424B3 1 d804285d424b3.htm PROSPECTUS FILED PURSUANT TO RULE 424(B)(3) Prospectus Filed Pursuant to Rule 424(b)(3)
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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-236236

 

PROSPECTUS—OFFER TO EXCHANGE

MCKESSON CORPORATION

Offer to Exchange All Shares of Common Stock of

PF2 SPINCO, INC.

which are owned by McKesson Corporation

and will be converted into

Shares of Common Stock of

CHANGE HEALTHCARE INC.

for

Outstanding Shares of Common Stock of McKesson Corporation

McKesson Corporation, a Delaware corporation (“McKesson”), is offering to exchange all of the issued and outstanding shares of common stock, par value $0.001 (“SpinCo Common Stock”), of PF2 SpinCo, Inc., a Delaware corporation (formerly, PF2 SpinCo LLC) (“SpinCo”), owned by McKesson on the date of consummation of the exchange offer, for outstanding shares of common stock of McKesson, par value $0.01 (“McKesson Common Stock”), that are validly tendered and not properly withdrawn (the “exchange offer”). In the exchange offer, McKesson is offering 175,995,192 shares of SpinCo Common Stock, which will be all of the issued and outstanding shares of SpinCo Common Stock on the date of consummation of the exchange offer. The number of shares of McKesson Common Stock that will be accepted if the exchange offer is completed will depend on the final exchange ratio and the number of shares of McKesson Common Stock tendered. The terms and conditions of the exchange offer are described in this prospectus—offer to exchange (“this document”), which you should read carefully. Neither McKesson, Change (as defined below), the Joint Venture (as defined below), SpinCo nor any of their respective directors, officers or representatives makes any recommendation as to whether you should participate in the exchange offer. You must make your own decision regarding participation in the exchange offer after reading this document and consulting with your advisors.

Immediately following consummation of the exchange offer and, if necessary, the spin-off (as defined below), SpinCo will be merged with and into Change Healthcare Inc., a Delaware corporation (formerly HCIT Holdings, Inc.) (“Change”), whereby the separate corporate existence of SpinCo will cease and Change will continue as the surviving company (the “Merger”). In addition, McKesson and its subsidiaries will complete an internal reorganization (the “Internal Reorganization”) such that, among other things, (i) prior to the effectiveness of the registration statement of which this document forms a part, PF2 SpinCo LLC was, on December 27, 2019, reorganized into a Delaware corporation and (ii) prior to the consummation of the exchange offer, McKesson will contribute, directly or indirectly, all of the limited liability company membership interests it directly or indirectly holds in the Joint Venture to SpinCo. The form of the Internal Reorganization will be determined in light of all relevant factors, including tax considerations. In the Merger, each share of SpinCo Common Stock will be converted into one share of common stock of Change, par value $0.001 per share (“Change Common Stock”). No trading market currently exists or is ever expected to exist for shares of SpinCo Common Stock, and you will not be able to trade the shares of SpinCo Common Stock before they are converted into shares of Change Common Stock in the Merger. In addition, there can be no assurance that shares of Change Common Stock will, after the Merger, trade at the same prices at which they traded before the Merger.

The value of McKesson Common Stock and SpinCo Common Stock will be calculated by McKesson by reference to the simple arithmetic average of the daily volume–weighted average prices (“VWAP”), on each of


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the Valuation Dates (as defined below), of McKesson Common Stock and Change Common Stock on the New York Stock Exchange (the “NYSE”) and The Nasdaq Global Select Market (“Nasdaq”), respectively, during a period of three consecutive trading days (the “Valuation Dates”) ending on and including the second trading day preceding the expiration date of the exchange offer. Based on an expiration date of March 9, 2020, the Valuation Dates are expected to be March 3, 2020, March 4, 2020 and March 5, 2020. See “The Exchange Offer—Terms of the Exchange Offer.”

For each $100 of McKesson Common Stock accepted in the exchange offer, you will receive approximately $107.53 of SpinCo Common Stock, subject to an upper limit of 11.4086 shares of SpinCo Common Stock per share of McKesson Common Stock. The exchange offer does not provide for a minimum exchange ratio. See “The Exchange Offer—Terms of the Exchange Offer.” If the upper limit is reached, then the exchange ratio will be fixed at the upper limit. IF THE UPPER LIMIT IS REACHED, AND UNLESS YOU PROPERLY WITHDRAW YOUR SHARES, YOU WILL RECEIVE LESS THAN $107.53 OF SPINCO COMMON STOCK FOR EACH $100 OF MCKESSON COMMON STOCK THAT YOU TENDER, AND YOU COULD RECEIVE MUCH LESS.

The indicative exchange ratio that would have been in effect following the official close of trading on the NYSE and Nasdaq on February 7, 2020 (the last trading day before the commencement of the exchange offer), based on the daily VWAPs of McKesson Common Stock and Change Common Stock on February 5, 2020, February 6, 2020 and February 7, 2020, would have provided for 10.2797 shares of SpinCo Common Stock to be exchanged for every share of McKesson Common Stock accepted in the exchange offer. The value of SpinCo Common Stock received and, following the Merger, the value of Change Common Stock received, may not remain above the value of McKesson Common Stock tendered following the expiration date of the exchange offer on March 9, 2020.

THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 11:59 P.M., NEW YORK CITY TIME, ON MARCH 9, 2020, UNLESS THE EXCHANGE OFFER IS EXTENDED OR TERMINATED. SHARES OF MCKESSON COMMON STOCK TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION OF THE EXCHANGE OFFER. IN ADDITION, SHARES OF MCKESSON COMMON STOCK TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN AFTER APRIL 6, 2020 (I.E., AFTER THE EXPIRATION OF 40 BUSINESS DAYS FROM THE COMMENCEMENT OF THE EXCHANGE OFFER), IF MCKESSON DOES NOT ACCEPT YOUR SHARES OF MCKESSON COMMON STOCK PURSUANT TO THE EXCHANGE OFFER BY 11:59 P.M., NEW YORK CITY TIME, ON SUCH DATE.

Each of Change and SpinCo is an “emerging growth company” as defined under the federal securities laws. They have elected, however, to comply in their respective registration statements of which this document forms a part with the disclosure requirements otherwise applicable generally to registrants that are not emerging growth companies. See “Risk Factors—Risks Related to Change’s Organizational Structure—Change is an ‘emerging growth company’ under the federal securities laws. Change may decide in the future to comply with certain reduced reporting and disclosure requirements applicable to emerging growth companies, which could make the Change Common Stock less attractive to investors.”

 

 

In reviewing this document, you should carefully consider the risk factors beginning on page 64 of this document.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or determined if this document is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this document is February 28, 2020

The final exchange ratio used to determine the number of shares of SpinCo Common Stock that you will receive for each share of McKesson Common Stock accepted in the exchange offer (as well as whether the upper


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limit on the number of shares that can be received for each share of McKesson Common Stock tendered has been reached) will be announced by press release and be available on the website www.dfking.com/McKesson, in each case by 11:59 p.m., New York City time, at the end of the second trading day (currently expected to be March 5, 2020) immediately preceding the expiration date of the exchange offer (currently expected to be March 9, 2020), unless the exchange offer is extended or terminated. At such time, the final exchange ratio will also be available from the information agent at the toll-free number provided on the back cover of this document. For each day during the exchange offer prior to the Valuation Dates, indicative exchange ratios (calculated in the manner described in this document) will also be available through www.dfking.com/McKesson and from the information agent at the toll-free number provided on the back cover of this document.

This document provides information regarding McKesson, SpinCo, the Joint Venture, Change, the exchange offer, the spin-off and the Merger. McKesson Common Stock is listed on the NYSE under the symbol “MCK.” Change Common Stock is listed on Nasdaq under the symbol “CHNG.” On February 13, 2020, the last reported sale price of McKesson Common Stock on the NYSE was $167.91, and the last reported sale price of Change Common Stock on Nasdaq was $16.03. The market prices of McKesson Common Stock and of Change Common Stock may fluctuate prior to the completion of the exchange offer and thereafter, and may be higher or lower at the expiration date of the exchange offer than the prices set forth above. No trading market currently exists for shares of SpinCo Common Stock, and no such market is expected to exist in the future. SpinCo has not applied, and does not plan to apply, for listing of the SpinCo Common Stock on any stock exchange.

If the exchange offer is consummated but is not fully subscribed or if the exchange offer is consummated but not all of the shares of SpinCo Common Stock owned by McKesson are exchanged due to the upper limit, as described elsewhere herein, being reached, the remaining shares of SpinCo Common Stock owned by McKesson will be distributed on a pro rata basis in a spin-off (the “spin-off”) to the holders of shares of McKesson Common Stock immediately following the consummation of the exchange offer, based on the relative number of shares of McKesson Common Stock held by such holders, excluding those shares of McKesson Common Stock that have been validly tendered and accepted for exchange in the exchange offer. The spin-off, if any, would also be consummated immediately prior to the Merger. Any holder of McKesson Common Stock whose shares of McKesson Common Stock are validly tendered and accepted for exchange for shares of SpinCo Common Stock in the exchange offer will waive (and will cause any nominee of the holder to waive) their rights with respect to such validly tendered shares (but not with respect to any other shares of McKesson Common Stock that are not validly tendered or that are validly tendered and validly withdrawn) to receive, and forfeit any rights to, shares of SpinCo Common Stock distributed to McKesson stockholders in any spin-off following consummation of the exchange offer. This document covers all shares of SpinCo Common Stock offered by McKesson in the exchange offer and all shares of SpinCo Common Stock that may be distributed by McKesson in the spin-off. See “The Exchange Offer—Distribution of Any Shares of SpinCo Common Stock Remaining After the Exchange Offer.”

Immediately following consummation of the exchange offer and the spin-off, if any, SpinCo will be merged with and into Change in the Merger, whereby the separate corporate existence of SpinCo will cease and Change will continue as the surviving company. Each outstanding share of SpinCo Common Stock will be converted in the Merger into one share of Change Common Stock. Immediately after the Merger, approximately 51% of the shares of Change Common Stock are expected to be held by pre-Merger holders of McKesson Common Stock and approximately 49% of the shares of Change Common Stock are expected to be held by pre-Merger holders of Change Common Stock, in each case on a fully diluted basis in the aggregate, including Change employees who hold outstanding equity awards issued pursuant to Change’s equity incentive plans and investors who hold Change’s purchase contracts that are a component of the 6.00% tangible equity units issued by Change (such tangible equity units, the “TEUs” and the purchase contract components of the TEUs, the “purchase contracts”) (and assuming the maximum number of shares of Change Common Stock issuable upon automatic settlement of such purchase contracts, and excluding any shares of Change Common Stock that a pre-Merger holder of McKesson Common Stock may have held, or vice-versa).

McKesson’s obligation to exchange shares of SpinCo Common Stock for McKesson Common Stock is subject to the conditions listed under “The Exchange Offer—Conditions for Consummation of the Distribution.”


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TABLE OF CONTENTS

 

 

 

     Page  

About this Document

     1  

Questions and Answers About the Exchange Offer and the Transactions

     7  

Questions and Answers About the Exchange Offer and the Spin-Off

     7  

Questions and Answers About the Transactions

     21  

Summary

     26  

The Companies

     26  

The Transactions

     27  

McKesson’s Reasons for the Transactions

     31  

The Sponsors’ and Change’s Reasons for the Transactions

     32  

Number of Shares of SpinCo Common Stock to Be Distributed to Holders of McKesson Common Stock

     32  

Terms of the Exchange Offer

     32  

Risk Factors

     39  

Board of Directors and Management of Change Following the Transactions

     40  

No Additional Stockholder Approval

     41  

Accounting Treatment and Considerations

     41  

Material U.S. Federal Income Tax Consequences of the Distribution and the Merger

     42  

Comparison of Stockholder Rights

     43  

The Exchange Agent for the Exchange Offer and the Merger

     43  

The Distribution Agent for the Spin-Off

     43  

The Information Agent

     43  

The Transfer Agent

     43  

Summary Historical and Pro Forma Financial Data

     44  

Risk Factors

     64  

Risks Related to the Transactions

     64  

Risks Related to Change’s Business and Industry

     70  

Risks Related to the Indebtedness of Change

     107  

Risks Related to Change’s Organizational Structure

     109  

Cautionary Statement on Forward-Looking Statements

     120  

The Exchange Offer

     121  

Terms of the Exchange Offer

     121  

Conditions for Consummation of the Distribution

     136  

Material U.S. Federal Income Tax Consequences of the Distribution and the Merger

     137  

Fees and Expenses

     141  

Legal Limitations; Certain Matters Relating to Non-U.S. Jurisdictions

     141  

Distribution of Any Shares of SpinCo Common Stock Remaining After the Exchange Offer

     142  

Information on McKesson

     143  

Information on SpinCo

     145  

Information on Change Healthcare Inc.

     146  

Information on Change Healthcare LLC

     147  

Organizational Structure

     147  

Overview

     147  

Growth Strategy

     147  

Source of Revenue

     148  

Competition

     149  

Regulatory Matters

     150  

Legal Proceedings

     150  

Intellectual Property

     151  

 

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Employees

     151  

Seasonality

     151  

Change’s Business After the Consummation of the Transactions

     151  

Directors and Officers of Change

     152  

Change Compensation Discussion and Analysis

     156  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     191  

Selected Historical Financial Data

     263  

Unaudited Pro Forma Condensed Combined Financial Statements

     271  

Historical Per Share Data, Market Price and Dividend Data

     282  

The Transactions

     285  

Determination of Number of Shares of SpinCo Common Stock to be Distributed to Holders of McKesson Common Stock

     288  

The Merger Agreement

     313  

The Separation and Distribution Agreement

     317  

Other Agreements and Other Related Party Transactions

     323  

Description of Certain Indebtedness of Change Healthcare Inc.

     333  

Description of Change Healthcare Inc. Capital Stock

     337  

Description of Change Healthcare Inc. Tangible Equity Units

     344  

Ownership of Change Healthcare Inc. Common Stock

     346  

Comparison of Rights of Holders of McKesson Common Stock and Change Healthcare Inc. Common Stock

     349  

Certain Anti-Takeover Effects of Provisions of the Change Charter, the Change Bylaws and Delaware Law

     360  

Certain Relationships and Related Transactions

     361  

Legal Matters

     361  

Experts

     361  

Where You Can Find More Information; Incorporation by Reference

     362  

Index to Financial Statements

     F-1  

 

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This document incorporates by reference important business and financial information about McKesson from documents filed with the SEC that have not been included in or delivered with this document. This information is available at the website that the SEC maintains at www.sec.gov, as well as from other sources. See “Where You Can Find More Information; Incorporation by Reference.” In addition, copies of these materials (when they become available) may be obtained free of charge by accessing McKesson’s website at www.mckesson.com.

All information contained in this document with respect to Change and its subsidiaries has been provided by Change. All information contained or incorporated by reference in this document with respect to McKesson, its subsidiaries and SpinCo has been provided by McKesson.

This document is not an offer to sell or exchange and it is not a solicitation of an offer to buy any shares of McKesson Common Stock, SpinCo Common Stock or Change Common Stock in any jurisdiction in which such offer, sale or exchange is not permitted. Non-U.S. stockholders should consult their advisors in considering whether they may participate in the exchange offer in accordance with the laws of their home countries and, if they do participate, whether there are any restrictions or limitations on transactions in the shares of McKesson Common Stock, SpinCo Common Stock or Change Common Stock that may apply in their home countries. McKesson, SpinCo and Change cannot provide any assurance about whether such limitations may exist. No public offer to sell, purchase or exchange any securities is made to stockholders and investors in the European Union, the other countries of the European Economic Area (EEA) and the United Kingdom (each a “Relevant State”). Within a Relevant State, only qualified investors as defined in Article 2 (e) of the Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 may participate in the exchange offer in reliance on the private placement exemption as provided by Article 1 (4) (a) of the Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017. See “The Exchange Offer—Legal Limitations; Certain Matters Relating to Non-U.S. Jurisdictions” for additional information about limitations on the exchange offer outside the United States.

 

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ABOUT THIS DOCUMENT

This document is part of (i) SpinCo’s Registration Statement (Registration No. 333-236236) initially filed with the SEC on February 4, 2020 and (ii) Change’s Registration Statement (Registration No. 333-236234) initially filed with the SEC on February 4, 2020.

Financial Statement Presentation

On March 1, 2017, McKesson and Change completed the Joint Venture Transactions (as defined below) whereby the majority of McKesson’s Technology Solutions segment (“Core MTS”) and substantially all of Change Healthcare Performance, Inc.’s (formerly Change Healthcare, Inc.) legacy business (“Legacy CHC”) were contributed to Change Healthcare LLC, a Delaware limited liability company (the “Joint Venture”) pursuant to the Contribution Agreement (as defined below), resulting in the establishment of the Joint Venture. The creation of the Joint Venture, including the contribution of the Contributed Businesses (as defined below) and related transactions, is collectively referred to as the “Joint Venture Transactions.” From the time of its formation on June 17, 2016 until March 1, 2017 (the closing date of the Joint Venture Transactions), the Joint Venture had no substantive assets or operations.

Change is a holding company that was formed in connection with the Joint Venture Transactions and does not own any material assets or have any operations other than through its interest in the Joint Venture. SpinCo is a holding company that was formed by McKesson in connection with the Joint Venture Transactions and does not own any material assets or have any material liabilities or operations other than through its interest in the Joint Venture. Each of the McKesson Members (as defined below) is a holding company that was formed by McKesson in connection with the Joint Venture Transactions and does not own any material assets or have any operations other than through its respective interest in the Joint Venture.

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.” Change holds approximately 42% of the issued and outstanding LLC Units and McKesson indirectly holds (in aggregate) approximately 58% of the outstanding LLC Units. However, each of Change and McKesson have equal representation on the Joint Venture’s board of directors and all major operating, investing and financial activities require the consent of both Change and McKesson. As a result, neither Change nor McKesson consolidates the financial position and results of the Joint Venture. Instead, each of Change and McKesson accounts for its respective investment in the Joint Venture under the equity method of accounting.

