Agreements or otherwise, including liabilities resulting from the inability of McKesson or its affiliates or the eRx Network to provide these services themselves or to obtain substitute arrangements with third parties. Any such financial consequences or liabilities could have a material adverse impact on our business, results of operations or financial condition. See “Certain Relationships and Related Person Transactions—Transition Services Agreements.”

If certain transactions in connection with a Qualified McKesson Exit do not qualify as tax-free transactions under Sections 368(a)(1)(D) and 355 of the U.S. Internal Revenue Code of 1986, as amended then McKesson may be required to pay substantial U.S. federal income taxes. We may be required to indemnify McKesson for all or part of any such tax liability in certain circumstances, which generally relate to certain actions taken by us that cause the Distribution to become taxable, and may be obligated to make payments to McKesson in respect of certain tax savings resulting to us.

It is intended that the distribution contemplated under the Separation and Distribution Agreement (the “Distribution”) will qualify as a tax-free transaction to McKesson under Sections 368(a)(1)(D) and 355 of the Code, but there can be no assurance that the Distribution will so qualify. Even if the Distribution were otherwise to qualify as a tax-free transaction under Sections 368(a)(1)(D) and 355 of the Code, it would be taxable to McKesson pursuant to Section 355(e) of the Code if there were a 50% or greater change in ownership of either McKesson or SpinCo (including stock of Change Healthcare Inc. after the Merger), directly or indirectly, as part of a plan or series of related transactions involving the Distribution. For this purpose, any acquisitions of McKesson, SpinCo or Change Healthcare Inc. stock within a certain period are presumed to be part of such a plan, although McKesson may be able to rebut that presumption in certain circumstances. If the Internal Revenue Service (the “IRS”) were to determine that other acquisitions of McKesson, SpinCo or Change Healthcare Inc. stock were part of a plan or series of related transactions, that determination could result in significant tax to McKesson. In certain circumstances (which generally relate to certain actions taken by us that cause the Distribution to become taxable, such as certain issuances and redemptions of common stock of Change Healthcare Inc., or entering into certain mergers or consolidations) and subject to certain limitations, under the Tax Matters Agreement, we will be required to indemnify McKesson for losses relating to the treatment of the Distribution as taxable. If we are required to indemnify McKesson, this indemnification obligation could be substantial and could have a material adverse effect on us, including with respect to our financial condition or results of operations. See “Certain Relationships and Related Person Transactions.” In addition, the Tax Matters Agreement could restrict our ability to enter into certain change of control or other transactions involving our equity if such transactions could implicate the tax-free status of the Distribution.

In addition, McKesson will have the option to make a protective election under Section 336(e) of the Code that would take effect if the Distribution does not qualify as a tax-free transaction and, upon taking effect, may result in tax savings to SpinCo and its subsidiaries. Pursuant to the Tax Matters Agreement that we will enter into with McKesson in connection with a Qualified McKesson Exit, if the election under Section 336(e) of the Code takes effect, in certain circumstances we will be required to enter into a new tax receivable agreement pursuant to which we will be required to pay to McKesson 85% of certain cash tax savings, if any, arising from the utilization of certain tax basis increases resulting from the Distribution, with terms substantially similar to the terms of the McKesson Tax Receivable Agreement, as discussed above under “—The amounts we or the Joint Venture will be required to pay under our tax receivable agreements could be significant and, in certain circumstances, could differ significantly (in both timing and amount) from the underlying tax benefits we actually realize.” The amount of such payments may be significant, and in certain circumstances could differ significantly (in both timing and amount) from the underlying tax benefits realized by us and our subsidiaries.

 

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We are subject to certain restrictions in order to avoid significant tax-related liabilities.

The Contribution Agreement, the LLC Agreement and the Tax Matters Agreement prohibit us from taking certain actions that could cause the Distribution to fail to qualify for tax-free treatment. In particular, prior to the Distribution and for a two-year period thereafter, our ability to restructure or discontinue certain aspects of Core MTS will be subject to significant restrictions, which may adversely affect our ability to timely and efficiently integrate the Contributed Businesses. In addition, these agreements impose significant restrictions during that two-year period on the issuance and redemption by Change Healthcare Inc. of its stock, as well as on our and Change Healthcare Inc.’s ability to engage in certain mergers, consolidations, or other strategic transactions, or to enter into agreements with respect to any of the foregoing matters. Furthermore, any failure to comply with any of these restrictions could require us and Change Healthcare Inc. to make substantial indemnification payments to McKesson for tax-related losses. Due to these restrictions and indemnification obligations, we may be limited in our ability to pursue strategic transactions, equity or convertible debt financings or other transactions that may otherwise be in our best interests.

Risks Related to this Offering and Ownership of our Common Stock

Our pre-IPO owners will continue to control us and their interests may conflict with ours or yours in the future. Prior to this offering, McKesson directly holds approximately 70% of the outstanding LLC Units of the Joint Venture. Because it holds its ownership interest in our business directly in the Joint Venture, rather than through Change Healthcare Inc., McKesson may have conflicting interests with holders of shares of our common stock.

Immediately following this offering and the application of net proceeds therefrom, our Sponsors will beneficially own approximately     % of our common stock (or     % if the underwriters exercise in full their option to purchase additional shares of common stock). Moreover, under our stockholders agreement with our Sponsors, McKesson and the Joint Venture, for so long as Blackstone and its affiliates retain significant ownership of us, we will agree to nominate to the board of directors of Change Healthcare Inc. individuals designated in accordance with our stockholders agreement. See “Certain Relationships and Related Person Transactions—Stockholders Agreement.” Even when our Sponsors cease to own shares of our stock representing a majority of the total voting power, for so long as our Sponsors continue to own a significant percentage of our stock, they will still be able to significantly influence the composition of our board of directors and the approval of actions requiring stockholder approval through their voting power. Accordingly, for such period of time, our Sponsors will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers. In particular, for so long as our Sponsors continue to own a significant percentage of our stock, our Sponsors will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of our company and ultimately might affect the market price of our common stock.

In addition, prior to this offering, McKesson directly holds approximately 70% of the outstanding LLC units of the Joint Venture, and immediately following this offering and the application of the net proceeds therefrom, McKesson will own     % of the LLC Units (or     % if the underwriters exercise in full their option to purchase additional shares of common stock). The Joint Venture will continue to be controlled jointly as between us and McKesson. Because it holds its ownership interest in our business directly in the Joint Venture, rather than through Change Healthcare Inc., McKesson may have conflicting interests with holders of shares of our common stock. For example, if the Joint Venture makes distributions to Change Healthcare Inc., McKesson will also generally be entitled to receive such distributions pro rata in accordance with the percentage of its limited liability company interests in the Joint Venture and its preferences as to the timing and amount of any such distributions may differ from those of our public stockholders.

 

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Our amended and restated certificate of incorporation will not limit the ability of our Sponsors and McKesson to compete with us.

Our Sponsors and McKesson and their respective affiliates engage in a broad spectrum of activities, including investments in businesses that may compete with us. In the ordinary course of their business activities, our Sponsors and McKesson and their respective affiliates may engage in activities where their interests conflict with our interests or those of our stockholders. Our amended and restated certificate of incorporation will provide that none of our Sponsors or McKesson, or any of their respective affiliates or any of our directors who is not employed by us (including any non-employee director who serves as one of our officers in both his or her director and officer capacities) or his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Our Sponsors and McKesson and their respective affiliates also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, our Sponsors and McKesson may have an interest in our pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their investment, even though such transactions might involve risks to you.

We are an “emerging growth company” under the federal securities laws. We may decide in the future to comply with certain reduced reporting and disclosure requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.

We are an emerging growth company as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012. We have elected to comply in the registration statement of which this prospectus forms a part with the disclosure requirements otherwise applicable generally to registrants that are not emerging growth companies. In the future, however, we may take advantage of exemptions from various reporting requirements available to emerging growth companies including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our registration statements, periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved and the ability to use an extended transition period for complying with new or revised accounting standards. We will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of this offering; (ii) the last day of the first fiscal year during which the annual gross revenue of Change Healthcare Inc. is $1.07 billion or more; (iii) the date on which Change Healthcare Inc. or its consolidated subsidiaries have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We cannot predict if investors will find our common stock less attractive if we choose in the future to rely on exemptions from certain disclosure requirements. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

We will incur increased costs and become subject to additional regulations and requirements as a result of becoming a public company, which could lower our profits or make it more difficult to run our business.