For periods prior to the Internal Reorganization, McKesson held all of its LLC Units through its wholly-owned subsidiaries, PF2 IP LLC, a Delaware limited liability company (“MCK IPCo”) and PF2 PST Services Inc., a Delaware corporation (“PST”, and together with MCK IPCo, the “McKesson Members”). Prior to and in connection with the Transactions (as defined below), McKesson and its subsidiaries will complete the Internal Reorganization such that, among other things, (i) prior to the effectiveness of the registration statement of which this document forms a part, PF2 SpinCo LLC was, on December 27, 2019, reorganized into a Delaware corporation named PF2 SpinCo, Inc. and (ii) prior to the consummation of the exchange offer described in this document, McKesson will cause all of the LLC Units indirectly held by McKesson in the Joint Venture to be contributed, directly or indirectly, to SpinCo. SpinCo will then consummate a split-off followed, if necessary, by the spin-off. The split-off and, if necessary, the spin-off, shall collectively be referred to herein as the “Distribution.” Immediately following consummation of the Distribution, SpinCo will be merged with and into Change, whereby the separate corporate existence of SpinCo will cease and Change will continue as the surviving company. In the Merger, each share of SpinCo Common Stock will be converted into one share of Change Common Stock.

For periods on and after August 22, 2016 (the date of SpinCo’s formation), this document presents SpinCo’s combined financial position, results of operations and related balances as (i) McKesson’s ownership of its

 

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investment in the Joint Venture carved out from McKesson’s consolidated financial statements and (ii) PF2 SpinCo, Inc. (formerly PF2 SpinCo LLC). All assets, liabilities, revenue and expenses related to McKesson’s interest in the Joint Venture and SpinCo are combined to form the basis for the combined financial statements.

For periods prior to March 1, 2017, this document presents the financial position and results of Legacy CHC and Core MTS, the businesses contributed to the Joint Venture at the consummation of the Joint Venture Transactions. In addition, this document supplementally presents the consolidated financial position and results of the Joint Venture, the equity method investee of SpinCo and Change, in all periods since the Joint Venture’s inception.

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

Certain Definitions

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

 

   

“2017 Tax Receivable Agreement” means the Tax Receivable Agreement, dated as of February 28, 2017, among Change Healthcare Performance, Inc. (formerly Change Healthcare, Inc.), Change, Change Healthcare LLC and the other parties named therein.

 

   

“Ancillary Agreements” means the agreements negotiated in connection with the Joint Venture Transactions and the Transactions, including the Contribution Agreement, LLC Agreement, Transition Services Agreements, Registration Rights Agreement, Tax Matters Agreement, the Letter Agreement and each other agreement entered into in writing in connection with the Controlled Transfer and/or the Distribution (to the extent the applicable party to the Separation Agreement is bound thereby), in each case to the extent such Ancillary Agreements remain in effect pursuant to their terms.

 

   

“Blackstone” means investment funds associated with The Blackstone Group Inc.

 

   

“BPS” means McKesson Business Performance Services, a business unit of Core MTS.

 

   

“CCA” means McKesson Connected Care & Analytics, a business unit of Core MTS, excluding RelayHealth Pharmacy.

 

   

“Change” means Change Healthcare Inc. (formerly HCIT Holdings, Inc.), a Delaware Corporation.

 

   

“Change Common Stock” means the common stock of Change, par value $0.001 per share.

 

   

“Change Tax Opinion” means an opinion of Ropes & Gray LLP, dated as of the closing date of the Merger, on the basis of customary assumptions and representations, to the effect that the Merger will be treated for U.S. federal income tax purposes as a “reorganization” within the meaning of Section 368(a) of the Code and that each of Change and SpinCo will be a “party to the reorganization” within the meaning of Section 368(b) of the Code (or, if Ropes & Gray LLP shall have notified Change that it will be unable to render a Change Tax Opinion, a written opinion to the same effect from a law or accounting firm that is nationally recognized as an expert in federal income tax matters and reasonably acceptable to Change and SpinCo).

 

   

“Code” means the U.S. Internal Revenue Code of 1986, as amended.

 

   

“Completing Transfer” means, to the extent not previously completed, the conveyance to SpinCo by McKesson and/or McKesson’s affiliates of (i) all of McKesson or its subsidiaries’ rights, title and interest in and to all of the issued and outstanding equity of the McKesson Members and (ii) if applicable, all of McKesson or its subsidiaries’ rights, title and interest in and to any LLC Units not held at such time by the McKesson Members.

 

   

“Contributed Businesses” means the Core MTS business and Legacy CHC business, including substantially all of the assets and operations of Legacy CHC, but excluding the eRx Network.

 

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“Contribution Agreement” means the Agreement of Contribution and Sale, dated as of June 28, 2016, the Legacy CHC Stockholders entered into with McKesson and the other parties thereto in connection with the formation of the Joint Venture.

 

   

“Controlled Transfer” means certain transfers by McKesson of McKesson’s direct and indirect equity interests in the Joint Venture by contributing, in one or more contributions, all of the issued and outstanding equity in the McKesson Members, to SpinCo in exchange for McKesson’s receipt of SpinCo Common Stock, in accordance with the Separation Agreement, immediately after which SpinCo will hold, directly or indirectly, all of McKesson’s direct and indirect equity interests in the Joint Venture.

 

   

“Core MTS” means the majority of McKesson’s former Technology Solutions segment that was contributed to the Joint Venture pursuant to the Contribution Agreement in connection with the Joint Venture Transactions.

 

   

“Credit Agreement” means the credit agreement dated as of March 1, 2017 among Change Healthcare Intermediate Holdings, LLC, Change Healthcare Holdings, LLC, the other borrowers party thereto, the other guarantors party thereto from time to time, Bank of America, N.A. and the other lenders party thereto from time to time, as amended.

 

   

“Distribution” means the split-off together with the spin-off, if any.

 

   

“EIS” means McKesson Enterprise Information Solutions, a business unit of MTS that was excluded from Core MTS and retained by McKesson in the Joint Venture Transactions.

 

   

“eRx Network” means Legacy CHC’s pharmacy claims switching and prescription routing businesses.

 

   

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

   

“exchange agent” means Equiniti Trust Company, in its role as exchange agent in connection with the Transactions.

 

   

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

 

   

“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

 

   

“information agent” means D.F. King & Co., Inc., in its role as information agent for the exchange offer.

 

   

“Internal Reorganization” means an internal reorganization to be completed by McKesson and its subsidiaries such that, among other things, (i) prior to the effectiveness of the registration statement of which this document forms a part, PF2 SpinCo LLC was, on December 27, 2019, reorganized into a Delaware corporation named PF2 SpinCo, Inc. and (ii) prior to the consummation of the exchange offer, McKesson will contribute, directly or indirectly, all of the LLC Units it directly or indirectly holds in the Joint Venture to SpinCo.

 

   

“IWS” means McKesson Imaging & Workflow Solutions, a business unit of Core MTS.

 

   

“Joint Venture” means Change Healthcare LLC, a Delaware limited liability company.

 

   

“Joint Venture Transactions” means the transactions that closed on March 1, 2017 pursuant to the Contribution Agreement related to the establishment of the Joint Venture, including the contribution of the Contributed Businesses.

 

   

“Legacy CHC” means the legacy business of Change Healthcare Performance, Inc. (formerly Change Healthcare, Inc.).

 

   

“Legacy CHC Transition Services Agreement” means the transition services agreement pursuant to which Change is obligated to provide certain services to the eRx Network for a specified transition period.

 

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“Letter Agreement” means an amended and restated letter agreement between the Joint Venture, McKesson, the McKesson Members, Change and certain subsidiaries of the Joint Venture, pursuant to which, among other things, McKesson may adjust the manner in which depreciation or amortization deductions in respect of assets transferred to the Joint Venture at the closing of the Joint Venture Transactions are allocated among Change and the McKesson Members, and Change may be required to make cash payments to McKesson in respect of certain cash tax savings realized by Change for any tax period ending prior to the date on which McKesson ceases to own at least 20% of the outstanding LLC Units in the Joint Venture.

 

   

“LLC Agreement” means the limited liability company agreement of the Joint Venture.

 

   

“LLC Units” means the single class of membership interests in the Joint Venture provided for by the LLC Agreement.

 

   

“MCK IPCo” means PF2 IP LLC, a Delaware limited liability company.

 

   

“McKesson” means McKesson Corporation, a Delaware corporation.

 

   

“McKesson Common Stock” means the common stock of McKesson, par value $0.01 per share.

 

   

“McKesson Merger Tax Opinion” means an opinion of a McKesson Tax Advisor, dated as of the closing date of the Merger, on the basis of customary assumptions and representations, to the effect that the Merger will be treated for U.S. federal income tax purposes as a “reorganization” within the meaning of Section 368(a) of the Code and that each of Change and SpinCo will be a “party to the reorganization” within the meaning of Section 368(b) of the Code.

 

   

“McKesson Members” means PST together with MCK IPCo.

 

   

“McKesson Separation Tax Opinion” means an opinion of a McKesson Tax Advisor, dated as of the closing date of the Merger, on the basis of customary assumptions and representations, to the effect that (i) the Controlled Transfer, together with the Distribution, will qualify as a “reorganization” within the meaning of Section 368(a)(1)(D) of the Code, and that each of McKesson and SpinCo will be a “party to the reorganization” within the meaning of Section 368(b) of the Code, (ii) the Distribution, as such, will qualify as a distribution of stock of SpinCo to McKesson’s stockholders pursuant to Section 355 of the Code and (iii) the Merger should not cause Section 355(e) of the Code to apply to the Distribution.

 

   

“McKesson Tax Advisor” means Davis Polk & Wardwell LLP or Ernst & Young LLP, tax advisors to McKesson.

 

   

“McKesson Tax Opinions” means the McKesson Merger Tax Opinion and the McKesson Separation Tax Opinion.

 

   

“McKesson Tax Receivable Agreement” means the tax receivable agreement, dated as of March 1, 2017, entered into in connection with the closing of the Joint Venture Transactions among Change Healthcare LLC, the McKesson Members, McKesson and Change.

 

   

“McKesson Transition Services Agreement” means the transition services agreement pursuant to which Change relies on McKesson and its affiliates to provide Change with certain services for its business and customers for a specified transition period.

 

   

“Merger” means the merger of SpinCo with and into Change pursuant to the Merger Agreement.

 

   

“Merger Agreement” means the Agreement and Plan of Merger by and between SpinCo, Change and McKesson, dated as of December 20, 2016 in respect of the Merger.

 

   

“MHS” means McKesson Health Solutions, a business unit of Core MTS.

 

   

“MTS” means McKesson Technology Solutions, McKesson’s former operating segment that included the Core MTS business.

 

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“Option Agreement” means the option agreement entered into in connection with the Joint Venture Transactions for a subsidiary of the Joint Venture to acquire the eRx Network.

 

   

“Pricing Mechanism” means the pricing mechanism for determining the final exchange ratio for the exchange offer, as described under “The Exchange Offer—Terms of the Exchange Offer—Pricing Mechanism”.

 

   

“PST” means PF2 PST Services LLC (formerly PF2 PST Services Inc.), a Delaware limited liability company. In connection with the Internal Reorganization, PST reorganized into a Delaware limited liability company on December 24, 2019.

 

   

“purchase contract” means the purchase contract component of each TEU.

 

   

“Qualified McKesson Exit” means, subject to the terms and conditions provided in the LLC Agreement, a spin-off or split-off transaction (or a combination of the foregoing) that would result, among other things, in the acquisition by Change of SpinCo, which will hold, following the Internal Reorganization, all the LLC Units in the Joint Venture currently held by McKesson, directly or indirectly, and the issuance by Change to McKesson and/or McKesson’s securityholders of an equal number of shares of Change Common Stock.

 

   

“Registration Rights Agreement” means the registration rights agreement Change entered into with the Sponsors and McKesson in connection with the Joint Venture Transactions.

 

   

“RelayHealth Pharmacy” means McKesson’s RelayHealth Pharmacy Network, a business formerly operated by CCA that was excluded from Core MTS and retained by McKesson in the Joint Venture Transactions.

 

   

“Revolving Credit Facility” means the Joint Venture’s senior secured revolving credit facility.

 

   

“SEC” means the Securities and Exchange Commission.

 

   

“Senior Notes” means the Joint Venture’s 5.75% senior notes due March 1, 2025.

 

   

“Senior Secured Credit Facilities” means the Revolving Credit Facility and the Term Loan Facility.

 

   

“Securities Act” means the Securities Act of 1933, as amended.

 

   

“Separation” means the separation of SpinCo from McKesson pursuant to the Separation Agreement.

 

   

“Separation Agreement” means the Separation and Distribution Agreement dated as of February 10, 2020, by and between McKesson, SpinCo and Change.

 

   

“SpinCo” means (i) prior to the Internal Reorganization, PF2 SpinCo LLC, a Delaware limited liability company and (ii) following its reorganization into a Delaware corporation in connection with the Internal Reorganization on December 27, 2019, PF2 SpinCo, Inc.

 

   

“SpinCo Common Stock” means the common stock of SpinCo, par value $0.001.

 

   

“spin-off” means a pro rata distribution by McKesson to its stockholders of the outstanding shares of SpinCo remaining if the exchange offer is undertaken and consummated but the exchange offer is not fully subscribed because less than all shares of SpinCo Common Stock owned by McKesson are exchanged, or if the exchange offer is consummated but not all of the shares of SpinCo Common Stock owned by McKesson are exchanged due to the upper limit being reached.

 

   

“Sponsors” means investment funds associated with The Blackstone Group Inc. and investment funds associated with the affiliated companies of Hellman & Friedman LLC.

 

   

“Tax Matters Agreement” means the tax matters agreement which would govern the rights, responsibilities and obligations of McKesson and SpinCo after a 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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“Term Loan Facility” means the Joint Venture’s senior secured term loan facility.

 

   

“TEUs” means the 6.00% tangible equity units issued by Change.

 

   

“Transactions” means the transactions contemplated by the Merger Agreement and the Separation Agreement, which provide for, among other things, the Separation, the Distribution and the Merger, as described in “The Transactions.”

 

   

“transfer agent” means Equiniti Trust Company, in its role as transfer agent and registrar for the Change Common Stock in connection with the Transactions.

 

   

“Transition Services Agreements” means the Legacy CHC Transition Services Agreement collectively with the McKesson Transition Services Agreement.

 

   

“Valuation Date” means each of the second, third and fourth trading days preceding the exchange offer period, as may be extended.

 

   

“VWAP” means volume–weighted average price.

 

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QUESTIONS AND ANSWERS ABOUT THE EXCHANGE OFFER AND THE TRANSACTIONS

Questions and Answers About the Exchange Offer and the Spin-Off

The following are answers to some of the questions that stockholders of McKesson may have relating to the exchange offer and the Transactions. These questions and answers, as well as the following summary, are not meant to be a substitute for the information contained in the remainder of this document, and are qualified in their entirety by the detailed descriptions and explanations contained elsewhere in this document. You are urged to read this document and the documents incorporated by reference herein in their entirety prior to making any decision about whether to tender any shares of McKesson Common Stock in the exchange offer.

McKesson is a Delaware corporation. As used in this document, “SpinCo” refers to PF2 SpinCo, Inc. (formerly PF2 SpinCo LLC), a subsidiary of McKesson and a Delaware corporation which, prior to the Merger, will hold (directly or indirectly through wholly-owned subsidiaries) all of the LLC Units in the Joint Venture currently held directly or indirectly by McKesson. As described in greater detail in the Separation Agreement, SpinCo will be separated from McKesson as part of the Transactions.

 

Q:

What is the Joint Venture, and why did McKesson enter into the Joint Venture?

 

A:

In June 2016, the Legacy CHC Stockholders entered into 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 Contributed Businesses.

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 Joint Venture 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 (as defined below) and (b) the issuance to Change of LLC Units 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 Joint Venture Transactions by the Joint Venture to McKesson of a promissory note in the amount of approximately $1.3 billion, (b) the issuance of LLC Units in the Joint Venture and (c) the McKesson Tax Receivable Agreement.

McKesson and the Legacy CHC Stockholders formed the Joint Venture to bring together the complementary strengths of Core MTS and Legacy CHC to deliver a broad portfolio of solutions aimed at helping to lower healthcare costs, improve patient access and outcomes, and make it simpler for payers, providers and consumers to manage the transition to value-based care. As a separate entity singularly focused on healthcare technology and technology-enabled services, the new organization is positioned to better respond to customer needs and deliver next-generation innovations.

 

Q:

What is the organizational structure of SpinCo, the Joint Venture and Change?

 

A:

SpinCo, Change and each of the McKesson Members were formed in connection with the Joint Venture Transactions and do not own any material assets or have any operations other than through their respective interests in the Joint Venture (which interests SpinCo acquired or will acquire pursuant to the Internal Reorganization). As of December 31, 2019, each of Change and McKesson (through the McKesson Members) has equal representation on the Joint Venture’s board of directors and all major operating, investing and financial activities require the consent of both such members. As a result, neither McKesson nor Change consolidates the financial position and results of the Joint Venture. Instead, each of McKesson and Change account for their respective investments in the Joint Venture under the equity method of accounting. Upon consummation of the Transactions, the Joint Venture would become a consolidated subsidiary of Change.

 

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The LLC Agreement provides for a single class of LLC Units. Prior to the Separation, Change holds approximately 42% of the issued and outstanding LLC Units and McKesson holds approximately 58% of the issued and outstanding LLC Units (or 49% and 51%, respectively, on a fully diluted basis).

Change’s organizational structure, as described above, is commonly referred to as an umbrella partnership-C-corporation (or UP-C) structure. This organizational structure allows McKesson to retain its equity ownership directly 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. Change’s investors, the Sponsors and Change’s management, by contrast, hold their equity ownership in the Joint Venture indirectly through their equity ownership in Change, a Delaware corporation that is classified as a domestic corporation for U.S. federal income tax purposes, in the form of shares of common stock.

Pursuant to the LLC Agreement, upon the expiration of the underwriter lock-up period in connection with Change’s initial public offering, which expiration occurred on December 23, 2019, subject to the terms and conditions provided in the LLC Agreement, McKesson has the right, at its election, to initiate and complete a Qualified McKesson Exit from the Joint Venture, which would be conducted as a spin-off or split-off transaction (or a combination of the foregoing) that would result, among other things, in the acquisition by Change of SpinCo, which will hold, following the Internal Reorganization, all of the LLC Units currently held by McKesson, and the issuance by Change to McKesson and/or McKesson’s securityholders of an equal number of shares of Change Common Stock. In connection with such a Qualified McKesson Exit, McKesson would contribute the equity interests of McKesson subsidiaries that own all of McKesson’s interests in the Joint Venture to SpinCo and then would either distribute stock of SpinCo to the stockholders of McKesson as a dividend in the spin-off, commence one or more exchange offers pursuant to which McKesson would 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, pursuant to which the stockholders of SpinCo would be entitled to receive a number of shares of Change Common Stock equal to the number of LLC Units held, directly or indirectly, by SpinCo at the effective time of the Merger.