As a public company, we will incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also will incur costs associated with the Sarbanes-Oxley Act and related rules implemented by the SEC and Nasdaq. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations also could make it more difficult or costly for us to

 

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obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock and the Units, fines, sanctions and other regulatory action and potentially civil litigation.

Our internal controls over financial reporting currently do not meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and common stock price.

Our internal controls over financial reporting currently do not meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act that eventually we will be required to meet. Because currently we do not have comprehensive documentation of our internal controls and have not yet tested our internal controls in accordance with Section 404, we cannot conclude in accordance with Section 404 that we do not have a material weakness in our internal controls or a combination of significant deficiencies that could result in the conclusion that we have a material weakness in our internal controls. Once we are no longer an emerging growth company, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting on an annual basis. If we are not able to complete our initial assessment of our internal controls and otherwise implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to certify as to the adequacy of our internal controls over financial reporting. For example, management of Legacy CHC concluded that there was a material weakness in its internal control over financial reporting in connection with its deferred tax liability accounting for a change in the tax status of one of its wholly owned subsidiaries from a partnership to a corporation in 2014. This material weakness has been remediated but resulted in Legacy CHC restating its consolidated financial statements as of and for the year ended December 31, 2014 to reflect the removal of this deferred tax liability and restating its consolidated financial statements as of and for the year ended December 31, 2015 and as of and for the three and nine months ended September 30, 2016 and 2015 to adjust for the effect of this 2014 adjustment on the subsequent periods.

Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules, which may result in a breach of the covenants under existing or future financing arrangements. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also could suffer if we or our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This could materially adversely affect us and lead to a decline in the price of our common stock.

If securities or industry analysts do not publish research or reports about our business, or if they downgrade their recommendations regarding our common stock, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price may decline. If analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our common stock price or trading volume to decline and our common stock to be less liquid.

 

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There may not be an active trading market for shares of our common stock, which may cause shares of our common stock to trade at a discount from their initial offering price and make it difficult to sell the shares of common stock you purchase.

Prior to this offering, there has not been a public trading market for shares of our common stock. It is possible that after this offering an active trading market will not develop or continue or, if developed, that any market will be sustained which would make it difficult for you to sell your shares of common stock at an attractive price or at all. The initial public offering price per share of common stock will be determined by agreement among us and the representatives of the underwriters, and may not be indicative of the price at which shares of our common stock will trade in the public market after this offering. Further, our directors, officers and certain employees and other persons associated with us have the opportunity to purchase up to 2% of the shares of common stock offered by this prospectus at the initial public offering price in a directed share program. To the extent these individuals purchase shares in this offering, fewer shares may be actively traded in the public market because certain of these stockholders will be restricted from selling shares by a 180-day lock-up restriction, which would reduce the liquidity of the market for our common stock. Consequently, you may not be able to sell your common stock at or above the initial public offering price or at any other price or at the time that you would like to sell.

Any directors and officers that participate in our directed share program must hold their shares for a minimum of 180 days following the date of the final prospectus related to this offering and accordingly will be subject to market risks not imposed on other investors in the offering.

At our request, the underwriters have reserved up to                  shares of the common stock offered hereby for sale to our directors, officers and certain of our employees and other persons associated with us. Directors and officers that purchase these shares will be required to enter into a lockup agreement with the underwriters in connection with this offering pursuant to which such persons will be required to agree that they will not, subject to exceptions, offer, sell, contract to sell or otherwise dispose of or hedge any such shares for a period of 180 days after the date of the final prospectus relating to this offering, subject to certain specified extensions. As a result of such restriction, such purchasers may face risks not faced by other investors who have the right to sell their shares at any time following the offering. These risks include the market risk of holding our shares during the period that such restrictions are in effect. In addition, the price of our common stock may be adversely affected following expiration of the lockup period if there is an increase in the number of shares for sale in the market.

The market price of shares of our common stock may be volatile, which could cause the value of your investment to decline.

Even if a trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our common stock regardless of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly operating results or dividends, if any, to stockholders, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, adverse publicity about the industries we participate in or individual scandals, and in response the market price of shares of our common stock could decrease significantly. You may be unable to resell your shares of common stock at or above the initial public offering price.

 

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Stock markets and the price of shares of our common stock may experience extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Investors in this offering will suffer immediate and substantial dilution.

The initial public offering price per share of common stock will be substantially higher than our net tangible book value per share immediately after this offering. As a result, you will pay a price per share of common stock that substantially exceeds the per share book value of our tangible assets after subtracting our liabilities. In addition, you will pay more for your shares of common stock than the amounts paid for by our pre-IPO owners and the LLC Units paid for by McKesson. See “Dilution.”

You may be diluted by the future issuance of additional common stock or LLC Units in connection with our incentive plans, acquisitions or otherwise.

After this offering we will have approximately                shares of common stock authorized but unissued, including approximately                 shares of common stock issuable upon exchange of LLC Units that will be held by McKesson. Our certificate of incorporation authorizes us to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. Similarly, the LLC Agreement permits the Joint Venture, with the prior written consent of both the McK Members and Change Healthcare Inc., to issue an unlimited number of additional limited liability company interests of the Joint Venture with designations, preferences, rights, powers and duties that are different from, and may be senior to, those applicable to the LLC Units, and which may be exchangeable for shares of our common stock. Additionally, we have reserved an aggregate of                shares of common stock for issuance under our Omnibus Incentive Plan. Any common stock that we issue, including under our Omnibus Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase common stock in this offering.

Concurrently with this offering, we are offering                 Units, plus an additional                 Units if the underwriters in that offering exercise their over-allotment option to purchase additional Units in full. Unless settled earlier as described below, each purchase contract that is a component of a Unit will settle automatically on the mandatory settlement date into between                 and                 shares of our common stock, subject to certain anti-dilution adjustments. The number of shares of common stock issuable upon settlement will be determined based on the average volume weighted average price per share of our common stock over the 20 consecutive trading day period beginning on and including the 21st scheduled trading day immediately preceding the mandatory settlement date in accordance with the purchase contract agreement. Assuming automatic settlement at the rate of shares of common stock per purchase contract assuming the maximum number of shares issuable upon automatic settlement of such purchase contracts, up to                 shares of common stock (or up to                  shares if the underwriters in the concurrent offering of the Units exercise in full their option to purchase additional Units) are issuable upon settlement of the purchase contracts that are a component of the Units being offered in the concurrent offering, subject to certain anti-dilution adjustments. At any time prior to the second scheduled trading day immediately preceding                 , 2022, holders of the purchase contracts may elect to settle purchase contracts early and we will deliver shares of our common stock at the minimum settlement rate of shares of our common stock per purchase contract, subject to certain anti-dilution adjustments. If holders elect to settle any purchase contracts early in connection with a fundamental change, such purchase contracts will be settled at the fundamental change early settlement rate, which may be greater than the minimum settlement rate. See “Tangible Equity Units Offering.”

 

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Any of these issuances may dilute your ownership interest in us and any of these events or the perception that these settlements and/or issuances could occur may have an adverse impact on the price of our common stock. See “Dilution.”

The Units may adversely affect the market price of our common stock.

The market price of our common stock is likely to be influenced by the Units. For example, the market price of our common stock could become more volatile and could be depressed by:

 

   

investors’ anticipation of the potential resale in the market of a substantial number of additional shares of our common stock received upon settlement of the purchase contracts that are a component of the Units;

 

   

possible sales of our common stock by investors who view the Units as a more attractive means of equity participation in us than owning shares of our common stock; and

 

   

hedging or arbitrage trading activity that may develop involving the Units and our common stock.

We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.

Our amended and restated certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the common stock.

Sales or issuances of a substantial amount of shares of our common stock in the public market, particularly sales by our directors, executive officers and significant stockholders, including our pre-IPO owners, or the perception that these sales or issuances may occur, or the settlement of the purchase contracts, could cause the market price of our common stock to decline and may make it more difficult for investors to sell their common stock at a time and price that they deem appropriate.

The sale or issuance of substantial amounts of shares of our common stock or other securities convertible or exchangeable into shares of our common stock in the public market, or the settlement of the purchase contracts that are a component of the Units, or the perception that such sales or issuances could occur, could harm the prevailing market price of shares of our common stock. This could also impair our ability to raise additional capital through the sale of our equity securities. Future sales or issuances of our common stock or other equity-related securities could be dilutive to holders of our common stock and could adversely affect their voting and other rights and economic interests, including holders of any shares of common stock issued upon settlement of the purchase contracts. Holders of our common stock, including holders of any shares of common stock issued upon settlement of the purchase contracts, may also experience additional dilution upon future equity issuances, exercise of options to purchase our common stock or the settlement of restricted stock units granted to our employees, executive officers and directors under our Omnibus Incentive Plan. See “Dilution.”

Upon completion of this offering, we will have a total of                 shares of our common stock outstanding, or                 shares if the underwriters exercise in full their option to purchase additional shares of our common stock. We will also have outstanding                 Units, or                 Units if the underwriters in the concurrent offering exercise in full their option to purchase additional Units, which will settle into up to                 shares of our common stock, or                 shares if the underwriters in the concurrent offering exercise in full their option

 

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to purchase additional Units, issuable upon settlement of the purchase contracts that are a component of the Units, in each case, at the rate of                 shares of common stock per purchase contract assuming the maximum number of shares issuable upon automatic settlement of such purchase contracts, subject to certain anti-dilution adjustments. See “Tangible Equity Units Offering.” All of the shares of our common stock sold in this offering, the Units sold in the concurrent offering and the shares of common stock issuable upon settlement of the Units will be freely tradable without restriction or further registration under the Securities Act by persons other than our “affiliates,” as that term is defined under Rule 144 of the Securities Act. See “Shares Eligible for Future Sale.”

We anticipate that shares issued to McKesson’s stockholders in a Qualified McKesson Exit would generally be freely tradeable by non-affiliates. Any shares we issue upon exchange of LLC Units will be “restricted securities” as defined in Rule 144 and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemptions contained in Rule 144. Under applicable SEC guidance, we believe that for purposes of Rule 144 the holding period in such shares will generally include the holding period in the corresponding LLC Units exchanged. We, our directors and executive officers, our Sponsors and McKesson have agreed, subject to certain exceptions, not to dispose of or hedge any shares of our common stock (including shares issued upon exchange of LLC Units) or securities convertible into or exchangeable for shares of our common stock for 180 days from the date of this prospectus, except with the prior written consent of Barclays Capital Inc., Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC. Barclays Capital Inc., Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC may, in their sole discretion, release all or a portion of the shares subject to the lock-up agreements at any time and for any reason. As a result of the registration rights agreement, however, all of these shares of our common stock (including shares issued upon exchange of LLC Units) may be eligible for future sale without restriction, subject to applicable lock-up arrangements. Additionally, our pre-IPO owners have agreed to transfer or sell shares of common stock only during certain specified time periods following this offering, as provided by the LLC Agreement of the Joint Venture. See “Shares Eligible for Future Sale—Registration Rights,” “Certain Relationships and Related Person Transactions—Registration Rights Agreement” and “Certain Relationships and Related Person Transactions—LLC Agreement of the Joint Venture—Transfers of LLC Units.”

Upon the expiration of the lock-up agreements described above, all of such shares will be eligible for resale in the public market, subject, in the case of shares held by our affiliates, to volume, manner of sale and other limitations under Rule 144. We expect that our Sponsors will continue to be considered affiliates following the expiration of the lock-up period based on their expected share ownership and board nomination rights. Certain other of our stockholders may also be considered affiliates at that time. However, subject to the expiration or waiver of the 180-day lock-up period, the holders of these shares of common stock will have the right, subject to certain exceptions and conditions, to require us to register their shares of common stock under the Securities Act, and they will have the right to participate in future registrations of securities by us. Registration of any of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. See “Shares Eligible for Future Sale.”

We intend to file one or more registration statements on Form S-8 under the Securities Act to register shares of our common stock or securities convertible into or exchangeable for shares of our common stock issued pursuant to our Omnibus Incentive Plan. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market. We expect that the initial registration statement on Form S-8 will cover                 shares of our common stock.

As restrictions on resale end, including as a result of any early release of any such restrictions, the market price of our shares of common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our common stock or other securities.

 

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Change Healthcare Inc.’s pre-IPO stockholders and board of directors have already approved the Merger that would occur in connection with a Qualified McKesson Exit, and the related Merger Agreement, and the pre-IPO owners who will continue to control Change Healthcare Inc. following this offering have entered into a voting agreement with McKesson. Accordingly, investors in this offering will not have the ability to prevent a Qualified McKesson Exit (including the related Merger) from occurring.

Following this offering, on the terms and subject to the conditions provided in the LLC Agreement, McKesson may, at its election, initiate and complete a spin-off or split-off transaction that would result in the acquisition by Change Healthcare Inc. of all of McKesson’s LLC Units and the issuance by Change Healthcare Inc. to McKesson and/or McKesson’s securityholders of an equal number of shares of its common stock. Change Healthcare Inc.’s pre-IPO stockholders and board of directors have already approved the Merger that would occur in connection with a Qualified McKesson Exit, and the related Merger Agreement, and the pre-IPO owners who will continue to control Change Healthcare Inc. following this offering have entered into a voting agreement with McKesson which requires them to vote in favor of the Merger. Accordingly, investors in this offering will not have the ability to prevent a Qualified McKesson Exit (and the related Merger) from occurring.

Anti-takeover provisions in our organizational documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our amended and restated certificate of incorporation and amended and restated bylaws that will become effective immediately prior to the consummation of this offering will contain provisions that may make the merger or acquisition of our company more difficult without the approval of our board of directors. Among other things, these provisions:

 

   

would allow us to authorize the issuance of shares of one or more series of preferred stock, including in connection with a stockholder rights plan, financing transactions or otherwise, the terms of which series may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;

 

   

prohibit stockholder action by written consent from and after the date on which the parties to our stockholders agreement and their affiliates cease to beneficially own at least 30% of the total voting power of all then outstanding shares of our capital stock entitled to vote generally in the election of directors unless such action is recommended by all directors then in office;

 

   

provide for certain limitations on convening special stockholder meetings;

 

   

provide (i) that the board of directors is expressly authorized to make, alter, or repeal our bylaws and (ii) that, at any time the Sponsors beneficially own, in the aggregate, less than 30% in voting power of the stock entitled to vote generally in the election of directors, our stockholders may only amend our bylaws with the approval of 80% or more of all of the outstanding shares of our capital stock entitled to vote; and

 

   

establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Further, as a Delaware corporation, we are also subject to provisions of Delaware law, which may impede or discourage a takeover attempt that our stockholders may find beneficial. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, including actions that our stockholders may deem advantageous, or could negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire. For a further discussion of these and other such anti-takeover provisions, see “Description of Capital Stock—Anti-Takeover Effects of Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws and Certain Provisions of Delaware Law.”

 

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Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with the Company or the Company’s directors, officers or other employees.