McKesson has elected to initiate a Qualified McKesson Exit through the Transactions described in this document. The simplified diagram below depicts Change’s organizational structure immediately following consummation of the Transactions. For additional detail, see “Summary—The Transactions.”

 

LOGO

 

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(1)

Immediately after consummation of the Merger, approximately 51% of the outstanding shares of Change Common Stock are expected to be held by pre-Merger holders of McKesson Common Stock, and approximately 49% of the outstanding shares of Change Common Stock are expected to be held by pre-Merger holders of Change Common Stock, in each case on a fully diluted basis in the aggregate, including Change employees who hold outstanding equity awards issued pursuant to Change’s equity incentive plans and investors who hold Change’s purchase contracts (and assuming the maximum number of shares of Change Common Stock issuable upon automatic settlement of such purchase contracts, and excluding any shares of Change Common Stock that a pre-Merger holder of McKesson Common Stock may have held, or vice-versa).

 

Q:

Why has McKesson decided to separate SpinCo from McKesson through the exchange offer?

 

A:

McKesson believes that distribution of the shares of SpinCo Common Stock that it holds to McKesson stockholders, by way of an exchange offer rather than a pro rata spin-off, is a tax-efficient way to divest its interest in the Joint Venture while allowing McKesson’s stockholders an opportunity to adjust their current investment between McKesson and the post-Merger Change. See “The Transactions—McKesson’s Reasons for the Transactions.” McKesson believes that the exchange offer is an efficient way to allow holders of McKesson Common Stock to own an interest in a post-Merger Change that wholly owns and consolidates the entire business of the Joint Venture. See “The Transactions—McKesson’s Reasons for the Transactions.”

If holders of McKesson Common Stock subscribe for less than all of the shares of SpinCo Common Stock owned by McKesson in the exchange offer, or in the event the exchange offer is consummated but not all of the shares of SpinCo Common Stock owned by McKesson are exchanged due to the upper limit being reached, McKesson will distribute the remaining outstanding shares of SpinCo Common Stock held by McKesson on a pro rata basis in the spin-off to holders of McKesson Common Stock whose shares of McKesson Common Stock remain outstanding after consummation of the exchange offer, based on the relative number of shares of McKesson Common Stock held by such holders, excluding those shares of McKesson Common Stock that have been validly tendered and accepted for exchange.

 

Q:

What are you being offered in the Transactions?

 

A.

In the exchange offer, McKesson will offer to you the right to exchange all or a portion of your shares of McKesson Common Stock for shares of SpinCo Common Stock.

SpinCo anticipates that the final exchange ratio will be set by the Pricing Mechanism (as described below) such that the exchange offer will be fully- or over-subscribed by holders of McKesson Common Stock, although there can be no assurance that this will be the case. In the event that the exchange offer is consummated but is not fully subscribed, or in the event the exchange offer is consummated but not all of the shares of SpinCo Common Stock owned by McKesson are exchanged due to the upper limit being reached, McKesson will distribute the remaining outstanding shares of SpinCo Common Stock held by McKesson on a pro rata basis in the spin-off to holders of McKesson Common Stock whose shares of McKesson Common Stock remain outstanding after consummation of the exchange offer, based on the relative number of shares of McKesson Common Stock held by such holders, excluding those shares that have been validly tendered and accepted for exchange.

Any holder of McKesson Common Stock whose shares of McKesson Common Stock are validly tendered and accepted for exchange for shares of SpinCo Common Stock in the exchange offer will waive (and will cause any nominee of the holder to waive) their rights with respect to such validly tendered shares of McKesson Common Stock (but not with respect to any other shares that are not validly tendered or validly tendered and validly withdrawn in the exchange offer) to receive, and forfeit any rights to, shares of SpinCo Common Stock distributed in any spin-off following consummation of the exchange offer. See “The Exchange Offer—Distribution of Any Shares of SpinCo Common Stock Remaining After the Exchange Offer.”

 

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In the Merger, each outstanding share of SpinCo Common Stock will be converted into one share of Change Common Stock, as set forth in the Merger Agreement and as described in the section entitled “The Merger Agreement—Merger Consideration.”

 

Q:

What is the aggregate number of shares of SpinCo Common Stock being offered in the exchange offer?

 

A:

In the exchange offer, McKesson is offering 175,995,192 shares of SpinCo Common Stock, which will be all of the issued and outstanding shares of SpinCo Common Stock on the date of consummation of the exchange offer.

 

Q:

Who may participate in the exchange offer?

 

A:

Any U.S. holders of McKesson Common Stock during the exchange offer period may participate in the exchange offer. Although McKesson has mailed this document to its stockholders to the extent required by U.S. law, including stockholders located outside the United States, this document is not an offer to buy, sell or exchange, and it is not a solicitation of an offer to buy or sell, any shares of McKesson Common Stock, shares of Change Common Stock or shares of SpinCo Common Stock in any jurisdiction in which such offer, sale or exchange is not permitted.

Countries outside the United States generally have their own legal requirements that govern securities offerings made to persons resident in those countries and often impose stringent requirements about the form and content of offers made to the general public. None of McKesson, Change or SpinCo has taken any action under non-U.S. regulations to facilitate a public offer to exchange the shares of McKesson Common Stock, Change Common Stock or SpinCo Common Stock outside the United States. Accordingly, the ability of any non-U.S. person to tender shares of McKesson Common Stock in the exchange offer will depend on whether there is an exemption available under the laws of such person’s home country that would permit the person to participate in the exchange offer without the need for McKesson, Change or SpinCo to take any action to facilitate a public offering in that country or otherwise. For example, some countries exempt transactions from the rules governing public offerings if they involve persons who meet certain eligibility requirements relating to their status as sophisticated or professional investors.

Non-U.S. stockholders should consult their advisors in considering whether they may participate in the exchange offer in accordance with the laws of their home countries and, if they do participate, whether there are any restrictions or limitations on transactions in the shares of McKesson Common Stock, Change Common Stock or SpinCo Common Stock that may apply in their home countries. None of McKesson, Change or SpinCo can provide any assurance about whether such limitations may exist. No public offer to sell, purchase or exchange any securities is made to stockholders and investors in the European Union, the other countries of the European Economic Area (EEA) and the United Kingdom (each a “Relevant State”). Within a Relevant State, only qualified investors as defined in Article 2 (e) of the Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 may participate in the exchange offer in reliance on the private placement exemption as provided by Article 1 (4) (a) of the Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017. See “The Exchange Offer—Legal Limitations; Certain Matters Relating to Non-U.S. Jurisdictions” for additional information about limitations on the exchange offer outside the United States.

 

Q:

How will Change acquire the equity interests in SpinCo?

 

A:

Change will acquire the equity interests in SpinCo through a “Reverse Morris Trust” transaction structure. A Reverse Morris Trust transaction allows a parent company (in this case, McKesson) to divest a subsidiary (in this case, SpinCo) in a tax-efficient manner. In a Reverse Morris Trust transaction, the parent generally will divest stock of the subsidiary (in this case, SpinCo Common Stock) through a dividend (i.e., a spin-off) or exchange offer (i.e., a split-off) of the subsidiary stock to parent stockholders. Immediately after the spin-off or split-off, the subsidiary effects a merger with another company (in this case, Change), in a

 

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Index to Financial Statements
 

transaction in which the other company’s stockholders will hold less than 50% of the capital stock of the combined company immediately after the transaction. For information about the material tax consequences to McKesson stockholders resulting from the Reverse Morris Trust structure of the Transactions, see “Summary—Material U.S. Federal Income Tax Consequences of the Distribution and the Merger.”

 

Q:

What are the main ways that the relationship between the Joint Venture and McKesson will change after the exchange offer is completed?

 

A:

Following the completion of the exchange offer, assuming the exchange offer is fully subscribed, the Joint Venture (which will be wholly-owned by Change) will be wholly independent from McKesson, except that certain agreements between McKesson and Change will remain in place. See “Other Agreements and Other Related Party Transactions.” If the exchange offer is consummated but less than all shares of SpinCo Common Stock owned by McKesson are exchanged because the exchange offer is not fully subscribed (or if the exchange offer is consummated but not all of the shares of SpinCo Common Stock held by McKesson are exchanged due to the upper limit being reached), the additional shares of SpinCo Common Stock owned by McKesson will be distributed on a pro rata basis to holders of McKesson Common Stock whose shares of McKesson Common Stock remain outstanding after consummation of the exchange offer, based on the relative number of shares of McKesson Common Stock held by such holders, excluding those shares of McKesson Common Stock that have been validly tendered and accepted for exchange. See “The Exchange Offer—Distribution of Any Shares of SpinCo Common Stock Remaining After the Exchange Offer.”

 

Q:

How many shares of SpinCo Common Stock will I receive for each share of McKesson Common Stock that I tender?

 

A:

The exchange offer is designed to permit you to exchange your shares of McKesson Common Stock for shares of SpinCo Common Stock. For each $100 of your McKesson Common Stock accepted in the exchange offer, you will receive approximately $107.53 of SpinCo Common Stock. The value of the McKesson Common Stock will be based on the calculated per-share value for the McKesson Common Stock on the NYSE and the value of the SpinCo Common Stock will be based on the calculated per-share value for Change Common Stock on Nasdaq, in each case determined by reference to the simple arithmetic average of the daily VWAP of McKesson Common Stock and Change Common Stock on the NYSE and Nasdaq, respectively, during the Valuation Dates ending on and including the second trading day preceding the expiration date of the exchange offer, as it may be extended. The last day on which tenders will be accepted, whether on March 9, 2020 or any later date to which the exchange offer is extended, is referred to in this document as the “expiration date.” Please note, however, that:

 

   

The number of shares you can receive is subject to an upper limit of an aggregate of 11.4086 shares of SpinCo Common Stock for each share of McKesson Common Stock accepted in the exchange offer. The questions and answers below describe how this limit may impact the value you receive.

 

   

The exchange offer does not provide for a minimum exchange ratio. See “The Exchange Offer—Terms of the Exchange Offer.”

 

   

Because the exchange offer is subject to proration if it is over-subscribed, McKesson may only accept for exchange a portion of the McKesson Common Stock that you tender.

 

Q:

Is there a limit on the number of shares of SpinCo Common Stock I can receive for each share of McKesson Common Stock that I tender?

 

A:

The number of shares you can receive is subject to an upper limit of 11.4086 shares of SpinCo Common Stock for each share of McKesson Common Stock accepted in the exchange offer. If the upper limit is reached, you will receive less than $107.53 of SpinCo Common Stock for each $100 of McKesson Common Stock that you tender, and you could receive much less. For example, if the calculated per-share value of McKesson Common Stock was $158.32 (the highest closing price for McKesson Common Stock on the NYSE during the three-month period prior to commencement of the exchange offer) and the calculated

 

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per-share value of SpinCo Common Stock was $12.75 (the lowest closing price for Change Common Stock on Nasdaq during that three-month period), the value of SpinCo Common Stock, based on the price of the Change Common Stock you receive for McKesson Common Stock tendered in the exchange offer would be approximately $91.88 for each $100 of McKesson Common Stock tendered for exchange.

 

Q:

Is there a minimum number of shares I must tender to participate in the exchange offer?

 

A:

There is no minimum number of shares that must be tendered by a holder of McKesson Common Stock in order to participate in the exchange offer.

 

Q:

Why is there an upper limit on the number of shares of SpinCo Common Stock I can receive for each share of McKesson Common Stock that I tender?

 

A:

McKesson management set the upper limit at the amount set forth herein to protect non-tendering holders of McKesson Common Stock from an unusual or unexpected drop in the trading price of Change Common Stock relative to the trading price of McKesson Common Stock, and the prospective loss of value to such non-tendering holders if shares of McKesson Common Stock were exchanged for shares of SpinCo Common Stock at an unduly high exchange ratio.

 

Q:

How and when will I know the final exchange ratio and whether the upper limit is reached?

 

A:

McKesson will announce the final exchange ratio used to determine the number of shares that can be received for each share of McKesson Common Stock accepted in the exchange offer by press release, and it will be available on the website www.dfking.com/McKesson, in each case by 11:59 p.m., New York City time, at the end of the second trading day (currently expected to be March 5, 2020) immediately preceding the expiration date of the exchange offer (currently expected to be March 9, 2020), unless the exchange offer is extended or terminated. At such time, the final exchange ratio will also be available from the information agent at the toll-free number provided on the back cover of this document. McKesson will also announce at that time whether the upper limit on the number of shares that can be received for each share of McKesson Common Stock tendered has been reached. The timing of such announcement will provide each holder of McKesson Common Stock with two full business days after knowing the final exchange ratio and whether the upper limit has been reached during which to decide whether to tender or withdraw their shares in the exchange offer.

 

Q:

How are the calculated per-share values of McKesson Common Stock and Change Common Stock determined for purposes of calculating the number of shares of SpinCo Common Stock to be received in the exchange offer?

 

A:

The calculated per-share value of McKesson Common Stock and Change Common Stock for purposes of the exchange offer will be determined by reference to the simple arithmetic average of the daily VWAP of McKesson Common Stock and Change Common Stock on the NYSE and Nasdaq, respectively, on each of the Valuation Dates. The daily VWAP will be as reported by Bloomberg L.P. as displayed under the heading Bloomberg VWAP on the Bloomberg pages “MCK UN<Equity>AQR” with respect to McKesson Common Stock and “CHNG UQ<Equity>AQR” with respect to Change Common Stock (or any other recognized quotation source selected by McKesson in its sole discretion if such pages are not available or are manifestly erroneous). The daily VWAPs of McKesson Common Stock and Change Common Stock obtained from Bloomberg L.P. may be different from other sources of volume-weighted average prices or investors’ or other security holders’ own calculations. McKesson will determine the simple arithmetic average of the VWAPs of McKesson Common Stock and Change Common Stock based on prices provided by Bloomberg L.P., and such determinations will be final.

 

Q:

What is the “daily volume-weighted average price” or “daily VWAP?”

 

A:

The “daily volume-weighted average price” for McKesson Common Stock and Change Common Stock will be the volume-weighted average price of McKesson Common Stock and Change Common Stock on the

 

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NYSE and Nasdaq, respectively, during the period beginning at 9:30 a.m., New York City time and ending at 4:00 p.m., New York City time, except that such data will only take into account adjustments made to reported trades included by 4:10 p.m., New York City time, as reported to McKesson by Bloomberg L.P. for the equity ticker pages of MCK, in the case of McKesson Common Stock, and CHNG, in the case of Change Common Stock.

 

Q:

Where can I find the daily VWAP of McKesson Common Stock and Change Common Stock during the exchange offer period?

 

A:

McKesson will maintain a website at www.dfking.com/McKesson that will provide the daily VWAP of both McKesson Common Stock and Change Common Stock for each day during the exchange offer (including each of the Valuation Dates). The website will also provide indicative exchange ratios commencing on the third trading day of the exchange offer until the first Valuation Date. On the first two Valuation Dates, when the values of McKesson Common Stock and Change Common Stock are calculated for the purposes of the exchange offer, the website will show the indicative exchange ratios based on indicative calculated per-share values calculated by McKesson, which will equal: (i) on the first Valuation Date, the daily VWAP of McKesson Common Stock and Change Common Stock for that day; and (ii) on the second Valuation Date, the simple arithmetic mean of the daily VWAPs of McKesson Common Stock and Change Common Stock for the first and second Valuation Dates. The website will not provide an indicative exchange ratio on the third Valuation Date. The final exchange ratio (as well as whether the upper limit on the number of shares that can be received for each share of McKesson Common Stock tendered has been reached) will be announced by press release and be available on the website, in each case by 11:59 p.m., New York City time, at the end of the second trading day (currently expected to be March 5, 2020) immediately preceding the expiration date of the exchange offer (currently expected to be March 9, 2020). McKesson will determine the simple arithmetic average of the VWAPs based on data provided by Bloomberg L.P., and such determinations will be final.

 

Q:

Why is the calculated per-share value for SpinCo Common Stock based on the trading prices for Change Common Stock?

 

A:

There is currently no trading market for SpinCo Common Stock and no such trading market is expected to be established in the future. McKesson believes, however, that the trading price for Change Common Stock is an appropriate proxy for the trading price of SpinCo Common Stock because in the Merger, each outstanding share of SpinCo Common Stock will be converted into one share of Change Common Stock. There can be no assurance, however, that Change Common Stock after the Merger will trade on the same basis as Change Common Stock trades prior to the Merger.

 

Q:

Will indicative exchange ratios be provided during the exchange offer period?

 

A:

Yes. Prior to the Valuation Dates and commencing on the third trading day of the exchange offer, indicative exchange ratios will be available online or by contacting the information agent at the toll-free number provided on the back cover of this document, calculated on each day as though that day were the expiration date of the exchange offer. A website will be maintained at www.dfking.com/McKesson that will provide the daily VWAPs of both McKesson Common Stock and Change Common Stock during the exchange offer on each day prior to the third Valuation Date.

The indicative exchange ratios will also reflect whether the upper limit on the exchange ratio, described above, would have been reached. You may also contact the information agent at its toll-free number to obtain these indicative exchange ratios. In addition, for purposes of illustration, a table that indicates the number of shares of Change Common Stock that you would receive per share of McKesson Common Stock, calculated on the basis described above and taking into account the upper limit, assuming a range of averages of the daily VWAP of McKesson Common Stock and Change Common Stock on the Valuation Dates, is provided under “The Exchange Offer—Terms of the Exchange Offer.”

 

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Q:

What if the shares of McKesson Common Stock or Change Common Stock do not trade on any of the Valuation Dates?

 

A:

If a market disruption event occurs with respect to the shares of McKesson Common Stock or Change Common Stock on any of the Valuation Dates, the calculated per-share value of McKesson Common Stock and SpinCo Common Stock will be determined using the daily VWAP of shares of McKesson Common Stock and shares of Change Common Stock on the preceding trading day or days, as the case may be, on which no market disruption event occurred with respect to both McKesson Common Stock and Change Common Stock. If a market disruption event occurs as specified above, McKesson may also terminate the exchange offer if, in its reasonable judgment, the market disruption event has impaired the benefits of the exchange offer. If McKesson decides to extend the exchange offer period following a market disruption event, the Valuation Dates will be reset, as with any extension of the exchange offer, to the period of three consecutive trading days ending on and including the second trading day preceding the expiration date of the exchange offer, as it may be extended. Therefore, the timing of such announcement will provide each holder of McKesson Common Stock with two full business days after knowing the final exchange ratio and whether the upper limit has been reached during which to decide whether to tender or withdraw their shares in the exchange offer. For specific information as to what would constitute a market disruption event, see “The Exchange Offer—Conditions for Consummation of the Distribution.”