Our amended and restated certificate of incorporation will provide that, unless we consent in writing to the selection of an alternative forum, any (i) derivative action or proceeding brought on behalf of our Company, (ii) action asserting a claim of breach of a fiduciary duty owed by any director, officer, stockholder or employee of our Company to our Company or our Company’s stockholders, (iii) action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”) or our amended and restated certificate of incorporation or our amended and restated bylaws or (iv) action asserting a claim governed by the internal affairs doctrine, shall, to the fullest extent permitted by law, be exclusively brought in the Court of Chancery of the State of Delaware or, if such court does not have subject matter jurisdiction thereof, the federal district court of the State of Delaware. Any person or entity purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have consented to the forum provisions in our amended and restated certificate of incorporation. These choice-of-forum provisions may limit a stockholder’s ability to bring a claim in a different judicial forum, including one that it may find favorable or convenient for specified class of disputes with the Company or the Company’s directors, officers, other stockholders or employees, which may discourage such lawsuits. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially and adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management and board of directors.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that reflect our current views with respect to, among other things, our operations and financial performance. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “predicts,” “intends,” “trends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. These factors include but are not limited to those described under “Risk Factors.” These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

MARKET AND INDUSTRY DATA

This prospectus includes market and industry data and forecasts that we have derived from independent consultant reports, publicly available information, various industry publications, other published industry sources and our internal data and estimates. Independent consultant reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable.

Although we believe that these third-party sources are reliable, we do not guarantee the accuracy or completeness of this information, and neither we nor the underwriters have independently verified this information. Some market data and statistical information are also based on our good faith estimates, which are derived from management’s knowledge of our industry and such independent sources referred to above. Certain market, ranking and industry data included elsewhere in this prospectus, including the size of certain markets and our size or position and the positions of our competitors within these markets, including our services relative to our competitors, are based on estimates of our management. These estimates have been derived from our management’s knowledge and experience in the markets in which we operate, as well as information obtained from surveys, reports by market research firms, our customers, distributors, suppliers, trade and business organizations and other contacts in the markets in which we operate and have not been verified by independent sources. Unless otherwise noted, all of our market share and market position information presented in this prospectus is an approximation. Our market share and market position in each of our lines of business, unless otherwise noted, is based on our sales relative to the estimated sales in the markets we served. References herein to our being a leader in a market or product category refer to our belief that we have a leading market share position in each specified market, unless the context otherwise requires. As there are no publicly available sources supporting this belief, it is based solely on our internal analysis of our sales as compared to our estimates of sales of our competitors. In addition, the discussion herein regarding our various end markets is based on how we define the end markets for our products, which products may be either part of larger overall end markets or end markets that include other types of products and services.

Our internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Although we believe that such information is reliable, we have not had this information verified by any independent sources.

TRADEMARKS, SERVICE MARKS AND TRADE NAMES

We own or have rights to trademarks, service marks or trade names that we use in connection with the operation of our business. In addition, our names, logos and domain names are our service marks or trademarks,

 

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for which we also own or have adequate rights to use. We do not intend our use or display of other companies’ trademarks, service marks or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus are used without the ® and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, and trade names. All trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners.

 

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ORGANIZATIONAL STRUCTURE

Organizational Structure Following this Offering

Change Healthcare Inc. is a holding company that was formed in connection with the Transactions and does not own any material assets or have any operations other than through its interest in the Joint Venture. Prior to and immediately following this offering, each of Change Healthcare Inc. and McKesson holds a 50% voting interest in the Joint Venture, with equal representation on the Joint Venture’s board of directors and with all major operating, investing, and financial activities requiring the consent of both members. As a result, Change Healthcare Inc. does not consolidate the financial position and results of the Joint Venture. Instead, Change Healthcare Inc. accounts for its investment in the Joint Venture under the equity method of accounting.

Our post-offering organizational structure, as described above, is commonly referred to as an umbrella partnership-C-corporation (or UP-C) structure. This organizational structure will allow McKesson to retain its equity ownership in the Joint Venture, an entity that is classified as a partnership for U.S. federal income tax purposes, in the form of LLC Units. Investors in this offering, the Sponsors and management will, by contrast, hold their equity ownership in Change Healthcare Inc., a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes, in the form of shares of common stock. We believe that McKesson generally finds it advantageous, in periods prior to the Qualified McKesson Exit, to continue to hold its equity interests in an entity that is not taxable as a corporation for U.S. federal income tax purposes. We do not believe that our UP-C organizational structure will give rise to any significant business or strategic benefit or detriment to us. See “Risk Factors—Risks Related to Our Organizational Structure” for additional information about our organizational structure, including our tax receivable agreements.

The diagram below depicts our organizational structure immediately following this offering and the concurrent offering of the Units.

 

 

LOGO

 

(1)

Immediately following this offering, our Sponsors, management and other pre-IPO owners will own     % of our outstanding common stock (or     % if the underwriters exercise in full their option to purchase additional shares of common stock) and public stockholders will own     % of our outstanding common stock (or     % if the underwriters exercise in full their option to purchase additional shares of common stock).

 

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(2)

Immediately following this offering, McKesson and Change Healthcare Inc. will hold     % and     %, respectively, of the outstanding LLC Units of the Joint Venture. Prior to and immediately following this offering, each of Change Healthcare Inc. and McKesson holds a 50% voting interest in the Joint Venture, with equal representation on the Joint Venture’s board of directors and with all major operating, investing, and financial activities requiring the consent of both members.

(3)

Following the expiration of the underwriter lock-up period in connection with this offering, on the terms and subject to the conditions provided in the LLC Agreement, McKesson may, at its election, initiate and complete a Qualified McKesson Exit. In addition, following this offering, on the terms and subject to the conditions provided in the LLC Agreement, McKesson (or certain permitted transferees) will have the right from time to time to exchange its LLC Units for shares of our common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. For a description of the LLC Agreement of the Joint Venture, please read “Certain Relationships and Related Person Transactions.”

(4)

Change Healthcare Inc. intends to invest an amount equal to the net proceeds from the sale of the Units in the concurrent offering of the Units (including from any exercise by the underwriters in the concurrent offering of the Units of their option to purchase additional Units) in the Joint Venture. The Joint Venture, in turn, will enter into the Mirror Arrangements with Change Healthcare Inc. on economic terms designed to materially mirror those of the Units. See “—Offering Transactions.”

Incorporation of Change Healthcare Inc.

Change Healthcare Inc. was incorporated in Delaware on June 22, 2016 under the name HCIT Holdings, Inc. On October 26, 2018, we changed our name to Change Healthcare Inc. Change Healthcare Inc. is a holding company that was formed in connection with the Joint Venture and related transactions and does not own any material assets or have any operations other than through its interest in the Joint Venture. The certificate of incorporation of Change Healthcare Inc. authorizes three classes of stock, having the terms described in “Description of Capital Stock.”

Qualified McKesson Exit & Exchanges

Following the expiration of the underwriter lock-up period in connection with this offering, on the terms and subject to the conditions provided in the LLC Agreement, McKesson may, at its election, initiate and complete a spin-off or split-off transaction (or a combination of the foregoing) that would result, among other things, in the acquisition by Change Healthcare Inc. of all of McKesson’s LLC Units and the issuance by Change Healthcare Inc. to McKesson and/or McKesson’s securityholders of an equal number of shares of its common stock (such transactions, a “Qualified McKesson Exit”). In connection with a Qualified McKesson Exit, McKesson would contribute the stock of McKesson subsidiaries that own all of McKesson’s interests in the Joint Venture to SpinCo, a Delaware corporation that is McKesson’s direct or indirect wholly-owned subsidiary, and then would either distribute stock of SpinCo to the stockholders of McKesson as a dividend in a spin-off, commence one or more exchange offers pursuant to which McKesson will exchange stock of SpinCo for stock of McKesson held by the stockholders of McKesson or consummate one or more exchanges of stock of SpinCo for debt securities of McKesson (or a combination of the foregoing). Immediately thereafter, SpinCo would merge with and into Change Healthcare Inc. (the “Merger”), pursuant to which the stockholders of SpinCo will be entitled to receive a number of shares of common stock of Change Healthcare Inc. equal to the number of LLC Units held by SpinCo at the effective time of the Merger. Following a Qualified McKesson Exit, Change Healthcare LLC is expected to become a consolidated subsidiary of Change Healthcare Inc. Change Healthcare Inc.’s stockholders and board of directors have already approved the Merger and the related Merger Agreement described herein.

McKesson would also enter into a customary Separation and Distribution Agreement with SpinCo (the “Separation and Distribution Agreement”) and other ancillary agreements prior to, and in connection with, a Qualified McKesson Exit. McKesson, SpinCo and Change Healthcare Inc. would also enter into a Tax Matters Agreement, which would govern the rights, responsibilities and obligations of McKesson and SpinCo after the Qualified McKesson Exit with respect to tax liabilities and benefits (including indemnification provisions in favor of McKesson in the event certain transactions related to the Qualified McKesson Exit do not qualify for tax-free treatment), tax attributes, tax contests and other tax sharing regarding U.S. federal, state and local, and non-U.S., taxes, other tax matters and related tax returns.

 

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In addition, following this offering, on the terms and subject to the conditions provided in the LLC Agreement, McKesson (or certain permitted transferees) will have the right from time to time to exchange its LLC Units for shares of our common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. For a description of the LLC Agreement of the Joint Venture, please read “Certain Relationships and Related Person Transactions.”

The diagram below depicts what our organizational structure would be immediately following a Qualified McKesson Exit if McKesson were to conduct a spin-off or split-off transaction of all of McKesson’s LLC Units immediately following this offering and the concurrent offering of the Units. There is no assurance that McKesson will pursue a Qualified McKesson Exit.

 

 

LOGO

 

(1)

In the event that a Qualified McKesson Exit were to occur immediately following this offering, our Sponsors, management and other pre-IPO owners would own     % of our outstanding common stock (or     % if the underwriters exercise in full their option to purchase additional shares of common stock) and public stockholders (including the securityholders of McKesson who receive shares of our common stock in connection with the Qualified McKesson Exit) will own     % of our outstanding common stock (or     % if the underwriters exercise in full their option to purchase additional shares of common stock).

Offering Transactions

At the time of the consummation of this offering, Change Healthcare Inc. intends to consummate the purchase, for cash, of newly issued LLC Units from the Joint Venture at a purchase price per unit equal to the initial public offering price per share of common stock in this offering net of underwriting discounts. Assuming that the shares of common stock to be sold in this offering are sold at $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, at the time of this offering, Change Healthcare Inc. will purchase from the Joint Venture                newly issued LLC Units for an aggregate of $                 million (or                 newly issued LLC Units for an aggregate of $                 million if the underwriters exercise in full their option to purchase additional shares of common stock). The issuance and sale of such newly issued LLC Units by the Joint Venture to Change Healthcare Inc. will correspondingly dilute the ownership interests of our pre-IPO owners in the Joint Venture. See “Principal Stockholders” for more information regarding the proceeds from this offering that will be paid to our directors and named executive officers. Accordingly, following this offering Change Healthcare Inc. will hold a number of LLC Units that is equal to the number of

 

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shares of common stock that it has issued, a relationship that we believe fosters transparency because it results in a single share of common stock representing (albeit indirectly) the same percentage equity interest in the Joint Venture as a single LLC Unit.

At the time of the consummation of the concurrent offering of the Units, Change Healthcare Inc. intends to invest an amount equal to the net proceeds from the sale of the Units in the concurrent offering of the Units (including from any exercise by the underwriters in the concurrent offering of the Units of their option to purchase additional Units) in the Joint Venture. The Joint Venture, in turn, will enter into the Mirror Arrangements with Change Healthcare Inc. on economic terms designed to materially mirror those of the Units. More specifically, Change Healthcare Inc. will lend a portion of the net proceeds from the sale of the Units to the Joint Venture on terms designed to materially mirror those of the amortizing notes, including with respect to installment payments, redemption and settlement. In addition, the Joint Venture will provide Change Healthcare Inc. with the right to acquire additional LLC Units in the future on terms designed to materially mirror those of the prepaid purchase contracts, including with respect to settlement rates and certain anti-dilution adjustments.

We refer to the foregoing transactions as the “Offering Transactions.”

As a result of the transactions described above:

 

   

the investors in this offering will collectively own                shares of our common stock (or                shares of common stock if the underwriters exercise in full their option to purchase additional shares of common stock), our pre-IPO owners will own                 shares of our common stock, and Change Healthcare Inc. will hold                LLC Units (or                LLC Units if the underwriters exercise in full their option to purchase additional shares of common stock);

 

   

McKesson will hold                LLC Units (     % of the outstanding LLC Units (or     % if the underwriters exercise in full their option to purchase additional shares of common stock));

 

   

the investors in this offering will collectively have     % of the voting power in Change Healthcare Inc. (or     % if the underwriters exercise in full their option to purchase additional shares of common stock); and

 

   

we will have outstanding                  Units (or                  Units if the underwriters in the concurrent offering of the Units exercise in full their option to purchase additional Units), which will settle into up to                  shares of our common stock (or up to                  shares if the underwriters in the concurrent offering of the Units exercise in full their option to purchase additional Units), issuable upon settlement of the purchase contracts that are a component of the Units being offered in the concurrent offering of the Units, in each case, at the rate of                  shares of common stock per purchase contract assuming the maximum number of shares issuable upon automatic settlement of such purchase contracts, subject to certain anti-dilution adjustments.

 

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USE OF PROCEEDS

We estimate that the net proceeds to Change Healthcare Inc. from this offering at an assumed initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions, will be approximately $                million (or $                million if the underwriters exercise in full their option to purchase additional shares of common stock). A $1.00 increase or decrease in the assumed initial public offering price of $                per share would increase or decrease, as applicable, the net proceeds to Change Healthcare Inc. from this offering by approximately $                million, assuming the number of shares offered by us remains the same as set forth on the cover page of this prospectus and after deducting the estimated underwriting discounts and commissions. The Joint Venture will bear or reimburse Change Healthcare Inc. for all of the expenses payable by it in this offering. We estimate these offering expenses (excluding underwriting discounts and commissions) will be approximately $                million.

We estimate that the net proceeds to Change Healthcare Inc. from the concurrent offering of the Units, if completed, after deducting estimated underwriting discounts and commissions, will be approximately $                 million (or $                 million if the underwriters in the concurrent offering of the Units exercise in full their option to purchase additional Units). The Joint Venture will bear or reimburse Change Healthcare Inc. for all of the expenses of the concurrent offering of the Units payable by it. We estimate these offering expenses (excluding underwriting discounts and commissions) will be approximately $                 million.

Change Healthcare Inc. intends to use all of the net proceeds from this offering (including from any exercise by the underwriters of their option to purchase additional shares of common stock) to purchase a number of newly issued LLC Units from the Joint Venture that is equivalent to the number of shares of common stock that we offer and sell in this offering. Change Healthcare Inc. intends to invest an amount equal to the net proceeds from the sale of the Units in the concurrent offering of the Units (including from any exercise by the underwriters in the concurrent offering of the Units of their option to purchase additional Units) in the Joint Venture. The Joint Venture, in turn, will enter into the Mirror Arrangements with Change Healthcare Inc. on economic terms designed to materially mirror those of the Units. See “Organizational Structure—Offering Transactions.” The Joint Venture, in turn, expects to use the proceeds from (i) this offering, together with cash on hand, to repay outstanding indebtedness under our senior secured term loan facility totaling approximately $                 million in aggregate principal amount (or $                 million in aggregate principal amount if the underwriters exercise in full their option to purchase additional shares of common stock) at an assumed initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and for offering expenses and (ii) the concurrent offering of the Units, if completed, together with cash on hand, to repay outstanding indebtedness under our senior secured term loan facility totaling approximately $                 million in aggregate principal amount (or $                 million in aggregate principal amount if the underwriters in the concurrent offering of the Units exercise in full their option to purchase additional Units), and for offering expenses. The Term Loan Facility and Revolving Credit Facility provided for by the Senior Secured Credit Facilities mature on March 1, 2024 and March 1, 2022, respectively. Borrowings under the Senior Secured Credit Facilities bear interest at a rate equal to, at our option, either (i) LIBOR for the relevant interest period, adjusted for statutory reserve requirements (which may be subject, solely in the case of the Term Loan Facility, to a floor of 1.00% per annum and, solely in the case of the Revolving Credit Facility, to a floor of 0.00% per annum), plus an applicable margin or (ii) a base rate equal to the highest of (a) the rate of interest in effect as publicly announced by the administrative agent as its prime rate, (b) the federal funds effective rate plus 0.50% and (c) adjusted LIBOR for an interest period of one month plus 1.00% (which may be subject, solely in the case of the Term Loan Facility, to a floor of 2.00% per annum), in each case, plus an applicable margin. See “Description of Certain Indebtedness.” The net proceeds from borrowings under the Senior Secured Credit Facilities were used, together with the net proceeds of the Senior Notes, to refinance certain existing indebtedness of Legacy CHC and to pay fees and expenses incurred in connection with the Transactions.