 

Q:

Are there circumstances under which I would receive fewer shares of SpinCo Common Stock than I would have received if the exchange ratio were determined using the closing prices of McKesson Common Stock and Change Common Stock on the expiration date of the exchange offer?

 

A:

Yes. For example, if the trading price of McKesson Common Stock were to increase during the period of the Valuation Dates, the calculated per-share value of McKesson Common Stock would likely be lower than the closing price of McKesson Common Stock on the expiration date of the exchange offer. As a result, you may receive fewer shares of SpinCo Common Stock for each $100 of McKesson Common Stock than you would have if that per-share value were calculated on the basis of the closing price of McKesson Common Stock on the expiration date. Similarly, if the trading price of Change Common Stock were to decrease during the period of the Valuation Dates, the calculated per-share value of SpinCo Common Stock would likely be higher than the closing price of Change Common Stock on the expiration date. This could also result in your receiving fewer shares of SpinCo Common Stock for each $100 of McKesson Common Stock than you would otherwise receive if that per-share value were calculated on the basis of the closing price of Change Common Stock on the expiration date of the exchange offer. See “The Exchange Offer—Terms of the Exchange Offer.”

 

Q:

Will fractional shares of SpinCo Common Stock or Change Common Stock be distributed in the exchange offer or the Merger?

 

A:

No fractional shares will be issued in the Merger, as described in this document. See the section entitled “The Exchange Offer—Terms of the Exchange Offer—Final Exchange Ratio.” The exchange agent will hold shares of SpinCo Common Stock as agent for the holders of McKesson Common Stock who validly tendered and did not properly withdraw their shares in the exchange offer or are entitled to receive shares in the spin-off, if any. Immediately following the consummation of the exchange offer and the spin-off, if any, and by means of the Merger, each outstanding share of SpinCo Common Stock will be converted into one share of Change Common Stock. In the Merger, no fractional shares of Change Common Stock will be delivered to holders of SpinCo Common Stock. Any fractional shares that would otherwise be allocable to any former holders of SpinCo Common Stock in the Merger shall be aggregated, and no holder of SpinCo Common Stock shall receive cash equal to or greater than the value of one full share of Change Common Stock. The exchange agent and the transfer agent shall cause the whole shares obtained from aggregating fractional shares that would otherwise remain across all holders of SpinCo Common Stock to be sold in the open market or otherwise as reasonably directed by McKesson within 20 business days after the effective time of the Merger. The exchange agent and the transfer agent shall make available the net proceeds thereof, after deducting any required withholding taxes and brokerage charges, commissions and transfer taxes, on a

 

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pro rata basis, without interest, as soon as practicable to the holders of SpinCo Common Stock entitled to receive such cash in lieu of fractional shares.

 

Q:

What happens if not enough shares of McKesson Common Stock are tendered to allow McKesson to exchange all of the shares of SpinCo Common Stock it holds?

 

A:

In the event that the exchange offer is consummated but less than all shares of SpinCo Common Stock owned by McKesson are exchanged because the exchange offer is not fully subscribed or in the event the exchange offer is consummated but not all of the shares of SpinCo Common Stock held by McKesson are exchanged due to the upper limit being reached, the additional shares of SpinCo Common Stock owned by McKesson will be distributed on a pro rata basis in the spin-off to holders of McKesson Common Stock whose shares of McKesson Common Stock remain outstanding after consummation of the exchange offer, based on the relative number of shares of McKesson Common Stock held by such holders, excluding those shares of McKesson Common Stock that have been validly tendered and accepted for exchange. Any holder of McKesson Common Stock whose shares of McKesson Common Stock are validly tendered and accepted for exchange for shares of SpinCo Common Stock in the exchange offer will waive (and will cause any nominee of the holder to waive) their rights with respect to such validly tendered shares of McKesson Common Stock (but not with respect to any other shares that are not validly tendered or validly tendered and validly withdrawn in the exchange offer) to receive, and forfeit any rights to, shares of SpinCo Common Stock distributed in any spin-off following consummation of the exchange offer.

Upon consummation of the Distribution, McKesson will deliver to the exchange agent the global certificate(s) representing all of the shares of SpinCo Common Stock, with instructions to hold the shares of SpinCo Common Stock in trust for holders of shares of McKesson Common Stock who validly tendered and did not properly withdraw their shares in the exchange offer or are entitled to receive shares in the spin-off, if any. If there is a spin-off, the exchange agent will calculate the exact number of shares of SpinCo Common Stock not exchanged in the exchange offer and to be distributed on a pro rata basis in the spin-off to holders of McKesson Common Stock whose shares of McKesson Common Stock remain outstanding after consummation of the exchange offer, based on the relative number of shares of McKesson Common Stock held by such holders, excluding those shares of McKesson Common Stock that have been validly tendered and accepted for exchange. See “The Exchange Offer—Distribution of Any Shares of SpinCo Common Stock Remaining After the Exchange Offer.”

 

Q:

Will all shares of McKesson Common Stock that I tender be accepted in the exchange offer?

 

A:

Not necessarily. Depending on the number of shares of McKesson Common Stock validly tendered in the exchange offer and not properly withdrawn, and the calculated per-share values of McKesson Common Stock and SpinCo Common Stock determined as described above, McKesson may have to limit the number of shares of McKesson Common Stock that it accepts in the exchange offer through a proration process. Any proration of the number of shares accepted in the exchange offer will be determined on the basis of the proration mechanics described under “Summary—Terms of the Exchange Offer—Proration; Tenders for Exchange by Holders of Fewer than 100 Shares of McKesson Common Stock.”

Stockholders who directly or beneficially own fewer than 100 shares of McKesson Common Stock (“odd-lots”) and who validly tender all of their shares will not be subject to proration. If, however, you hold fewer than 100 shares of McKesson Common Stock, but do not tender all of your shares, you will be subject to proration to the same extent as holders of more than 100 shares if the exchange offer is oversubscribed. Direct or beneficial holders of 100 or more shares of McKesson Common Stock will be subject to proration. In addition, shares held on behalf of participants in McKesson’s retirement savings plan (each of which plans holds more than 100 shares of McKesson Common Stock) will be subject to proration.

Proration for each tendering stockholder subject to proration will be based on (i) the proportion that the total number of shares of McKesson Common Stock to be accepted, except for tenders of odd-lots, as described above, bears to the total number of shares of McKesson Common Stock validly tendered and not properly withdrawn, except for tenders of odd-lots, as described above, and (ii) the number of shares of McKesson

 

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Index to Financial Statements

Common Stock validly tendered and not properly withdrawn by that stockholder (and not on that stockholder’s aggregate ownership of shares of McKesson Common Stock). Any shares of McKesson Common Stock not accepted for exchange as a result of proration will be returned to tendering stockholders promptly after the final proration factor (as defined below) is determined.

McKesson will announce its preliminary determination, if any, of the extent to which tenders will be prorated by press release by 9:00 a.m., New York City time, on the business day immediately following the expiration of the exchange offer. This preliminary determination is referred to as the “preliminary proration factor.” McKesson will announce its final determination of the extent to which tenders will be prorated by press release promptly after this determination is made. This final determination is referred to as the “final proration factor.”

 

Q:

Will I be able to sell my shares of SpinCo Common Stock after the exchange offer and spin-off, if any, are completed?

 

A:

No. There is currently no trading market for shares of SpinCo Common Stock and no such trading market is expected to be established in the future. The SpinCo Common Stock will not be listed for trading on any exchange. In the Merger, each outstanding share of SpinCo Common Stock will automatically be converted into one share of Change Common Stock. See “The Exchange Offer—Terms of the Exchange Offer.”

 

Q:

How many shares of McKesson Common Stock will McKesson accept if the exchange offer is completed?

 

A:

The number of shares of McKesson Common Stock that will be accepted if the exchange offer is completed will depend on the final exchange ratio and the number of shares of McKesson Common Stock tendered. Prior to the consummation of the Distribution, McKesson will directly hold 175,995,192 shares of SpinCo Common Stock. McKesson will offer the 175,995,192 shares of SpinCo Common Stock in the exchange offer. The maximum number of shares of McKesson Common Stock that will be accepted if the exchange offer is completed will be equal to the number of shares of SpinCo Common Stock held by McKesson (i.e., 175,995,192) divided by the final exchange ratio (which will be subject to the upper limit). For example, assuming that the final exchange ratio is 11.4086 (the upper limit for shares of SpinCo Common Stock that could be exchanged for one share of McKesson Common Stock), then McKesson would accept up to 15,426,537 shares of McKesson Common Stock.

 

Q:

Are there any conditions to McKesson’s obligation to complete the exchange offer?

 

A:

Yes. The exchange offer is subject to various conditions listed under “The Exchange Offer—Conditions for Consummation of the Distribution.” If any of these conditions are not satisfied or waived prior to the expiration of the exchange offer, McKesson will not be required to accept shares for exchange and may extend or terminate the exchange offer, subject to the terms and conditions of the Separation Agreement. If the exchange offer is not consummated, McKesson will distribute all of its shares of SpinCo Common Stock in the spin-off to McKesson’s stockholders, provided that the conditions to the consummation of the Distribution are satisfied or waived.

Each of McKesson and Change may waive certain conditions precedent to the Distribution. For a description of the material conditions precedent to the Distribution, and those which may be waived by McKesson and Change, respectively, see “The Exchange Offer—Conditions for Consummation of the Distribution.”

 

Q:

When does the exchange offer expire?

 

A:

The period during which you are permitted to tender your shares of McKesson Common Stock in the exchange offer will expire at 11:59 p.m., New York City time, on March 9, 2020, unless McKesson extends the exchange offer. See “The Exchange Offer—Terms of the Exchange Offer—Extension, Termination or Amendment by McKesson.”

 

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Q:

Can the exchange offer be extended and under what circumstances?

 

A:

Yes. McKesson can, subject to the terms and conditions of the Separation Agreement and the Merger Agreement, extend the exchange offer, in its sole discretion, at any time and from time to time. For instance, the exchange offer may be extended if any of the conditions for consummation of the exchange offer listed under “The Exchange Offer—Conditions for Consummation of the Distribution” are not satisfied or waived prior to the expiration of the exchange offer. In case of an extension of the exchange offer, McKesson will publicly announce the extension at www.dfking.com/McKesson and separately by press release no later than 9:00 a.m., New York City time, on the next business day following the previously scheduled expiration date.

 

Q:

How do I decide whether to participate in the exchange offer?

 

A:

Whether you should participate in the exchange offer depends on many factors. You should carefully examine your specific financial position, plans and needs before you decide whether to participate, as well as the relative risks associated with an investment in Change and McKesson. In addition, you should consider all of the factors described in “Risk Factors.” None of McKesson, Change, the Joint Venture, SpinCo or any of their respective directors, officers, managers or any other person makes any recommendation as to whether you should tender all, some or none of your shares of McKesson Common Stock. You must make your own decision about participation in the exchange offer after carefully reading this document, and the documents incorporated by reference, and consulting with your advisors in light of your own particular circumstances. You are strongly encouraged to read this document in its entirety, including any documents referred to in this document, very carefully.

 

Q:

Will holders of McKesson stock options or restricted stock units have the opportunity to exchange their McKesson stock options or restricted stock units for SpinCo Common Stock in the exchange offer?

 

A:

No, neither holders of vested or unvested stock options nor holders of restricted stock units (including performance-based restricted stock units and time-based restricted stock units) can tender the shares of McKesson Common Stock underlying such awards in the exchange offer. However, holders of vested and unexercised McKesson stock options can exercise their vested stock options in accordance with the terms of the McKesson stock plans under which the options were issued (the “McKesson Stock Plans”) and tender the shares of McKesson Common Stock received upon exercise in the exchange offer. The exercise of a stock option covering McKesson Common Stock cannot be revoked for any reason, including if the exchange offer is terminated for any reason or if shares of McKesson Common Stock received upon exercise of a stock option that are tendered are not accepted for exchange in the exchange offer. Additionally, if you hold shares of McKesson Common Stock as a result of the vesting and settlement of restricted stock units, these shares can be tendered in the exchange offer.

If you are a holder of vested and unexercised McKesson stock options and wish to exercise such stock options and tender shares of McKesson Common Stock received upon exercise in the exchange offer, you should be certain to initiate such exercise generally no later than 4:00 p.m., New York City time, on the tenth trading day prior to the expiration of the exchange offer, so that the shares of McKesson Common Stock are received in your account in enough time to tender the shares in accordance with the instructions for tendering available from your broker or account administrator. In the event that you choose to exercise such stock options and tender shares of McKesson Common Stock received upon exercise in the exchange offer, you will be required to pay the exercise price and any applicable tax withholding amounts in cash.

There are tax consequences associated with the exercise of a stock option, and individual tax circumstances may vary. You are urged to consult the prospectus provided to you in connection with your participation in the McKesson Stock Plans, and to consult your own tax advisor regarding the consequences to you of exercising your stock options. You are also urged to read carefully the discussion in “The Exchange Offer—Material U.S. Federal Income Tax Consequences of the Distribution and the Merger” and to consult your own tax advisor regarding the consequences to you of the exchange offer.

 

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Index to Financial Statements
Q:

Will participants in the McKesson Corporation 2000 Employee Stock Purchase Plan (the “McKesson ESPP”) have rights to participate in the exchange offer with regard to any open offering period under that plan?

 

A:

No, participants in the McKesson ESPP will not have rights to participate in the exchange offer with regard to their participation in any offering period under the McKesson ESPP that is open at the time of the tender offer. Shares of McKesson Common Stock previously acquired under the McKesson ESPP can be tendered in the exchange offer.

There are tax consequences associated with the sale of shares acquired under an employee stock purchase plan such as the McKesson ESPP, and individual tax circumstances may vary. You are urged to consult the prospectus provided to you in connection with your participation in the McKesson ESPP. You are also urged to read carefully the discussion in “The Exchange Offer—Material U.S. Federal Income Tax Consequences of the Distribution and the Merger” and to consult your own tax advisor regarding the consequences to you of the exchange offer.

 

Q:

Will any shares of McKesson Common Stock allocated to accounts under the McKesson Corporation 401(k) Retirement Savings Plan (the “McKesson 401(k) Plan”) be tendered in response to the exchange offer?

 

A:

Participants in the McKesson 401(k) Plan will be able to instruct the plan trustee on whether to tender shares of McKesson Common Stock allocable to their respective accounts under that plan. Participants seeking to provide such instructions should follow the special directions that are being sent to them by the plan administrator. Such participants should not use the letter of transmittal to provide instructions regarding the tender of shares of McKesson Common Stock allocable to their accounts under this plan. As described in the special directions from the plan administrator, such participants may instruct the plan trustee to tender all, some or none of the shares of McKesson Common Stock allocable to their McKesson 401(k) Plan account, subject to certain limitations set forth in those directions.

Effective as of the consummation of the exchange offer, the McKesson 401(k) Plan will be amended to provide for a Change Common Stock fund as an investment alternative under that plan. This fund will hold the shares of Change Common Stock received with respect to the McKesson Common Stock held in the McKesson 401(k) Plan trust in the exchange offer or the spin-off only and will not be available for investment of new contributions or any incoming transfers of investments. Investments in the Change Common Stock fund will be eligible for liquidation and transfers to other investment alternatives under the plan. McKesson intends to remove the Change Common Stock fund from the McKesson 401(k) Plan at some future date. To the extent that participant accounts remain invested in the Change Common Stock fund at the time of such removal, these investments will be liquidated and the proceeds will be transferred to a qualified default investment alternative under the plan.

 

Q:

How do I participate in the exchange offer?

 

A:

The procedures you must follow to participate in the exchange offer will depend on whether you hold your shares of McKesson Common Stock through a bank or trust company or broker, as a participant in the McKesson 401(k) Plan, or if your shares of McKesson Common Stock are registered in your name in McKesson’s direct register of shares (the “DRS”). For specific instructions about how to participate, see “The Exchange Offer—Terms of the Exchange Offer—Procedures for Tendering.”

 

Q:

How do I tender my shares of McKesson Common Stock after the final exchange ratio has been determined?

 

A:

The final exchange ratio used to determine the number of shares that can be received for each share of McKesson Common Stock accepted in the exchange offer will be announced by press release and will also be available on the website www.dfking.com/McKesson, in each case by 11:59 p.m., New York City time, at the end of the second trading day (currently expected to be March 5, 2020) immediately preceding the

 

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expiration date of the exchange offer (currently expected to be March 9, 2020), unless the exchange offer is extended or terminated. The timing of such announcement will therefore provide each holder of McKesson Common Stock with two full business days after knowing the final exchange ratio during which to decide whether to tender or withdraw their shares in the exchange offer. If you wish to tender shares of McKesson Common Stock pursuant to the exchange offer but (i) the procedure for book-entry transfer cannot be completed on a timely basis or (ii) time will not permit all required documents to reach the exchange agent on or before the expiration date of the exchange offer, you may still tender your shares of McKesson Common Stock by complying with the guaranteed delivery procedures described in the section entitled “The Exchange Offer—Terms of the Exchange Offer—Procedures for Tendering—Guaranteed Delivery Procedures.” If you hold shares of McKesson Common Stock through a broker, dealer, commercial bank, trust company or similar institution, that institution must tender your shares on your behalf.

If your shares of McKesson Common Stock are held through an institution and you wish to tender your McKesson Common Stock after The Depository Trust Company has closed, the institution must deliver a notice of guaranteed delivery to the exchange agent via facsimile prior to 11:59 p.m., New York City time, on the expiration date.

 

Q:

Can I tender only a portion of my shares of McKesson Common Stock in the exchange offer?

 

A:

Yes. You may tender all, some or none of your shares of McKesson Common Stock. If you tender only a portion of your shares of McKesson Common Stock, or elect not to tender any of your shares, you will still be eligible to receive your pro rata distribution of shares in the spin-off, if any, with respect to the shares of McKesson Common Stock that you do not tender (and any shares of McKesson Common Stock that you own). There is no minimum number of shares that must be tendered by a holder of McKesson Common Stock in order to participate in the exchange offer.

 

Q:

What do I do if I want to retain all of my shares of McKesson Common Stock?

 

A:

If you want to retain all of your shares of McKesson Common Stock, you do not need to take any action. However, after the Transactions, SpinCo will no longer be owned by McKesson, and McKesson will no longer hold an interest in the Joint Venture (directly or indirectly) and, as a holder of McKesson Common Stock, you will no longer hold shares in a company that owns SpinCo or has an interest in the Joint Venture unless you receive shares of SpinCo Common Stock in the spin-off, if any, which shares will be immediately thereafter converted into an equal number of shares of Change Common Stock in the Merger.

 

Q:

Can I change my mind after I tender my shares of McKesson Common Stock?

 

A:

Yes. You may withdraw your tendered shares at any time before the expiration date of the exchange offer. See “The Exchange Offer—Terms of the Exchange Offer—Withdrawal Rights.” In addition, shares of McKesson Common Stock tendered pursuant to the exchange offer may be withdrawn after April 6, 2020 (i.e., after the expiration of 40 business days from the commencement of the exchange offer), if McKesson does not accept your shares of McKesson Common Stock pursuant to the exchange offer by such date. If you change your mind again, you can re-tender your shares of McKesson Common Stock by following the tender procedures again prior to the expiration date of the exchange offer.

 

Q:

Will I be able to withdraw the shares of McKesson Common Stock that I tender after the final exchange ratio has been determined?

 

A:

Yes. The final exchange ratio used to determine the number of shares of SpinCo Common Stock that you will receive for each share of McKesson Common Stock accepted in the exchange offer will be announced by press release and be available on the website www.dfking.com/McKesson, in each case by 11:59 p.m., New York City time, at the end of the second trading day (currently expected to be March 5, 2020) immediately preceding the expiration date of the exchange offer (currently expected to be March 9, 2020), unless the exchange offer is extended or terminated. McKesson will also announce at that time whether the upper limit on the number of

 

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shares of SpinCo Common Stock that can be received for each share of McKesson Common Stock tendered has been reached. The timing of such announcement will therefore provide each holder of McKesson Common Stock with two full business days after knowing the final exchange ratio and whether the upper limit has been reached during which to decide whether to tender or withdraw their shares in the exchange offer. Subject to any extension or termination, you have the right to withdraw shares of McKesson Common Stock you have tendered at any time before 11:59 p.m., New York City time, on the expiration date, which is currently expected to be March 9, 2020. In addition, shares of McKesson Common Stock tendered pursuant to the exchange offer may be withdrawn after April 6, 2020 (i.e., after the expiration of 40 business days from the commencement of the exchange offer), if McKesson does not accept your shares of McKesson Common Stock pursuant to the exchange offer by such date. See “The Exchange Offer—Terms of the Exchange Offer.”

 

Q:

How do I withdraw my tendered McKesson Common Stock, including after the final exchange ratio has been determined?

 

A:

If you are a registered stockholder of McKesson Common Stock holding shares through the DRS and you wish to withdraw your shares after the final exchange ratio has been determined, then you must deliver a written notice of withdrawal or a facsimile transmission notice of withdrawal to the exchange agent prior to 11:59 p.m., New York City time, on the expiration date. In addition, shares of McKesson Common Stock tendered pursuant to the exchange offer may be withdrawn after April 6, 2020 (i.e., after the expiration of 40 business days from the commencement of the exchange offer), if McKesson does not accept your shares of McKesson Common Stock pursuant to the exchange offer by such date. The information that must be included in that notice is specified under “The Exchange Offer—Terms of the Exchange Offer—Withdrawal Rights.”

If you hold your shares through a broker, dealer, commercial bank, trust company or similar institution, you should consult that institution on the procedures you must comply with and the time by which such procedures must be completed in order for that institution to provide a written notice of withdrawal or facsimile notice of withdrawal to the exchange agent on your behalf before 11:59 p.m., New York City time, on the expiration date. If you hold your shares through such an institution, that institution must deliver the notice of withdrawal with respect to any shares you wish to withdraw. In such a case, as a beneficial owner and not a registered stockholder, you will not be able to provide a notice of withdrawal for such shares directly to the exchange agent. In addition, shares of McKesson Common Stock tendered pursuant to the exchange offer may be withdrawn after April 6, 2020 (i.e., after the expiration of 40 business days from the commencement of the exchange offer), if McKesson does not accept your shares of McKesson Common Stock pursuant to the exchange offer by such date.

If you hold shares of McKesson Common Stock through a broker, dealer, commercial bank, trust company or similar institution, any notice of withdrawal must be delivered by that institution, on your behalf, to the Depository Trust Company and not the Exchange Agent. The Depository Trust Company is expected to remain open until 6:00 p.m., New York City time on the expiration date, and we expect institutions will be able to process withdrawals through The Depository Trust Company up to that time (although there is no assurance that will be the case). On the last day of the Exchange Offer, beneficial owners who cannot contact the institution through which they hold their shares will not be able to withdraw their shares. In addition, shares of McKesson Common Stock tendered pursuant to the exchange offer may be withdrawn after April 6, 2020 (i.e., after the expiration of 40 business days from the commencement of the exchange offer), if McKesson does not accept your shares of McKesson Common Stock pursuant to the exchange offer by such date. See “The Exchange Offer—Terms of the Exchange Offer—Withdrawal Rights.”

 

Q:

Will I be subject to U.S. federal income tax on the shares of SpinCo Common Stock that I receive in the Distribution and the Merger or on the shares of Change Common Stock that I receive in the Merger?

 

A:

Stockholders of McKesson generally will not recognize any gain or loss for U.S. federal income tax purposes as a result of the Distribution or the Merger, except for any gain or loss attributable to the receipt of cash in lieu of fractional shares, if any, of Change Common Stock received in the Merger.

 

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The material U.S. federal income tax consequences of the Distribution and the Merger are described in more detail under “The Exchange Offer—Material U.S. Federal Income Tax Consequences of the Distribution and the Merger.”

 

Q:

Are there any material differences between the rights of holders of McKesson Common Stock and Change Common Stock?

 

A:

Yes. Change and McKesson are subject to different organizational documents. Holders of McKesson Common Stock, whose rights are currently governed by McKesson’s organizational documents and Delaware law, will, with respect to the shares validly tendered and exchanged immediately following the exchange offer, become stockholders of Change, and their rights will be governed by Change’s organizational documents and Delaware law. The differences between the rights associated with McKesson Common Stock and Change Common Stock that may affect holders of McKesson Common Stock whose shares are accepted for exchange in the exchange offer and who will obtain shares of Change Common Stock in the Merger, relate to, among other things, the appointment and removal of directors, stockholder actions by written consent, the forums in which certain types of stockholder actions may be brought and amendment of the bylaws. For a further discussion of the differences between the rights of holders of McKesson Common Stock and Change Common Stock, see “Comparison of Rights of Holders of McKesson Common Stock and Change Common Stock.”

 

Q:

Are there any appraisal rights for holders of shares of McKesson Common Stock in connection with the Transactions?

 

A:

There are no appraisal rights available to holders of shares of McKesson Common Stock in connection with the Transactions.

 

Q:

What will McKesson do with the shares of McKesson Common Stock that are tendered, and what is the impact of the exchange offer on McKesson’s share count?

 

A:

The shares of McKesson Common Stock that are tendered in the exchange offer will be held as treasury stock by McKesson. Any shares of McKesson Common Stock acquired by McKesson in the exchange offer will reduce the total number of shares of McKesson Common Stock outstanding, although McKesson’s actual number of shares outstanding on a given date reflects a variety of factors such as option exercises and release of shares upon vesting of restricted stock units.

 

Q:

Whom do I contact for additional information regarding the exchange offer?

 

A:

You may ask any questions about the exchange offer or request copies of the exchange offer documents and the other information incorporated by reference in this document, including copies of this document and the letter of transmittal (including the instructions thereto), from McKesson, without charge, upon written or oral request to the information agent, D.F King & Co., Inc. at 48 Wall Street, New York, NY 10005 or by calling (866) 304-5477 (toll-free for all stockholders in the United States) or (212) 269-5550 (outside the United States).

Questions and Answers About the Transactions

 

Q:

What are the key steps of the Transactions?

 

A:

Below is a summary of the key steps of the Transactions. A step-by-step description of material events relating to the Transactions is set forth under “The Transactions.”

 

   

McKesson and its subsidiaries will complete the Internal Reorganization such that, among other things, (i) prior to the effectiveness of the registration statement of which this document forms a part, PF2 SpinCo LLC was, on December 27, 2019, reorganized into a Delaware corporation named PF2 SpinCo, Inc. and (ii) prior to the consummation of the exchange offer, McKesson will contribute, directly or

 

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indirectly, all of the LLC Units it directly or indirectly holds in the Joint Venture to SpinCo. The form of the Internal Reorganization will be determined in light of all relevant factors, including tax considerations. Prior to the Distribution, McKesson will own 175,995,192 shares of SpinCo Common Stock, which will constitute all of the issued and outstanding stock of SpinCo.

 

   

McKesson will offer to holders of McKesson Common Stock the right to exchange all or a portion of their shares of McKesson Common Stock for shares of SpinCo Common Stock in the exchange offer. If the exchange offer is consummated but is not fully subscribed (or if the exchange offer is consummated but not all of the shares of SpinCo Common Stock held by McKesson are exchanged due to the upper limit being reached), McKesson will distribute the remaining outstanding shares of SpinCo Common Stock held by McKesson on a pro rata basis in the spin-off to holders of McKesson Common Stock whose shares remain outstanding after consummation of the exchange offer, based on the relative number of shares of McKesson Common Stock held by such holders, excluding those shares of McKesson Common Stock that have been validly tendered and accepted for exchange. Any holder of McKesson Common Stock whose shares of McKesson Common Stock are validly tendered and accepted for exchange for shares of SpinCo Common Stock in the exchange offer will waive (and will cause any nominee of the holder to waive) their rights with respect to such validly tendered shares of McKesson Common Stock (but not with respect to any other shares that are not validly tendered or validly tendered and validly withdrawn in the exchange offer) to receive, and forfeit any rights to, shares of SpinCo Common Stock distributed in any spin-off following consummation of the exchange offer. If there is a pro rata distribution, the exchange agent will calculate the exact number of shares of SpinCo Common Stock not exchanged in the exchange offer and to be distributed on a pro rata basis, and the number of shares of Change Common Stock into which the remaining shares of SpinCo Common Stock will be converted in the Merger will be transferred to holders of SpinCo Common Stock (after giving effect to the consummation of the Distribution) as promptly as practicable thereafter.

 

   

Immediately after the Distribution, SpinCo will merge with and into Change, whereby the separate corporate existence of SpinCo will cease and Change will continue as the surviving company. In the Merger, each outstanding share of SpinCo Common Stock will be automatically converted into one share of Change Common Stock, as described in the section entitled “The Merger Agreement—Merger Consideration.”

 

Q:

What are the material U.S. federal income tax consequences to Change and holders of Change Common Stock resulting from the Distribution and the Merger?

 

A:

Change will not recognize any gain or loss for U.S. federal income tax purposes as a result of the Merger. Because holders of Change Common Stock will not participate in the Distribution or receive any consideration in the Merger, holders of Change Common Stock will not recognize gain or loss upon either the Distribution (including the exchange offer) or the Merger. The material U.S. federal income tax consequences of the Distribution and the Merger are described in more detail in “The Exchange Offer —Material U.S. Federal Income Tax Consequences of the Distribution and the Merger.”

 

Q:

What will holders of Change Common Stock receive in the Merger?

 

A:

Change stockholders will not directly receive any consideration in the Merger. All shares of Change Common Stock issued and outstanding immediately before the Merger will remain issued and outstanding after consummation of the Merger. Immediately after the Merger, holders of Change Common Stock will continue to own shares in Change, which will include SpinCo, and Change will own all of the outstanding LLC Units in the Joint Venture. Immediately after consummation of the Merger, approximately 51% of the outstanding shares of Change Common Stock are expected to be held by pre-Merger holders of McKesson Common Stock and approximately 49% of the outstanding shares of Change Common Stock are expected to be held by pre-Merger holders of Change Common Stock, in each case on a fully diluted basis in the aggregate, including Change employees who hold outstanding equity awards issued pursuant to Change’s

 

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equity incentive plans and investors who hold Change’s purchase contracts (and assuming the maximum number of shares of Change Common Stock issuable upon automatic settlement of such purchase contracts, and excluding any shares of Change Common Stock that a pre-Merger holder of McKesson Common Stock may have held, or vice-versa).

 

Q:

What are the possible effects on the value of Change Common Stock to be received by holders of McKesson Common Stock who participate in the exchange offer?

 

A:

Holders of McKesson Common Stock that participate in the exchange offer will be exchanging their shares of McKesson Common Stock for shares of SpinCo Common Stock at a 7.0% discount per-share value of Change Common Stock, based on a simple arithmetic average of daily VWAPs over the three Valuation Dates. McKesson determined the discount for holders of McKesson Common Stock with the objective of creating an economic incentive to encourage such holders to participate in the exchange offer. During the exchange offer, the existence of this discount could negatively affect the market price of Change Common Stock. See “The Exchange Offer—Terms of the Exchange Offer—General.” Prospective buyers of Change Common Stock could choose to acquire shares of Change Common Stock indirectly by purchasing shares of McKesson Common Stock and then tender such shares in the exchange offer. Additionally, certain market participants may use a hedging strategy to manage risk in the context of split-off transactions that involves shorting Change Common Stock. Both occurrences, or either individually, could result in a decrease in the price of Change Common Stock. See “Risk Factors—Risks Related to the Transactions—Arbitrage trading during the exchange offer could adversely impact the price of Change Common Stock.” However, because the Pricing Mechanism determines the final exchange ratio using VWAPs over the three Valuation Dates, any negative effect on the market price of Change Common Stock prior to the Valuation Dates resulting from these strategies would be offset by a higher exchange ratio, thereby reducing the impact on holders of McKesson Common Stock participating in the exchange offer. See “The Exchange Offer—Terms of the Exchange Offer—Pricing Mechanism.”

 

Q:

Are there any conditions to the consummation of the Transactions?

 

A:

Yes. Consummation of the Transactions is subject to a number of conditions, including:

 

   

The following events shall not have occurred at or prior to the date of the Distribution, and McKesson shall not reasonably expect any of the following events to occur at or prior to the date of the Distribution:

 

   

any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the-counter market in the United States;

 

   

a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States;

 

   

a commencement of a war (whether declared or undeclared), armed hostilities or other national or international calamity, including an act of terrorism, directly or indirectly involving the United States, which would reasonably be expected to affect materially and adversely, or to delay materially, the completion of the exchange offer;

 

   

if any of the situations described in the immediately preceding three bullet points exists, as of the date of the commencement of the exchange offer, the situation deteriorates materially;

 

   

a decline of at least 15% in the closing level of either the Dow Jones U.S. Healthcare Index or the Standard & Poor’s 500 Index from the closing level established as of the close of trading on the trading day immediately prior to the commencement of the exchange offer;

 

   

a material adverse change in the business, prospects, condition (financial or other), results of operations or stock price of the Joint Venture or Change;

 

   

a material adverse change in the business, prospects, condition (financial or other), results of operations or stock price of McKesson; and

 

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a market disruption event occurs with respect to McKesson Common Stock or Change Common Stock and such market disruption event has, in McKesson’s reasonable judgment, impaired the benefits of the exchange offer.

 

   

the board of directors of McKesson shall be satisfied that the Distribution can be made out of surplus within the meaning of Section 170 of the Delaware General Corporation Law (the “DGCL”) and shall have received a solvency opinion in form and substance satisfactory to the board of directors of McKesson to that effect;

 

   

McKesson shall have completed the Completing Transfer (if applicable);

 

   

an applicable registration statement or form as determined by McKesson in its sole discretion or as otherwise required by the SEC for commencement of the exchange offer, and consummating the Distribution shall have been filed with the SEC and declared effective, if applicable, by the SEC; no stop order suspending the effectiveness of such filing shall be in effect and no proceedings for such purpose shall be pending before or threatened by the SEC and such registration statement or form, as the case may be, shall have been mailed to holders of McKesson Common Stock (and the holders of Change Common Stock, if applicable), as of the applicable record date;

 

   

all actions and filings necessary or appropriate under applicable federal, state or foreign securities or “blue sky” laws and the rules and regulations thereunder shall have been taken and, where applicable, become effective or been accepted;

 

   

each of the Ancillary Agreements shall have been duly executed and delivered by the parties thereto;

 

   

no applicable law shall have been adopted, promulgated or issued that prohibits the consummation of the Distribution, the Merger or the other transactions contemplated by the Separation Agreement;

 

   

all material governmental approvals and consents and all material permits, registrations and consents from third parties, in each case, necessary to effect the Distribution and the Merger and to permit the operation of the business conducted by the Joint Venture after the date of the Distribution substantially as it is conducted at the date of the Separation Agreement shall have been obtained; and

 

   

the Merger Agreement shall have been entered into by the parties thereto and shall be in full force and effect, and all conditions and obligations of the parties to the Merger Agreement to consummate the Merger and to effect the other transactions contemplated by the Merger Agreement (other than the filing of the certificate of merger with the Secretary of State of the State of Delaware in connection with the Merger), including the receipt of the McKesson Tax Opinions by McKesson and the receipt of the Change Tax Opinion by Change, shall have been satisfied or waived, such that the Merger is consummated immediately following the Distribution. In addition, the consummation of the Merger is subject to a number of conditions. See “The Merger Agreement—Conditions to the Merger.”

McKesson may waive any of the above conditions in its sole discretion. Change may waive any of the conditions listed in the third through ninth bullet point above in its sole discretion. See “The Exchange Offer—Conditions for Consummation of the Distribution.”

 

Q:

When will the Transactions be completed?

 

A:

McKesson, SpinCo and Change expect to complete the Transactions in the fiscal quarter ending March 31, 2020. However, it is possible that the Transactions could be completed at a later time or not at all. For a discussion of the conditions to the Transactions, see “The Merger Agreement—Conditions to the Merger.”

 

Q:

Are there risks associated with the Transactions?

 

A:

Yes. The material risks associated with the Transactions are discussed in the section entitled “Risk Factors.” Those risks include the risk that sales of Change Common Stock may negatively affect that security’s market price, the risk that the historical financial information of SpinCo and the Joint Venture may not be a

 

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reliable indicator of their future results, the risk that Change’s business may be adversely affected by the Transactions and the risk that the Merger Agreement may be terminated and the exchange offer may not be consummated.