 

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DIVIDEND POLICY

The declaration, amount and payment of any future dividends on shares of common stock will be at the sole discretion of our board of directors and we may reduce or discontinue entirely the payment of such dividends at any time. Our board of directors may take into account general and economic conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries (including the Joint Venture) to us, and such other factors as our board of directors may deem relevant.

Change Healthcare Inc. is a holding company and has no material assets other than its ownership of LLC Units in the Joint Venture. As a result, Change Healthcare Inc. will not be able to pay any dividend unless the Joint Venture makes a distribution to its members in an amount sufficient to cover the dividend declared by Change Healthcare Inc. If the Joint Venture makes such distributions to Change Healthcare Inc., McKesson will be entitled to participate ratably in such distributions.

The agreements governing our Senior Secured Credit Facilities and Senior Notes contain a number of covenants that restrict, subject to certain exceptions, the Joint Venture’s ability to pay dividends to us. See “Description of Certain Indebtedness.”

Any financing arrangements that we enter into in the future may include restrictive covenants that limit our ability to pay dividends. In addition, the Joint Venture is generally prohibited under Delaware law from making a distribution to a member to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of the Joint Venture (with certain exceptions) exceed the fair value of its assets. Subsidiaries of the Joint Venture are generally subject to similar legal limitations on their ability to make distributions to the Joint Venture.

In connection with the Transactions, the Joint Venture made distributions to our pre-IPO owners and certain participants in the Legacy CHC Amended and Restated 2009 Equity Incentive Plan totaling approximately $3.1 billion. For the years ended March 31, 2019 and 2018 and the period from June 17, 2016 (inception) to March 31, 2017, the Joint Venture made no other distributions. Under the terms of the LLC Agreement, the Joint Venture is required to periodically advance to its members amounts necessary to fund their respective tax obligations on an interim basis. See “Certain Relationships and Related Person Transactions” for additional information.

 

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CAPITALIZATION

The following table sets forth the consolidated cash and cash equivalents and capitalization of Change Healthcare Inc. and Change Healthcare LLC as of March 31, 2019:

 

   

on a historical basis; and

 

   

on an as adjusted basis giving effect to:

 

   

the sale by Change Healthcare Inc. of                shares of common stock in this offering at an assumed public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and the concurrent issuance of                 Units, in each case after deducting underwriting discounts, commissions and estimated offering expenses; and

 

   

the application of the net proceeds from this offering and the concurrent offering of the Units as described under “Use of Proceeds” as if this offering and the concurrent offering of the Units and the application of the net proceeds of this offering and the concurrent offering of the Units had occurred on March 31, 2019.

The information below is illustrative only and our capitalization following the Offering Transactions will be adjusted based on the actual initial public offering price and other terms of the Offering Transactions determined at pricing. Cash and cash equivalents are not components of our total capitalization. You should read these tables together with the other information contained in this prospectus, including “Organizational Structure,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes thereto included elsewhere in this prospectus. Because the closing of this offering is not contingent upon the completion of the concurrent offering of the Units, you should not assume that the concurrent offering of the Units, including its component parts of the purchase contracts and the amortizing notes, as reflected in the applicable column below, will take place.

 

Capitalization of Change Healthcare Inc.

 
     As of March 31, 2019  
     Actual      As Adjusted(1)  
     (In thousands)  

Cash and cash equivalents

   $ 3,409      $                
  

 

 

    

 

 

 

Amortizing notes that are components of the Units(2)

   $ —        $                
  

 

 

    

 

 

 

Common Stock (par value, $0.001), 2,000,000 shares authorized and 597,113 shares issued and outstanding, actual; and 9,000,000,000 shares authorized and                 shares issued and outstanding, as adjusted(1)(3)

   $ 1      $                

Class X common stock (par value, $0.001), 1 share authorized and zero shares issued and outstanding, actual and as adjusted

     —          —    

Additional paid-in capital(1)(3)(4)

     1,153,583     

Accumulated other comprehensive income (loss)

     (3,256   

Retained earnings (deficit)

     (17,841   
  

 

 

    

 

 

 

Total stockholders’ equity

     1,132,487     
  

 

 

    

 

 

 

Total capitalization

   $ 1,132,487      $                
  

 

 

    

 

 

 

 

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Capitalization of Change Healthcare LLC

 
     As of March 31, 2019  
     Actual      As Adjusted(1)  
     (In thousands)  

Cash and cash equivalents(5)

   $ 47,718      $    
  

 

 

    

 

 

 

Term Loan Facility

     4,804,905     

Senior Notes

     979,905     

Amortizing debt payable to Change Healthcare Inc.(6)

     —       

Other

     5,129     
  

 

 

    

 

 

 

Total debt

     5,789,939     
  

 

 

    

 

 

 

Members’ deficit

     (904,786 )     

Total capitalization

   $ 4,885,153      $                
  

 

 

    

 

 

 

 

(1)

To the extent we change the number of shares of common stock sold by us in this offering from the shares we expect to sell or we change the initial public offering price from the $                per share assumed initial public offering price, representing the midpoint of the price range set forth on the cover page of this prospectus, or any combination of these events occurs, the net proceeds to us from this offering and each of total stockholders’ equity and total capitalization of Change Healthcare Inc. and total members’ equity and total capitalization of Change Healthcare LLC may increase or decrease. A $1.00 increase (decrease) in the assumed initial public offering price per share, assuming no change in the number of shares to be sold in this offering, would (i) increase (decrease) the net proceeds that we receive in this offering and each of total stockholders’ equity and total capitalization of Change Healthcare Inc. by approximately $                 million and (ii) increase (decrease) each of total members’ equity (deficit) and total capitalization of Change Healthcare LLC by approximately $             million. An increase (decrease) of 1,000,000 shares in the expected number of shares to be sold in this offering, assuming no change in the assumed initial offering price per share, would (i) increase (decrease) our net proceeds from this offering and total stockholders’ equity and total capitalization of Change Healthcare Inc. by approximately $                 million and (ii) would increase (decrease) each of total members’ equity (deficit) and total capitalization of Change Healthcare LLC by approximately $              million. If the underwriters exercise in full their option to purchase additional shares of common stock, (i) the as adjusted amount of each of total stockholders’ equity and total capitalization of Change Healthcare Inc. would increase by approximately $                 million, after deducting underwriting discounts and commissions, and Change Healthcare Inc. would have                shares of common stock issued and outstanding, as adjusted and (ii) the as adjusted amount of each of cash and cash equivalents, total members’ equity and total capitalization of Change Healthcare LLC would increase by approximately $                 million.

(2)

Each Unit will include an amortizing note, as described in “Tangible Equity Units Offering.” The exact amount of the principal amount of these amortizing notes will not be determined until the pricing of the concurrent offering of the Units. We have assumed that approximately     % of the stated amount of the Units, or $                 million, is represented by the amortizing notes.

(3)

Each Unit will include a purchase contract, as described in “Tangible Equity Units Offering.” Share numbers and amounts do not reflect shares of our common stock issuable upon settlement of the purchase contracts.

(4)

We will account for the purchase contracts that are components of the Units as equity and will record the $                 million initial fair value of these purchase contracts, net of the related underwriting discounts, commissions and offering expenses allocated to the purchase contracts, as additional paid-in capital. The exact amount of the initial fair value of these purchase contracts will not be determined until the pricing of the concurrent offering of the Units and our determination of the final offering expenses related thereto. We have assumed that approximately     % of the stated amount of the Units will be represented by the purchase contracts and that the related underwriting discounts and estimated offering expenses will be allocated to the purchase contracts.