 

Q:

What stockholder approvals are needed in connection with the Transactions?

 

A:

Upon the expiration of the underwriter lock-up period in connection with Change’s initial public offering, which expiration occurred on December 23, 2019, subject to the terms and conditions provided in the LLC Agreement, McKesson has the right, at its election, to initiate and complete a Qualified McKesson Exit from the Joint Venture. The Transactions are structured as a Qualified McKesson Exit. Prior to the execution of the Merger Agreement, on December 20, 2016, McKesson, which was the sole member of PF2 SpinCo LLC and is the sole stockholder of SpinCo, approved the Merger Agreement. Prior to the execution of the Separation Agreement, on February 10, 2020, McKesson approved the Transactions on behalf of itself and its subsidiaries, including the Merger, the exchange offer and the spin-off.

Change’s board of directors approved the Merger and the Merger Agreement prior to the execution of the Merger Agreement on December 20, 2016. On January 17, 2017, the stockholders of Change approved the Merger, the Merger Agreement and the transactions contemplated thereby. In addition, in connection with the closing of the Joint Venture Transactions, the Legacy CHC Stockholders who held, as of July 1, 2019 (the date of Change’s initial public offering), 60% of the issued and outstanding Change Common Stock, have entered into a voting agreement with McKesson which requires them to vote in favor of the Merger at any meeting of Change’s stockholders.

Accordingly, the stockholder approval conditions precedent to the Merger and the Distribution have already been obtained, and SpinCo does not expect any additional approvals of the equityholders of McKesson, Change or the Joint Venture to be required in connection with the Transactions.

 

Q:

Where will the Change Common Stock shares to be issued in the Merger be listed?

 

A:

Change Common Stock is listed on Nasdaq under the symbol “CHNG.” After the consummation of the Transactions, all shares of Change Common Stock issued in the Merger, and all other outstanding shares of Change Common Stock, will continue to be listed on Nasdaq.

 

Q:

Where can I find out more information about McKesson, Change and the Joint Venture?

 

A:

You can find out more information about McKesson, Change and the Joint Venture by reading this document and from various sources described in “Where You Can Find More Information; Incorporation by Reference.”

 

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SUMMARY

The following summary contains certain information described in more detail elsewhere in this document. It does not contain all the details concerning the Transactions, including information that may be important to you. To better understand the Transactions, you should carefully review this entire document and the documents it refers to. See “Where You Can Find More Information; Incorporation by Reference.”

The Companies

McKesson Corporation

McKesson Corporation

6555 State Hwy 161

Irving, TX 75039

Telephone: (972) 446-4800

McKesson Corporation, currently ranked 7th on the Fortune 500, is a global leader in healthcare supply chain management solutions, retail pharmacy, healthcare technology, community oncology and specialty care. McKesson partners with life sciences companies, manufacturers, providers, pharmacies, governments and other healthcare organizations to help provide the right medicines, medical products and healthcare services to the right patients at the right time, safely and cost-effectively. McKesson Common Stock is publicly traded on the NYSE under the symbol MCK. McKesson’s corporate headquarters is located in Irving, Texas. As of December 31, 2019, McKesson, through its subsidiaries, held 58% of the issued and outstanding LLC Units in the Joint Venture.

PF2 SpinCo, Inc.

PF2 SpinCo, Inc.

c/o McKesson Corporation

6555 State Hwy 161

Irving, TX 75039

Telephone: (972) 446-4800

PF2 SpinCo, Inc. a Delaware corporation referred to in this document as SpinCo, is a direct, wholly-owned subsidiary of McKesson that was formed in connection with the Joint Venture Transactions and does not own any material assets or have any material liabilities or operations other than through its interest in the Joint Venture. McKesson and its subsidiaries intend to complete the Internal Reorganization such that, among other things, (i) prior to the effectiveness of the registration statement of which this document forms a part, PF2 SpinCo LLC was, on December 27, 2019, reorganized into a Delaware corporation and (ii) prior to the consummation of the exchange offer, McKesson will contribute, directly or indirectly, all of the LLC Units it directly or indirectly holds in the Joint Venture to SpinCo. The form of the Internal Reorganization will be determined in light of all relevant factors, including tax considerations. PF2 SpinCo LLC was formed in Delaware on August 22, 2016 under the name PF2 SpinCo LLC.

Change Healthcare Inc.

Change Healthcare Inc.

3055 Lebanon Pike, Suite 1000

Nashville, Tennessee 37214

Telephone: (615) 932-3000



 

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Change Healthcare Inc. (formerly HCIT Holdings, Inc.) is a holding company that was formed in connection with the establishment of 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. Change completed its initial public offering on July 1, 2019, and Change Common Stock is publicly traded on Nasdaq under the symbol CHNG. Change’s corporate headquarters is located in leased office space in Nashville, Tennessee, and consists of approximately 178,000 square feet. The lease expires on October 31, 2022. As of December 31, 2019, Change held 42% of the issued and outstanding LLC Units in the Joint Venture. Change Healthcare Inc. was incorporated in Delaware on June 22, 2016 under the name HCIT Holdings, Inc. On October 26, 2018, HCIT Holdings, Inc. changed its name to Change Healthcare Inc.

Change Healthcare LLC

Change Healthcare LLC

3055 Lebanon Pike, Suite 1000

Nashville, Tennessee 37214

Telephone: (615) 932-3000

Change Healthcare LLC—the Joint Venture—is an 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. It offers a suite of software, analytics, technology-enabled services and network solutions that drive improved results in the complex workflows of healthcare system payers and providers. Change Healthcare LLC’s solutions are designed to improve clinical decision-making, simplify billing, collection and payment processes and enable a better patient experience. Change Healthcare LLC was organized as a joint venture between McKesson and Change on March 1, 2017, whereby the majority of McKesson’s Technology Solutions segment and substantially all of Change Healthcare Performance, Inc.’s legacy business were contributed pursuant to the Contribution Agreement.

The Transactions

In June 2016, the Legacy CHC Stockholders entered into 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, combining the Core MTS business with Legacy CHC’s business, including substantially all of the assets and operations of Legacy CHC, but excluding the eRx Network. The Joint Venture Transactions closed on March 1, 2017. From the time of its formation in June 2016 until the consummation of the Joint Venture 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 Joint Venture 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 (A) approximately $1.8 billion, (B) stock in eRx Network, and (C) the 2017 Tax Receivable Agreement and (b) the issuance to Change of LLC Units 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 Joint Venture Transactions by the Joint Venture to McKesson of a promissory note in the amount of approximately $1.3 billion, (b) the issuance of LLC Units in the Joint Venture and (c) the McKesson Tax Receivable Agreement.

Pursuant to the Joint Venture’s LLC Agreement, upon the expiration of the underwriter lock-up period in connection with Change’s initial public offering, which expiration occurred on December 23, 2019, subject to



 

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the terms and conditions provided in the LLC Agreement, McKesson has the right, at its election, to initiate and complete a Qualified McKesson Exit from the Joint Venture. In connection with a Qualified McKesson Exit, McKesson would contribute the equity interests 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 and then would either distribute stock of that subsidiary to the stockholders of McKesson as a dividend in a spin-off, commence one or more exchange offers pursuant to which McKesson would exchange stock of that subsidiary for stock of McKesson held by the stockholders of McKesson or consummate one or more exchanges of stock of that subsidiary for debt securities of McKesson (or a combination of the foregoing). Immediately thereafter, that subsidiary would merge with and into Change, pursuant to which the stockholders of that subsidiary would be entitled to receive a number of shares of Change Common Stock equal to the number of LLC Units held by that subsidiary at the effective time of the Merger.

In connection with the consummation of the Joint Venture Transactions, and in furtherance of a potential Qualified McKesson Exit, McKesson, SpinCo and Change entered into the Merger Agreement on December 20, 2016. McKesson and Change also negotiated the form of Separation Agreement and the other Ancillary Agreements, and entered into or agreed to enter into such agreements in connection with the Joint Venture Transactions and/or a Qualified McKesson Exit. The Ancillary Agreements include a form of Tax Matters Agreement, which would govern the rights, responsibilities and obligations of McKesson and SpinCo after a 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.

Change completed its initial public offering on July 1, 2019. On February 10, 2020, McKesson, SpinCo and Change finalized and entered into the Separation Agreement and the Tax Matters Agreement. The Merger Agreement, together with the Separation Agreement, provides for the combination of SpinCo and Change through the Merger, following which Change will own 100% of the outstanding LLC Units in the Joint Venture.

In connection with the Transactions, McKesson and its subsidiaries will complete the Internal Reorganization such that, among other things, (i) prior to the effectiveness of the registration statement of which this document forms a part, PF2 SpinCo LLC was, on December 27, 2019, reorganized into a Delaware corporation named PF2 SpinCo, Inc. and (ii) prior to the consummation of the exchange offer, McKesson will contribute, directly or indirectly, all of the LLC Units it directly or indirectly holds in the Joint Venture to SpinCo. The form of the Internal Reorganization will be determined in light of all relevant factors, including tax considerations.

Following the consummation of the Internal Reorganization, McKesson will consummate an offer to exchange all of the outstanding shares of SpinCo Common Stock for outstanding shares of McKesson Common Stock. McKesson anticipates that the final exchange ratio will be set by the Pricing Mechanism such that the exchange offer will be fully- or over-subscribed by holders of McKesson Common Stock, although there can be no assurance that this will be the case. Subject to the terms and conditions of the Merger Agreement and the Separation Agreement, in the event that holders of McKesson Common Stock subscribe for less than all of the outstanding shares of SpinCo Common Stock held by McKesson in the exchange offer (or if the exchange offer is consummated but not all of the shares of SpinCo Common Stock held by McKesson are exchanged due to the upper limit being reached), McKesson will distribute the remaining outstanding shares of SpinCo Common Stock held by McKesson on a pro rata basis to holders of McKesson Common Stock whose shares of McKesson Common Stock remain outstanding after consummation of the exchange offer in the spin-off, which, together with the exchange offer, is referred to in this document as the Distribution.

Immediately after the consummation of the Distribution, SpinCo will merge with and into Change, whereby the separate corporate existence of SpinCo will cease and Change will continue as the surviving company and as



 

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the owner of 100% of the LLC Units in the Joint Venture. In the Merger, each outstanding share of SpinCo Common Stock will be converted into one share of Change Common Stock, as described in the section entitled “The Merger Agreement—Merger Consideration.” Immediately after the Merger:

 

   

Approximately 51% of the outstanding shares of Change Common Stock are expected to be held by pre-Merger holders of McKesson Common Stock and approximately 49% of the outstanding shares of Change Common Stock are expected to be held by pre-Merger holders of Change Common Stock, in each case on a fully diluted basis in the aggregate, including Change employees who hold outstanding equity awards issued pursuant to Change’s equity incentive plans and investors who hold Change’s purchase contracts (and assuming the maximum number of shares of Change Common Stock issuable upon automatic settlement of such purchase contracts, and excluding any shares of Change Common Stock that a pre-Merger holder of McKesson Common Stock may have held, or vice-versa); and

 

   

Change will become the holder of 100% of the LLC Units in the Joint Venture.

Change will issue 175,995,192 shares of Change Common Stock in the Merger. After the Merger, Change will wholly own and operate Change Healthcare LLC. Change Common Stock issued in the Merger will be listed on Nasdaq under the current trading symbol for Change Common Stock, “CHNG.”

Below is a step-by-step description of the sequence of material events relating to the Transactions.

Step 1 SpinCo Reorganization

At the time of the signing of the Merger Agreement on December 20, 2016, McKesson directly owned 100% of the outstanding capital stock of MCK IPCo and indirectly owned 100% of the outstanding capital stock of PF2 PST Services Inc. through McKesson’s direct ownership of 100% of the outstanding capital stock of PF2 McKesson Technologies Inc., a Delaware corporation. In addition, McKesson directly owned 100% of the limited liability company interests of PF2 SpinCo LLC. Prior to the Internal Reorganization, the McKesson Members together directly held all of McKesson’s LLC Units in the Joint Venture.

Pursuant to the Internal Reorganization, among other things, (i) prior to the effectiveness of the registration statement of which this document forms a part, PF2 SpinCo LLC was, on December 27, 2019, reorganized into a Delaware corporation and (ii) prior to the split-off described below, McKesson will contribute, directly or indirectly, all of the LLC Units it directly or indirectly holds in the Joint Venture to SpinCo. As a result of the Internal Reorganization, as of immediately prior to the effective time of the Distribution, 175,995,192 shares of SpinCo Common Stock will be issued and outstanding, all of which will be owned directly by McKesson, and SpinCo will indirectly own all of McKesson’s LLC Units in the Joint Venture.

Step 2 Distribution—Exchange Offer and Possible Spin-Off

McKesson will offer to holders of McKesson Common Stock the right to exchange all or a portion of their shares of McKesson Common Stock for shares of SpinCo Common Stock in the exchange offer. If the exchange offer is consummated but is not fully subscribed, McKesson will distribute its remaining shares of SpinCo Common Stock on a pro rata basis to holders of McKesson Common Stock whose shares remain outstanding after consummation of the exchange offer in the spin-off, which will be conducted subject to the terms of the Separation Agreement and the Merger Agreement. Any holder of McKesson Common Stock whose shares of McKesson Common Stock are validly tendered and accepted for exchange for shares of SpinCo Common Stock in the exchange offer will waive (and will cause any nominee of the holder to waive) their rights with respect to such validly tendered shares to receive, and forfeit any rights to, shares of SpinCo Common Stock distributed on a pro rata basis in any spin-off following consummation of the exchange offer. If there is a pro rata distribution, the exchange agent will calculate the exact number of shares of SpinCo Common Stock not exchanged in the



 

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exchange offer and to be distributed on a pro rata basis in any spin-off, and the number of shares of Change Common Stock into which the remaining shares of SpinCo Common Stock will be converted in the Merger will be transferred to holders of McKesson Common Stock (after giving effect to the consummation of the exchange offer) as promptly as practicable thereafter.

The exchange agent will hold, for the account of the relevant holders of McKesson Common Stock, the global certificate(s) representing all of the outstanding shares of SpinCo Common Stock, pending the consummation of the Merger. Shares of SpinCo Common Stock will not be able to be traded during this period.

Step 3 Merger

Immediately after the Distribution, and on the closing date of the Merger, SpinCo will merge with and into Change, whereby the separate corporate existence of SpinCo will cease and Change will continue as the surviving company and as the owner of 100% of the LLC Units in the Joint Venture. In the Merger, each outstanding share of SpinCo Common Stock will be converted into one share of Change Common Stock, as described in the section entitled “The Merger Agreement—Merger Consideration.”

Immediately after consummation of the Merger, approximately 51% of the outstanding shares of Change Common Stock are expected to be held by pre-Merger holders of McKesson Common Stock, and approximately 49% of the outstanding shares of Change Common Stock are expected to be held by pre-Merger holders of Change Common Stock, in each case on a fully diluted basis in the aggregate, including Change employees who hold outstanding equity awards issued pursuant to Change’s equity incentive plans and investors who hold Change’s purchase contracts (and assuming the maximum number of shares of Change Common Stock issuable upon automatic settlement of such purchase contracts, and excluding any shares of Change Common Stock that a pre-Merger holder of McKesson Common Stock may have held, or vice-versa).

The following diagrams describe the simplified organizational structure of SpinCo, Change and the Joint Venture: (i) as they existed prior to the Internal Reorganization, (ii) as they would exist following the Internal Reorganization and the Distribution but prior to the consummation of the Merger and (iii) as they would exist immediately following consummation of the Transactions.

 

LOGO    LOGO


 

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LOGO

In connection with the Joint Venture Transactions and the Transactions, McKesson, SpinCo, Change and the Joint Venture, or their applicable subsidiaries, have entered into or will enter into the Ancillary Agreements, which relate to, among other things, certain tax matters. See “Other Agreements and Other Related Party Transactions.”

Under the LLC Agreement, McKesson has the right to conduct and consummate a Qualified McKesson Exit during the McKesson Exit Window, which McKesson expects to be the 12-month period (subject to certain extensions) beginning on December 23, 2019, the expiration date of the underwriter lock-up period applicable to Change’s initial public offering. If a Qualified McKesson Exit does not occur during the McKesson Exit Window, the Transactions would be terminated. See “Other Agreements and Other Related Party Transactions—LLC Agreement of Change Healthcare LLC—Transfers of LLC Units.”

McKesson’s Reasons for the Transactions

In reaching its decision to approve the Joint Venture Transactions and the Transactions, including the Merger Agreement and the Separation Agreement, McKesson considered a number of factors, including but not limited to the following. See “The Transactions—Background of the Transactions.”

 

   

McKesson’s knowledge of the businesses, financial conditions, results of operations, industries and competitive environments of each of McKesson, the Joint Venture, Legacy CHC and Change;

 

   

that the Transactions would allow McKesson and its stockholders to participate in the potential benefits and synergies of the combined businesses of Core MTS and Legacy CHC;

 

   

that in connection with the Joint Venture Transactions, McKesson would receive (i) an approximate 70% interest in the combined businesses of Core MTS and Legacy CHC through its LLC Units in the Joint Venture, (ii) the McK Note Payment in the approximate amount of $1.25 billion and (iii) the McKesson Tax Receivable Agreement;

 

   

McKesson’s expectation that, upon completion of the Transactions, former holders of McKesson Common Stock will receive 175,995,192 shares of Change Common Stock, or approximately 51% of all outstanding shares of Change Common Stock, on a fully diluted basis in the aggregate;

 

   

McKesson’s belief, following McKesson’s evaluation of strategic options for the Core MTS business and McKesson’s investment in the Joint Venture, that the Transactions could provide more value to McKesson and McKesson’s stockholders than other potential strategic options for the Core MTS business and McKesson’s investment in the Joint Venture, respectively;



 

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McKesson’s belief that the distribution of the shares of SpinCo Common Stock that it holds to McKesson stockholders, by way of an exchange offer rather than a pro rata spin-off, is a tax-efficient way, to both McKesson and its stockholders, to divest its interest in the Joint Venture, and McKesson’s belief that the exchange offer is an efficient way to allow holders of McKesson Common Stock to own an interest in a post-Merger Change that includes the entire business of the Joint Venture; and

 

   

other reasons, including those set forth in the section entitled “The Transactions—McKesson’s Reasons for the Transactions.”