 

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(5)

As adjusted amount reflects a decrease in cash and cash equivalents attributable to the portion of our total estimated offering expenses of approximately $             that had not yet been paid as of March 31, 2019.

(6)

Change Healthcare Inc. intends to invest an amount equal to the net proceeds from the sale of the Units (including from any exercise by the underwriters of their option to purchase additional Units) in the Joint Venture. The Joint Venture, in turn, will enter into the Mirror Arrangements with Change Healthcare Inc. on economic terms designed to materially mirror those of the Units. We will account for this as an investment in a purchase contract and an investment in an amortizing note. See “Unaudited Pro Forma Condensed Financial Information.”

 

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DILUTION

If you invest in shares of our common stock in this offering, your investment will be immediately diluted to the extent of the difference between the initial public offering price per share of common stock and the pro forma net tangible book value per share of common stock after the Offering Transactions. Dilution results from the fact that the per share offering price of the shares of common stock is substantially in excess of the pro forma net tangible book value per share attributable to the common stock held by our pre-IPO owners.

Our pro forma net tangible book value as of March 31, 2019 was approximately $                 million, or $                per share of common stock. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, and pro forma net tangible book value per share of common stock represents pro forma net tangible book value divided by the number of shares of common stock outstanding, after giving effect to the reclassification and assuming that McKesson exchanged its LLC Units for newly issued shares of common stock on a one-for-one basis.

After giving effect to the Offering Transactions, including the application of the proceeds from the Offering Transactions as described in “Use of Proceeds,” our pro forma net tangible book value as of March 31, 2019 would have been $                 million, or $                per share of common stock. This represents an immediate increase in net tangible book value of $                per share of common stock to our pre-IPO owners and an immediate dilution in net tangible book value of $                per share of common stock to investors in this offering.

The following table illustrates this dilution on a per share of common stock basis assuming the underwriters do not exercise their option to purchase additional shares of common stock in this offering:

 

Assumed initial public offering price per share of common stock

      $    

Pro forma net tangible book value per share of common stock as of March 31, 2019

   $       

Increase in pro forma net tangible book value per share of common stock attributable to investors in this offering

   $       
  

 

 

    

Pro forma net tangible book value per share of common stock after the offering

      $    
     

 

 

 

Dilution in pro forma net tangible book value per share of common stock to investors in this offering

                           $                    
     

 

 

 

Because McKesson does not own any common stock or other economic interests in Change Healthcare Inc., we have presented dilution in pro forma net tangible book value per share of common stock to investors in this offering assuming that McKesson exchanged its LLC Units for newly issued shares of common stock on a one-for-one basis in order to more meaningfully present the dilutive impact on the investors in this offering.

A $1.00 increase in the assumed initial public offering price of $                per share of our common stock would increase our pro forma net tangible book value after giving effect to this offering by $            million, or by $                per share of our common stock, assuming the number of shares offered by us remains the same as set forth on the cover page of this prospectus and after deducting estimated underwriting discounts and commissions. A $1.00 decrease in the assumed initial public offering price per share would result in equal changes in the opposite direction.

 

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The following table summarizes, on the same pro forma basis as of March 31, 2019, the total number of shares of common stock purchased from us, the total cash consideration paid to us, and the average price per share of common stock paid by our pre-IPO owners and by new investors purchasing shares of common stock in this offering, assuming that McKesson exchanged its LLC Units for newly issued shares of our common stock on a one-for-one basis.

 

     Shares of common stock
Purchased
    Total
Consideration
    Average
Price Per

Share of
common stock
 
     Number      Percent     Amount      Percent  
                  (In thousands)               

Pre-IPO owners

                       $                         $    

Investors in this offering

                                        $                         $    
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

                       $                                                     
  

 

 

    

 

 

   

 

 

    

 

 

   

Each $1.00 increase in the assumed offering price of $                per share of our common stock would increase total consideration paid by investors in this offering by $                million, assuming the number of shares offered by us remains the same as set forth on the cover page of this prospectus and after deducting estimated underwriting discounts and commissions. A $1.00 decrease in the assumed initial public offering price per share of our common stock would result in equal changes in the opposite direction.

If the underwriters’ option to purchase additional shares of common stock in this offering is exercised in full, the number of shares held by new investors will be increased to                , or approximately     % of the total number of shares of common stock, assuming that McKesson exchanged its LLC Units for newly issued shares of our common stock on a one-for-one basis.

The dilution information above is for illustrative purposes only. Our net tangible book value following the consummation of this offering is subject to adjustment based on the actual initial public offering price of our shares of common stock and other terms of this offering determined at pricing.

 

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UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION

The unaudited pro forma condensed balance sheet of Change Healthcare Inc. at March 31, 2019 gives effect to the Offering Transactions as if they had occurred on March 31, 2019 and the unaudited pro forma condensed statement of operations of Change Healthcare Inc. for the year ended March 31, 2019 gives effect to the Offering Transactions, the related effects on loss from equity method investment in the Joint Venture of resulting equity method basis differences and the repayment of outstanding indebtedness by the Joint Venture as if each had occurred on April 1, 2018.

The unaudited pro forma condensed balance sheet of Change Healthcare LLC at March 31, 2019 and the unaudited pro forma statement of operations of Change Healthcare LLC for the year ended March 31, 2019 gives effect to the Offering Transactions and the subsequent repayment of a portion of Change Healthcare LLC’s outstanding indebtedness as if each had occurred on March 31, 2019 for purposes of the unaudited pro forma condensed balance sheet of Change Healthcare LLC and on April 1, 2018 for purposes of the unaudited pro forma condensed statement of operations of Change Healthcare LLC.

The unaudited pro forma financial information has been prepared by our management and is based on the historical financial statements of Change Healthcare Inc. and the Joint Venture and the assumptions and adjustments described herein and in the notes to the unaudited pro forma financial information. The presentation of the unaudited pro forma financial information is prepared in conformity with Article 11 of Regulation S-X.

The historical financial information of Change Healthcare Inc. and Change Healthcare LLC have each been derived from the Change Healthcare Inc. and Change Healthcare LLC audited financial statements and accompanying notes included elsewhere in this prospectus.

The pro forma adjustments are based on available information and certain assumptions that we believe are reasonable. The actual adjustments will be made as of the closing date of this offering and may differ from those reflected in the unaudited pro forma condensed financial information presented below. Such differences may be material. The unaudited pro forma condensed financial information is for illustrative purposes only and does not purport to represent what the results of operations or financial position would actually be if the relevant transactions had occurred at on the dates indicated, nor does such data purport to project the results of operations for any future period or as of any future date.

The information in the following tables should be read in conjunction with “Use of Proceeds,” “Capitalization,” Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements and related notes of Change Healthcare LLC and historical financial statements and related notes of Change Healthcare Inc. included elsewhere in this prospectus.

 

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CHANGE HEALTHCARE INC.

UNAUDITED PRO FORMA BALANCE SHEET

AS OF MARCH 31, 2019

(amounts in thousands)

 

     Historical
Change
Healthcare Inc.
    Pro Forma
Adjustments
     Notes(1)    Pro Forma
Change
Healthcare Inc.
 