The Sponsors’ and Change’s Reasons for the Transactions

In evaluating the Transactions, including the Joint Venture Transactions, and the Ancillary Agreements, including the Merger Agreement and the Separation Agreement, the Sponsors and the Change board of directors consulted with Legacy CHC’s management and legal and financial advisors and carefully considered a number of factors, including, but not limited to, the following significant factors:

 

   

that the Transactions would allow the Sponsors and Change to participate in the potential benefits and synergies of the combined businesses of Core MTS and Legacy CHC;

 

   

the Sponsors’ belief, following the Sponsors’ exploration of strategic options for Legacy CHC, that the Transactions could provide more value to the Sponsors and their investors than other potential strategic options for Legacy CHC;

 

   

that in connection with the Joint Venture Transactions, the Sponsors would receive (i) an approximate 30% interest in the combined businesses of Core MTS and Legacy CHC through the LLC Units to be held by Change in the Joint Venture, (ii) the Legacy CHC Cash Payment in the approximate amount of $1.75 billion and (iii) the stock in eRx Network following its separation from Legacy CHC; and

 

   

other reasons, including those set forth in the section entitled “The Transactions—The Sponsors’ and Change’s Reasons for the Transactions.”

Number of Shares of SpinCo Common Stock to Be Distributed to Holders of McKesson Common Stock

McKesson is offering to exchange all issued and outstanding shares of SpinCo Common Stock for shares of McKesson Common Stock validly tendered and not properly withdrawn, at an exchange ratio to be calculated in the manner described below. SpinCo will authorize the issuance of a number of shares of SpinCo Common Stock such that there will be 175,995,192 shares of SpinCo Common Stock outstanding immediately prior to the effective time of the Merger. Prior to the effective time of the Merger, McKesson will consummate the Internal Reorganization, following which SpinCo will be a Delaware corporation holding all of the LLC Units in the Joint Venture currently held directly or indirectly by McKesson.

Terms of the Exchange Offer

McKesson is offering holders of shares of McKesson Common Stock the opportunity to exchange their shares for shares of SpinCo Common Stock. Holders of McKesson Common Stock may tender all, some or none of their shares of McKesson Common Stock. This document and related documents are being sent to persons who directly held shares of McKesson Common Stock on the record date and brokers, banks and similar persons whose names or the names of whose nominees appear on McKesson’s stockholder list or, if applicable, who are listed as participants in a clearing agency’s security position listing for subsequent transmittal to beneficial owners of McKesson Common Stock.

McKesson Common Stock validly tendered and not properly withdrawn will be accepted for exchange at the exchange ratio determined as described under “The Exchange Offer—Terms of the Exchange Offer,” on the



 

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terms and conditions of the exchange offer and subject to the limitations described below, including the proration provisions. McKesson will promptly return any shares of McKesson Common Stock that are not accepted for exchange following the expiration of the exchange offer and the determination of the final proration factor, if any, described below.

For the purposes of illustration, the table below indicates the number of shares of SpinCo Common Stock that you would receive per share of McKesson Common Stock you validly tender, calculated on the basis described under “The Exchange Offer—Terms of the Exchange Offer” and taking into account the upper limit, assuming a range of averages of the daily VWAP of McKesson Common Stock and Change Common Stock on the Valuation Dates. The first row of the table below shows the indicative calculated per-share values of McKesson Common Stock and SpinCo Common Stock and the indicative exchange ratio that would have been in effect following the official close of trading on the NYSE and Nasdaq on February 7, 2020 (the last trading day before the commencement of the exchange offer), based on the daily VWAPs of McKesson Common Stock and Change Common Stock on February 5, 2020, February 6, 2020 and February 7, 2020. The table also shows the effects of a 10% increase or decrease in either or both the calculated per-share values of McKesson Common Stock and SpinCo Common Stock based on changes relative to the values as of February 7, 2020.

 

McKesson
Common Stock

  

Change
Common Stock

   Calculated
per-share
value
of McKesson
Common
Stock(a)
    Calculated
per-share
value
of SpinCo
Common
Stock(a)
    Shares of SpinCo
Common Stock
per share of
McKesson
Common Stock
tendered
    Calculated
Value
Ratio(b)
    Shares of
Change
Common Stock
per McKesson
Common Stock
tendered
 

As of February 7, 2020

  

As of February 7, 2020

   $ 156.0365     $ 16.3216       10.2797       1.0753       10.2797  

(1) Down 10%

  

Up 10%

   $ 140.4329     $ 17.9538       8.4106       1.0753       8.4106  

(2) Down 10%

  

Unchanged

   $ 140.4329     $ 16.3216       9.2517       1.0753       9.2517  

(3) Down 10%

  

Down 10%

   $ 140.4329     $ 14.6894       10.2797       1.0753       10.2797  

(4) Unchanged

  

Up 10%

   $ 156.0365     $ 17.9538       9.3452       1.0753       9.3452  

(5) Unchanged

  

Down 10%(c)

   $ 156.0365     $ 14.6894       11.4086       1.0740       11.4086  

(6) Up 10%

  

Up 10%

   $ 171.6402     $ 17.9538       10.2797       1.0753       10.2797  

(7) Up 10%

  

Unchanged

   $ 171.6402     $ 16.3216       11.3077       1.0753       11.3077  

(8) Up 10%

  

Down 10%(c)

   $ 171.6402     $ 14.6894       11.4086       0.9764       11.4086  

 

(a)

The calculated per-share value of a share of McKesson Common Stock for purposes of the exchange offer will equal the simple arithmetic average of the daily VWAP of McKesson Common Stock on the NYSE on each of the Valuation Dates. The calculated per-share value of a share of SpinCo Common Stock for purposes of the exchange offer will equal the simple arithmetic average of the daily VWAP of Change Common Stock on Nasdaq on each of the Valuation Dates.

(b)

The Calculated Value Ratio equals (i) the calculated per-share value of SpinCo Common Stock multiplied by the exchange ratio, divided by (ii) the calculated per-share value of McKesson Common Stock.

(c)

In these scenarios, the upper limit has been reached. Absent the upper limit, the exchange ratio would have been 11.4219 and 12.5641 shares of SpinCo Common Stock per share of McKesson Common Stock tendered in the exchange offer in scenario 5 and scenario 8, respectively. In these scenarios, McKesson would announce that the upper limit on the number of shares that can be received for each share of McKesson Common Stock tendered has been reached when McKesson announces the final exchange ratio by 11:59 p.m., New York City time, at the end of the second trading day prior to the expiration date of the exchange offer.

During the three-month period of November 7, 2019 through February 7, 2020 (the three-month period prior to commencement of the exchange offer), the highest closing price of McKesson Common Stock on the NYSE was $158.32 and the lowest closing price of Change Common Stock on Nasdaq was $12.75. If the calculated per-share values of McKesson Common Stock and SpinCo Common Stock equaled these closing prices, you would have received only the upper limit of 11.4086 shares of SpinCo Common Stock for each share of McKesson Common Stock tendered, and the value of such shares of SpinCo Common Stock, based on the Change Common Stock price, would have been approximately $91.88 of SpinCo Common Stock for each $100 of McKesson Common Stock accepted for exchange.



 

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During the exchange offer, the daily VWAP will be as reported by Bloomberg L.P. as displayed under the heading Bloomberg VWAP on the Bloomberg pages “MCK UN<Equity>AQR” with respect to McKesson Common Stock and “CHNG UQ<Equity>AQR” with respect to Change Common Stock (or any other recognized quotation source selected by McKesson in its sole discretion if such pages are not available or are manifestly erroneous). The daily VWAP of McKesson Common Stock and Change Common Stock calculated by McKesson based on data provided by Bloomberg L.P. may be different from other sources of volume-weighted average prices or investors’ or security holders’ own calculations of volume-weighted average prices. McKesson will determine such calculations of the per-share values of McKesson Common Stock and SpinCo Common Stock, and such determinations will be final.

Termination; Extension

The exchange offer, and your withdrawal rights, will expire at 11:59 p.m., New York City time, on March 9, 2020, unless the exchange offer is extended. The exchange offer will be open for at least 20 full business days. In addition, shares of McKesson Common Stock tendered pursuant to the exchange offer may be withdrawn after April 6, 2020 (i.e., after the expiration of 40 business days from the commencement of the exchange offer), if McKesson does not accept your shares of McKesson Common Stock pursuant to the exchange offer by such date. You must tender your shares of McKesson Common Stock prior to this time if you want to participate in the exchange offer. McKesson may extend or terminate the exchange offer as described in this document. If McKesson decides to extend the exchange offer, the Valuation Dates will be reset to the period of three consecutive trading days ending on and including the second trading day preceding the expiration date of the exchange offer, as it may be extended.

Conditions for Consummation of the Distribution

McKesson’s obligation to exchange shares of SpinCo Common Stock for shares of McKesson Common Stock is subject to the conditions listed under “The Exchange Offer—Conditions for Consummation of the Distribution.”

The consummation of the Distribution is subject to a number of conditions that are outside the control of McKesson and Change, including:

 

   

the following events shall not have occurred at or prior to the date of the Distribution, and McKesson shall not reasonably expect any of the following events to occur at or prior to the date of the Distribution:

 

   

any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the-counter market in the United States;

 

   

a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States;

 

   

a commencement of a war (whether declared or undeclared), armed hostilities or other national or international calamity, including an act of terrorism, directly or indirectly involving the United States, which would reasonably be expected to affect materially and adversely, or to delay materially, the completion of the exchange offer;

 

   

if any of the situations described in the immediately preceding three bullet points exists, as of the date of the commencement of the exchange offer, the situation deteriorates materially;

 

   

a decline of at least 15% in the closing level of either the Dow Jones U.S. Healthcare Index or the Standard & Poor’s 500 Index from the closing level established as of the close of trading on the trading day immediately prior to the commencement of the exchange offer;

 

   

a material adverse change in the business, prospects, condition (financial or other), results of operations or stock price of the Joint Venture or Change;



 

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a material adverse change in the business, prospects, condition (financial or other), results of operations or stock price of McKesson; and

 

   

a market disruption event occurs with respect to McKesson Common Stock or Change Common Stock and such market disruption event has, in McKesson’s reasonable judgment, impaired the benefits of the exchange offer.

 

   

the board of directors of McKesson shall be satisfied that the Distribution can be made out of surplus within the meaning of Section 170 of the DGCL and shall have received a solvency opinion in form and substance satisfactory to the board of directors of McKesson;

 

   

McKesson shall have completed the Completing Transfer (if applicable);

 

   

an applicable registration statement or form as determined by McKesson in its sole discretion or as otherwise required by the SEC for commencement of the exchange offer, and consummating the Distribution shall have been filed with the SEC and declared effective, if applicable, by the SEC; no stop order suspending the effectiveness of such filing shall be in effect and no proceedings for such purpose shall be pending before or threatened by the SEC and such registration statement or form, as the case may be, shall have been mailed to holders of McKesson Common Stock (and the holders of Change Common Stock, if applicable), as of any applicable record date or as otherwise required by law;

 

   

all actions and filings necessary or appropriate under applicable federal, state or foreign securities or “blue sky” laws and the rules and regulations thereunder shall have been taken and, where applicable, become effective or been accepted;

 

   

each of the Ancillary Agreements shall have been duly executed and delivered by the parties thereto;

 

   

no applicable law shall have been adopted, promulgated or issued that prohibits the consummation of the Distribution, the Merger or the other transactions contemplated by the Separation Agreement;

 

   

all material governmental approvals and consents and all material permits, registrations and consents from third parties, in each case, necessary to effect the Distribution and the Merger and to permit the operation of the business conducted by the Joint Venture after the date of the Distribution substantially as it is conducted at the date of the Separation Agreement shall have been obtained; and

 

   

the Merger Agreement shall have been entered into by the parties thereto and shall be in full force and effect, and all conditions and obligations of the parties to the Merger Agreement to consummate the Merger and to effect the other transactions contemplated by the Merger Agreement (other than the filing of the Certificate of merger with the Secretary of State of the State of Delaware in connection with the Merger), including the receipt of the McKesson Tax Opinions by McKesson and the receipt of the Change Tax Opinion by Change, shall have been satisfied or waived, such that the Merger is consummated immediately following the Distribution.

McKesson may waive any of the above conditions in its sole discretion. Change may waive any of the conditions listed in the third through ninth bullet point above in its sole discretion. For a description of the material conditions precedent to the Merger, see “The Merger Agreement—Conditions to the Merger.”

Proration; Tenders for Exchange by Holders of Fewer than 100 Shares of McKesson Common Stock

If, upon the expiration of the exchange offer, holders of McKesson Common Stock have validly tendered more shares of McKesson Common Stock than McKesson is able to accept for exchange (taking into account the exchange ratio and the total number of shares of SpinCo Common Stock owned by McKesson), McKesson will accept for exchange the shares of McKesson Common Stock validly tendered and not properly withdrawn by



 

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each tendering stockholder on a pro rata basis, based on the proportion that the total number of shares of McKesson Common Stock to be accepted, except for tenders of odd-lots, as described below, bears to the total number of shares of McKesson Common Stock validly tendered and not properly withdrawn (rounded to the nearest whole number of shares of McKesson Common Stock, and subject to any adjustment necessary to ensure the exchange of all shares of SpinCo Common Stock owned by McKesson), except for tenders of odd-lots, as described below.

If applicable, the final proration factor will be announced at www.dfking.com/McKesson and separately by press release promptly after the expiration date. Upon determining the number of shares of McKesson Common Stock validly tendered for exchange and not properly withdrawn, McKesson will announce the final results of the exchange offer, including the final proration factor, if any.

Beneficial holders (other than plan participants in the McKesson 401(k) Plan) of odd-lots who validly tender all of their shares will not be subject to proration if the exchange offer is oversubscribed and if McKesson completes the exchange offer (those who own fewer than 100 shares but do not tender all of their shares will be subject to proration). In addition, shares held on behalf of participants in the McKesson 401(k) Plan (which holds more than 100 shares of McKesson Common Stock) will be subject to proration.

Fractional Shares

Immediately following the consummation of the Distribution, SpinCo will be merged with and into Change, whereby the separate corporate existence of SpinCo will cease and Change will continue as the surviving company. Each outstanding share of SpinCo Common Stock will be converted into one share of Change Common Stock in the Merger. No fractional shares of Change Common Stock will be delivered to holders of SpinCo Common Stock in the Merger.

Any fractional shares of Change Common Stock that would otherwise be allocable to any former holders of SpinCo Common Stock in the Merger shall be aggregated, and no holder of SpinCo Common Stock shall receive cash equal to or greater than the value of one full share of Change Common Stock. The exchange agent and the transfer agent shall cause the whole shares obtained from aggregating fractional shares that would otherwise remain across all holders of SpinCo Common Stock to be sold in the open market or otherwise as reasonably directed by McKesson within 20 business days after the effective time of the Merger. The exchange agent and the transfer agent shall make available the net proceeds thereof, after deducting any required withholding taxes and brokerage charges, commissions and transfer taxes, on a pro rata basis, without interest, as soon as practicable to the holders of SpinCo Common Stock entitled to receive such cash in lieu of fractional shares.

Procedures for Tendering

For you to validly tender your shares of McKesson Common Stock pursuant to the exchange offer, prior to the expiration of the exchange offer:

 

   

If you hold certificates representing shares of McKesson Common Stock, or if your shares of McKesson Common Stock are held in book-entry through the DRS, you must deliver to the exchange agent at the address listed on the letter of transmittal a properly completed and duly executed letter of transmittal, along with any required signature guarantees and any other required documents and, if you hold certificates, certificates representing the shares of McKesson Common Stock tendered.

 

   

If you hold shares of McKesson Common Stock through a broker, you should receive instructions from your broker on how to participate in the exchange offer. In this situation, do not complete a letter of transmittal to tender your shares of McKesson Common Stock. Please contact your broker directly if you have not yet received instructions. Some financial institutions may also effect tenders by book-entry transfer through The Depository Trust Company.



 

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Participants in the McKesson 401(k) Plan should follow the special directions that are being sent to them by the plan administrator in order to instruct the plan trustee on whether to tender shares of McKesson Common Stock allocable to their accounts. Such participants should not use the letter of transmittal to provide directions regarding the tender of shares of McKesson Common Stock allocable to their accounts under this plan. As described in the special directions, such participants may instruct the plan trustee to tender all, some or none of the shares of McKesson Common Stock allocable to their respective McKesson 401(k) Plan accounts, subject to certain limitations set forth in such directions. To allow sufficient time for the tender of shares by the trustee of the McKesson 401(k) Plan, plan participants must provide the tabulator for the trustee with the requisite instructions by 4:00 p.m., New York City time, on March 3, 2020, unless the exchange offer is extended. If the exchange offer is extended, and if administratively feasible, the deadline for receipt of participants’ instructions may also be extended.

Delivery of Shares of SpinCo Common Stock

Upon consummation of the Distribution, McKesson will deliver to the exchange agent the global certificate(s) representing all of the shares of SpinCo Common Stock, with irrevocable instructions to hold the shares of SpinCo Common Stock in trust for the holders of McKesson Common Stock who validly tendered and did not properly withdraw their shares in the exchange offer or are entitled to receive shares in the spin-off, if any. Change will deposit with the transfer agent for the benefit of persons who received shares of SpinCo Common Stock in the exchange offer book-entry authorizations representing shares of Change Common Stock, with irrevocable instructions to hold the shares of Change Common Stock in trust for the holders of SpinCo Common Stock. Shares of Change Common Stock will be delivered immediately following the expiration of the exchange offer, the acceptance of McKesson Common Stock for exchange, the determination of the final proration factor, if any, and the effectiveness of the Merger, pursuant to the procedures determined by the exchange agent and the transfer agent. See “The Exchange Offer—Terms of the Exchange Offer—Exchange of Shares of McKesson Common Stock.”

Withdrawal Rights

You may withdraw your tendered shares of McKesson Common Stock at any time prior to the expiration of the exchange offer by following the procedures described herein. In addition, shares of McKesson Common Stock tendered pursuant to the exchange offer may be withdrawn after April 6, 2020 (i.e., after the expiration of 40 business days from the commencement of the exchange offer), if McKesson does not accept your shares of McKesson Common Stock pursuant to the exchange offer by such date. If you change your mind again, you may re-tender your shares of McKesson Common Stock by again following the exchange offer procedures prior to the expiration of the exchange offer.