Assets

          

Current assets:

          

Cash

   $ 3,409     $        (a) (b)    $    

Due from the Joint Venture

     373          

Income tax receivable

     1,781       —          
  

 

 

   

 

 

       

 

 

 

Total current assets

     5,563       —          

Dividend receivable

     81,264          

Investment in amortizing notes

     —          (b)   

Investment in purchase contract

     —          (b)   
          

Investment in the Joint Venture

     1,211,996       —        (b)   
  

 

 

   

 

 

       

 

 

 

Total assets

   $ 1,298,823     $ —           $    
  

 

 

   

 

 

       

 

 

 

Liabilities and equity

          

Current liabilities:

          

Accrued expenses

   $ 176     $ —           $    
          

 

 

 

Due to the Joint Venture

     6,167          

Current maturities of long-term debt

     —          (a)   
  

 

 

         

Total current liabilities

     6,343       —          

Long-term debt

     —          (a)   

Deferred income tax liabilities

     159,993          

Commitments and contingencies

          

Equity:

          

Common stock

     1       —        (a)   

Class X common stock

     —         —          

Additional paid in capital

     1,153,583        (a)   

Accumulated other comprehensive income (loss)

     (3,256        

Retained earnings (deficit)

     (17,841        

Total stockholders’ equity

     1,132,487          
  

 

 

   

 

 

       

 

 

 

Total liabilities and stockholders’ equity

   $ 1,298,823     $ —           $                
  

 

 

   

 

 

       

 

 

 

 

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CHANGE HEALTHCARE LLC

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

AS OF MARCH 31, 2019

(amounts in thousands)

 

     Historical
Change
Healthcare LLC
    Pro Forma
Adjustments
     Notes(2)    Pro Forma
Change
Healthcare LLC
 

Assets

          

Current assets:

          

Cash and cash equivalents

   $ 47,718     $ —        (a) (c) (f)    $                

Restricted cash

     1,176       —          

Accounts receivable, net of allowance for doubtful accounts

     759,502       —          

Prepaid expenses and other current assets

     172,067       —          
  

 

 

   

 

 

       

Total current assets

     980,463       —          

Property and equipment, net

     197,263          

Goodwill

     3,284,266       —          

Intangible assets, net

     1,320,161       —          

Other noncurrent assets, net

     421,985       —        (d)   
  

 

 

   

 

 

       

 

 

 

Total assets

   $ 6,204,138     $ —           $    
  

 

 

   

 

 

       

 

 

 

Liabilities and members’ deficit

          

Current liabilities:

          

Drafts and accounts payable

   $ 98,550     $ —           $    

Accrued expenses

     316,179       —        (e)   

Deferred revenues

     437,636       —          

Due to related party, net

     34,629       —          

Current portion of long-term debt

     2,789       —        (b)   
  

 

 

   

 

 

       

 

 

 

Total current liabilities

     889,783       —          

Long-term debt excluding current portion

     5,787,150       —        (b) (c)   

Deferred income tax liabilities

     106,099       —          

Tax receivable agreement obligations due to related parties

     212,698       —          

Other long-term liabilities

     113,194       —          

Commitments and contingencies

          

Equity:

          

Members’ deficit

     (904,786     —        (a) (d) (e) (f)   
  

 

 

   

 

 

       

 

 

 

Total liabilities and members’ deficit

   $ 6,204,138     $ —           $    
  

 

 

   

 

 

       

 

 

 

 

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CHANGE HEALTHCARE INC.

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

FOR THE FISCAL YEAR ENDED MARCH 31, 2019

(amounts in thousands, except per share amounts)

 

     Historical
Change
Healthcare Inc.
    Pro Forma
Adjustments
     Notes(3)     Pro Forma
Change
Healthcare Inc.
 

Total revenue

   $ —       $ —          $ —    

Operating expenses:

         

General and administrative

     1,159       —         
  

 

 

   

 

 

      

 

 

 

Total operating expenses

     1,159       —         
  

 

 

   

 

 

      

 

 

 

Operating income (loss)

     (1,159     —         

Non-operating (income) expense

         

Loss from Equity Method Investment the Joint Venture

     70,487          (a )(b)   

Interest income

     —            (c  

Interest expense

     —            (d  

(Gain) Loss on Sale of Interests in the Joint Venture

     (661     —         

Management fee income

     (378     —         
  

 

 

   

 

 

      

Income (loss) before income tax provision (benefit)

     (70,607       

Income tax provision (benefit)

     (18,595     —          (e  
  

 

 

   

 

 

      

 

 

 

Net income (loss)

   $ (52,012   $                      $                
  

 

 

   

 

 

      

 

 

 

Net income (loss) per share:

         

Basic

   $ (87.06        (f  

Diluted

   $ (87.06        (f  

Weighted average common shares and equivalents:

         

Basic

     597,414          (f  

Diluted

     597,414          (f  

 

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CHANGE HEALTHCARE LLC

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE FISCAL YEAR ENDED MARCH 31, 2019

(amounts in thousands)

 

     Historical
Change
Healthcare LLC
    Pro Forma
Adjustments
     Notes(4)      Pro Forma
Consolidated
 

Revenue

          

Solutions revenue

   $ 3,043,111     $ —           $    

Postage revenue

     238,618       —          
  

 

 

   

 

 

       

 

 

 

Total revenue

     3,281,729       —          

Operating expenses:

          

Cost of operations (exclusive of depreciation and amortization below)

     1,354,655       —          

Research and development

     202,241       —          

Sales, marketing, general and administrative

     821,082       —          (a)     

Customer postage

     238,618       —          

Depreciation and amortization

     278,020       —          

Accretion and changes in estimate with related parties, net

     19,329       —          

Gain on Sale of Extended Care Business

     (111,435     —          

Impairment of long-lived assets and other exit related costs

     675       —          
  

 

 

   

 

 

       

 

 

 

Total operating expenses

     2,803,185       —          
  

 

 

   

 

 

       

 

 

 

Operating income (loss)

     478,544       —          

Interest expense, net

     325,431       —          (b)(c)     

Contingent consideration

     (809     —          

Other, net

     (18,267     —          
  

 

 

   

 

 

       

 

 

 

Income (loss) before income tax provision (benefit)

     172,189       —          

Income tax provision (benefit)

     (4,481        (d)     
  

 

 

   

 

 

       

 

 

 

Net income (loss)

   $ 176,670     $ —           $                
  

 

 

   

 

 

       

 

 

 

 

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NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS

(In thousands)

Pro Forma Adjustments

 

  (1)

Reflects the offering adjustments as follows:

 

  a.

Reflects the receipt of the net proceeds of this offering as follows.

 

     Tangible Equity
Units
     Common Stock      Total  

Assumed Gross Proceeds

   $                    $                    $         —  

Estimated fees and expenses

            
  

 

 

    

 

 

    

 

 

 

Net Proceeds

   $      $      $  
  

 

 

    

 

 

    

 

 

 

Current maturities of long-term debt

        

Long-term debt

        

Par Value ($.001 per share)

                    

Additional Paid in Capital

                    
  

 

 

    

 

 

    

 

 

 

Total

   $      $      $  
  

 

 

    

 

 

    

 

 

 

Amounts in the table above are based on an assumed initial public offering price of $                  per share of common stock, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting assumed underwriting discounts and commissions and estimated offering expenses, for the common stock, and a stated value of $50.00 per Unit, for the Units. In the event the underwriters were to exercise in full their option to purchase an additional                  shares and                  Units, respectively, the Company would expect to receive $                  million of additional proceeds, net of underwriting discounts and commissions and estimated offering expenses.

Net proceed amounts are allocable to the common stock, additional paid in capital, current portion of long-term debt and long-term debt. With respect to the common stock, the net proceeds are allocated to common stock based on the $0.001 par value per share with the residual allocable to additional paid in capital. With respect to the Units, the net proceeds are allocable on a relative fair value basis to the purchase contract and amortizing note components. As a result of fees and expenses incurred in connection with the amortizing note component being classified as a reduction of its carrying value, the resulting discount is expected to be accreted to the face amount of the amortizing note component using the interest method.

 

  b.

Reflects the contribution of the net proceeds of the common stock offering to the Joint Venture in exchange for a number of newly issued LLC Units of the Joint Venture equal to the number of shares of common stock of Change Healthcare Inc. issued in the common stock offering. Also reflects the investment by Change Healthcare Inc. in the Joint Venture of the net proceeds from the sale of the Units. We will account for this as an investment in a purchase contract and an investment in an amortizing note. The purchase contract component represents an equity instrument which is subject to periodic remeasurement to its fair value with the changes in the fair value reflected within earnings. The amortizing note component represents an investment in an available for sale security for which the instrument is subject to periodic fair value remeasurement with changes in that value reflected in other comprehensive income.

 

  (2)

Reflects the offering adjustments as follows:

 

  a.

Reflects the receipt of the contribution of the net proceeds of this offering from Change Healthcare Inc., which subject to differences associated with the Joint Venture’s organizational structure, are allocated similarly to proceeds received by Change Healthcare Inc.

 

  b.