When Distributed and When Issued Markets

McKesson will announce the preliminary proration factor, if applicable, by press release promptly after the expiration of the exchange offer. At the expiration of the guaranteed delivery period (two trading days following the expiration of the exchange offer), McKesson will confirm the final results of the exchange offer, including the final proration factor, if applicable, with the exchange agent. Promptly after the final results are confirmed, McKesson will issue a press release announcing the final results of the exchange offer, including the final proration factor, if applicable.

In the event proration is necessary, McKesson expects that the NYSE will create a “when distributed” market for the shares of McKesson Common Stock not accepted for exchange in the exchange offer if the NYSE determines that the creation of such a market would be useful to allow investors to facilitate transactions in those



 

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shares. McKesson expects that the “when distributed” market would be created promptly following McKesson’s announcement of the preliminary proration factor. In the “when distributed” market, McKesson expects that holders of McKesson Common Stock whose shares are not accepted for exchange in the exchange offer will be able to sell their rights to receive shares of McKesson Common Stock when those shares are returned by McKesson as described above. McKesson expects that such selling stockholders will, however, retain voting and dividend rights with respect to shares sold in the “when distributed” market accruing to stockholders of record as of any record date occurring prior to the date those shares are returned. Purchasers of shares of McKesson Common Stock in the “when distributed” market are expected to acquire the right to receive the shares of McKesson Common Stock when those shares are returned by McKesson as described above but will not acquire voting or dividend rights with respect to those shares until those shares are received by the record holder and credited to the account of the purchaser. McKesson expects that after the shares of McKesson Common Stock not accepted for exchange in the exchange offer are returned, “when distributed” trading with respect to shares of McKesson Common Stock will end.

In addition, Change expects that Nasdaq will create a “when issued” market for the new shares of Change Common Stock issuable to holders of McKesson Common Stock whose shares of McKesson Common Stock are accepted for exchange in the exchange offer promptly following McKesson’s announcement of the preliminary proration factor, if applicable. Change expects that in the “when issued” market, holders of McKesson Common Stock whose shares are accepted for exchange in the exchange offer will be able to sell their rights to receive shares of Change Common Stock when those shares are issued and delivered by the transfer agent. Purchasers of shares of Change Common Stock in the “when issued” market are expected to acquire the right to receive shares of Change Common Stock when those shares are issued and delivered by the transfer agent. These rights are not actual shares of Change Common Stock and do not entitle holders to voting or dividend rights with respect to shares of Change Common Stock. After the shares of Change Common Stock issuable to holders of McKesson Common Stock are issued and delivered, Change expects that “when issued” trading with respect to shares of Change Common Stock will end.

Any trades made in the “when distributed” and “when issued” markets will be made contingent on the actual return of shares of McKesson Common Stock or issuance and delivery of shares of Change Common Stock, as the case may be. The creation of a “when distributed” or “when issued” market is outside the control of McKesson and Change. Neither the NYSE nor Nasdaq is required to create a “when distributed” or “when issued” market, and there can be no assurances that either such market will develop or if they develop the prices at which shares will trade.

No Appraisal or Dissenters’ Rights

None of the stockholders or members of Change, McKesson or SpinCo will be entitled to exercise appraisal rights or to demand payment for their shares in connection with the Transactions.

Distribution of Any Shares of SpinCo Common Stock Remaining After the Exchange Offer

All outstanding shares of SpinCo Common Stock owned by McKesson that are not exchanged in the exchange offer will be distributed on a pro rata basis in the spin-off to holders of McKesson Common Stock whose shares of McKesson Common Stock remain outstanding after consummation of the exchange offer, based on the relative number of shares of McKesson Common Stock held by such holders, excluding those shares of McKesson Common Stock that have been validly tendered and accepted for exchange, with a record date that will be no later than the date of the Merger, to be announced by McKesson on such date. Any holder of McKesson Common Stock whose shares are validly tendered and accepted for exchange of McKesson Common Stock for shares of SpinCo Common Stock in the exchange offer will waive (and will cause any nominee of the holder to waive) their rights with respect to such validly tendered shares of McKesson Common Stock (but not



 

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with respect to any other shares that are not validly tendered or validly tendered and validly withdrawn in the exchange offer) to receive, and forfeit any rights to, shares of SpinCo Common Stock distributed on a pro rata basis in any spin-off following consummation of the exchange offer.

If the exchange offer is consummated, the exchange agent will calculate the exact number of shares of SpinCo Common Stock not exchanged in the exchange offer to be distributed on a pro rata basis, and that number of shares of SpinCo Common Stock will be held in trust for holders of McKesson Common Stock entitled thereto. If the exchange offer is terminated by McKesson without the exchange of shares and the Merger Agreement is not concurrently terminated, but the conditions for consummation of the Distribution have otherwise been satisfied, McKesson intends to distribute all shares of SpinCo Common Stock owned by McKesson on a pro rata basis to the holders of McKesson Common Stock, with a record date to be announced by McKesson that will be no later than the date of the Merger.

Legal Limitations; Certain Matters Relating to Non-U.S. Jurisdictions

This document is not an offer to buy, sell or exchange, and it is not a solicitation of an offer to buy or sell any shares of McKesson Common Stock, SpinCo Common Stock or Change Common Stock in any jurisdiction in which the offer, sale or exchange is not permitted. Countries outside the United States generally have their own legal requirements that govern securities offerings made to persons resident in those countries and often impose stringent requirements about the form and content of offers made to the general public. None of McKesson, Change or SpinCo have taken any action under non-U.S. regulations to facilitate a public offer to exchange the shares of McKesson Common Stock, SpinCo Common Stock or Change Common Stock outside the United States. Accordingly, the ability of any non-U.S. person to tender shares of McKesson Common Stock in the exchange offer will depend on whether there is an exemption available under the laws of such person’s home country that would permit the person to participate in the exchange offer without the need for McKesson, Change or SpinCo to take any action to facilitate a public offering in that country or otherwise. For example, some countries exempt transactions from the rules governing public offerings if they involve persons who meet certain eligibility requirements relating to their status as sophisticated or professional investors.

Non-U.S. stockholders should consult their advisors in considering whether they may participate in the exchange offer in accordance with the laws of their home countries and, if they do participate, whether there are any restrictions or limitations on transactions in the shares of McKesson Common Stock, SpinCo Common Stock or Change Common Stock that may apply in their home countries. None of McKesson, Change or SpinCo can provide any assurance about whether such limitations may exist. No public offer to sell, purchase or exchange any securities is made to stockholders and investors in the European Union, the other countries of the European Economic Area (EEA) and the United Kingdom (each a “Relevant State”). Within a Relevant State, only qualified investors as defined in Article 2 (e) of the Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 may participate in the exchange offer in reliance on the private placement exemption as provided by Article 1 (4) (a) of the Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017. See “The Exchange Offer—Legal Limitations; Certain Matters Relating to Non-U.S. Jurisdictions” for additional information about limitations on the exchange offer outside the United States.

Risk Factors

In deciding whether to tender your shares of McKesson Common Stock in the exchange offer, you should carefully consider the matters described in the section entitled “Risk Factors,” as well as other information included in this document and the other documents to which you have been referred.



 

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Board of Directors and Management of Change Following the Transactions

Following the consummation of the Distribution, SpinCo will merge with and into Change, whereby the separate corporate existence of SpinCo will cease and Change will continue as the surviving company and the holder of 100% of the LLC Units in the Joint Venture. SpinCo is a holding company that was formed as a wholly-owned subsidiary of McKesson in connection with the Joint Venture and related transactions and does not own any material assets or have any material liabilities or operations other than through its interest in the Joint Venture.

The following table sets forth the names and positions of the anticipated directors and executive officers of Change at the time of the Transactions:

 

Name

  

Position

Neil E. de Crescenzo

  

President and Chief Executive Officer, Director

Fredrik Eliasson

  

Executive Vice President and Chief Financial Officer

Loretta A. Cecil

  

Executive Vice President, General Counsel

Kriten Joshi

  

Executive Vice President, and President, Network Solutions

Thomas Laur

   Executive Vice President, and President, Technology Enabled Services

Roderick H. O’Reilly

  

Executive Vice President, and President, Software and Analytics

August Calhoun

  

Executive Vice President, and President, Sales and Operations

W. Thomas McEnery

  

Executive Vice President and Chief Marketing Officer

Linda K. Whitley-Taylor

  

Executive Vice President and Chief People Officer

Nicholas L. Kuhar

  

Director

Howard L. Lance

  

Director

Diana L. McKenzie

  

Director

Philip M. Pead

  

Director

Phillip W. Roe

  

Director

Neil P. Simpkins

  

Director

Robert J. Zollars

  

Director

At the time of the Transactions, Howard L. Lance is anticipated to serve as non-executive chairman of the Change board of directors.

In connection with the Joint Venture Transactions, Change entered into a stockholders agreement with certain affiliates of the Sponsors, McKesson and the Joint Venture. This agreement grants Blackstone the right to designate nominees to Change’s board of directors subject to the maintenance of certain ownership requirements in Change. Change presently anticipates that at the first annual meeting of its stockholders, its nominees for director will include at least two individuals designated by Blackstone in accordance with the stockholders agreement—Mr. Nicholas L. Kuhar and Mr. Neil P. Simpkins, who are each employees of Blackstone and currently directors of Change. See “Other Agreements and Other Related Party Transactions—Stockholders Agreement.”

Additionally, the LLC Agreement grants each of the McKesson Members and Change the right to designate directors to the Joint Venture’s board of directors subject to the maintenance of certain ownership requirements in the LLC Units in the Joint Venture. See “Other Agreements and Other Related Party Transactions—LLC Agreement of Change Healthcare LLC.” Upon the consummation of the Transactions, McKesson and its subsidiaries would no longer have the right to designate directors to the Joint Venture’s board of directors. In addition, as McKesson will no longer be a member of the Joint Venture following the Transactions, McKesson will no longer have a right to consent to major operating, investing and financial activities.



 

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No Additional Stockholder Approval

Prior to the execution of the Merger Agreement, on December 20, 2016, McKesson, which was the sole member of PF2 SpinCo LLC and is the sole stockholder of SpinCo, approved the Merger Agreement. Prior to the execution of the Separation Agreement, on February 10, 2020, McKesson approved the Transactions on behalf of itself and its subsidiaries, including the Merger, the exchange offer and the spin-off.

Change’s board of directors approved the Merger and the related Merger Agreement described herein prior to the execution of the Merger Agreement on December 20, 2016. On January 17, 2017, the stockholders of Change approved the Merger, the Merger Agreement and the transactions contemplated thereby. In addition, in connection with the closing of the Joint Venture Transactions, the Legacy CHC Stockholders who held, as of July 1, 2019 (the date of Change’s initial public offering), 60% of the issued and outstanding Change Common Stock, have entered into a voting agreement with McKesson which requires them to vote in favor of the Merger at any meeting of Change’s stockholders.

Accordingly, the stockholder approval conditions precedent to the Merger and the Distribution have already been satisfied, and SpinCo does not expect any additional approvals of the equityholders of McKesson, Change or the Joint Venture to be required in connection with the Transactions.

Sponsor “Lock-Up” Following the Transactions

The LLC Agreement provides that, for a period of 90 days following consummation of the Transactions, the Sponsors and the other Legacy CHC Stockholders are not permitted to sell, transfer, pledge, assign, create an encumbrance or otherwise dispose of any direct or indirect economic, voting or other rights in or to an LLC Unit or other equity security of the Joint Venture, directly or indirectly (whether by merger, operation of law or otherwise), including by means of a transfer of shares of Change Common Stock, other than to affiliates.

Accounting Treatment and Considerations

Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 805, Business Combinations, requires the use of the acquisition method of accounting for business combinations. In applying the acquisition method, it is first necessary to identify the accounting acquiror. In a business combination effected through an exchange of equity interests, such as the Merger, the entity that issues the equity interests is generally the accounting acquiror. In this case Change is issuing the equity interests and will be the ongoing registrant of the combined entity. In identifying the accounting acquiror in a combination effected through an exchange of equity interests, however, all pertinent facts and circumstances must be considered. Based on an evaluation of all facts and circumstances, management has determined that Change is the accounting acquiror in the Merger. This is based primarily on the considerations outlined below and a detailed analysis of the relevant generally accepted accounting principles in the United States (“GAAP”) guidance.

 

   

The relative voting interests after the Transactions and the existence of a large minority voting interest in the combined entity if no other owner or organized group of owners has a significant voting interest. Holders of McKesson Common Stock participating in the split-off (and the spin-off, if any) are expected to receive approximately 51% of the outstanding shares of Change Common Stock on a fully diluted basis in the aggregate, including Change employees who held Change stock-based compensation rights and investors who hold Change’s purchase contracts (and assuming the maximum number of shares of Change Common Stock issuable upon automatic settlement of such purchase contracts). However, this voting interest is expected to be widely dispersed, whereas, based on their holdings as of December 31, 2019, Change’s Sponsors are expected to have a large minority voting interest in the combined entity of approximately 25%. This is an indicator that Change is the accounting acquiror.



 

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The composition of the governing body of Change after the Transactions. Current members of Change’s board of directors are anticipated to comprise at least a majority of the Change board of directors immediately following consummation of the Merger. Holders of shares of Change Common Stock are entitled to one vote for each share held of record on all matters on which stockholders are entitled to vote generally, including the election or removal of directors, subject to Blackstone’s right to nominate a majority of the total number of directors comprising Change’s board of directors minus one director following the Transactions in accordance with Change’s stockholders agreement. The composition of the governing body of Change after the Transactions, as described above, is an indicator that Change is the accounting acquiror.

 

   

The composition of the senior management of Change after the Transactions. The executive officers of Change immediately following the consummation of the Merger will consist of the executive officers of Change as of immediately prior to the Merger. All executive officers of Change will report directly to the Chief Executive Officer of Change. The Chief Executive Officer of Change will be responsible for all day-to-day operations and collaboration on, and implementation of, strategy. The Chief Financial Officer of Change will be responsible for integration of Change and SpinCo, including synergy realization, and serving as the principal external spokesperson for Change with analysts, investors, media and clients. McKesson will not have any formal or informal appointment, consent or approval rights with respect to the composition of the post-merger officers of Change. The composition of the senior management of Change after the Transactions, as described above, is an indicator that Change is the accounting acquiror.

Additionally, management considered the relative size of the combining entities. Although SpinCo has a larger economic interest in the Joint Venture than Change, management has concluded that the factors above outweigh the relative size of the combining entities and indicate that Change will be the accounting acquirer in the Merger.

Material U.S. Federal Income Tax Consequences of the Distribution and the Merger

It is intended that the Distribution, together with certain related transactions, will qualify as a tax-free “reorganization” within the meaning of Section 368(a)(1)(D) of the Code and a tax-free distribution within the meaning of Section 355 of the Code and that the Merger will qualify as a tax-free “reorganization” within the meaning of Section 368(a) of the Code. On the basis that the Distribution and the Merger are so treated, U.S. Holders (as defined in “The Exchange Offer—Material U.S. Federal Income Tax Consequences of the Distribution and the Merger”) of McKesson Common Stock generally will not recognize gain or loss for U.S. federal income tax purposes by reason of the Distribution or the Merger, in each case, except for any gain or loss recognized with respect to any cash received in lieu of a fractional share of Change Common Stock.

The consummation of the Distribution, the Merger and the related transactions are conditioned upon the receipt of opinions of tax counsel to the effect that such transactions qualify for their intended tax treatment. An opinion of tax counsel neither binds the Internal Revenue Service (the “IRS”) nor precludes the IRS or the courts from adopting a contrary position. McKesson does not intend to obtain a ruling from the IRS on the tax consequences of the Distribution or the Merger. If the Distribution and/or the Merger fails to qualify for the intended tax treatment, McKesson and/or its stockholders may be subject to substantial U.S. federal income taxes.

The tax consequences to you of the Distribution and Merger will depend on your particular circumstances. You should read the discussion in the section of this document entitled “The Exchange Offer—Material U.S. Federal Income Tax Consequences of the Distribution and the Merger” and consult your own tax advisor for a full understanding of the tax consequences to you of the Distribution and Merger.



 

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Comparison of Stockholder Rights

There are differences between the rights that holders of McKesson Common Stock have with respect to McKesson and the rights that holders of Change Common Stock have with respect to Change, which differences arise primarily from the provisions of their respective constitutive documents. See “Comparison of Rights of Holders of McKesson Common Stock and Change Common Stock.”

The Exchange Agent for the Exchange Offer and the Merger

The exchange agent for the exchange offer and the Merger is Equiniti Trust Company (the “exchange agent”).

The Distribution Agent for the Spin-Off

Equiniti Trust Company will also act as distribution agent in connection with any spin-off.

The Information Agent

The information agent for the exchange offer is D.F. King & Co., Inc. (the “information agent”).

The Transfer Agent

The transfer agent for each of Change, McKesson and SpinCo is Equiniti Trust Company (the “transfer agent”).



 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

The following summary consolidated financial data of SpinCo, McKesson, Change and the Joint Venture are being provided to help you in your analysis of the financial aspects of the Transactions. You should read this information in conjunction with the financial information included elsewhere and incorporated by reference into this document. See “Where You Can Find More Information; Incorporation By Reference,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Information on SpinCo,” “Information on McKesson,” “Information on Change Healthcare Inc.,” “Information on Change Healthcare LLC” and “Selected Historical Financial Data.”

Summary Historical Financial Data of SpinCo

The following table sets forth the summary historical financial data of SpinCo for the periods ended and at the dates indicated below. The summary historical consolidated statements of operations data and the summary statements of cash flows data for the nine months ended December 31, 2019 and 2018 and the summary historical consolidated balance sheet information as of December 31, 2019 were derived from the unaudited financial statements of SpinCo included elsewhere in this document. The summary historical consolidated balance sheet information as of December 31, 2018 was derived from the unaudited financial statements of SpinCo not included elsewhere in this document. 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 August 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 SpinCo included elsewhere in this document. The summary balance sheet data as of March 31, 2017 was derived from the unaudited financial statements of SpinCo, not included elsewhere in this document. Historical results are not necessarily indicative of the results expected for any future period, and interim results are not necessarily indicative of the results expected for the full fiscal year.

Prior to the Internal Reorganization, McKesson held all of its LLC Units in the Joint Venture through its wholly-owned subsidiaries, the McKesson Members. Each of the McKesson Members is a holding company that was formed by McKesson in connection with the Joint Venture Transactions and does not own any material assets or have any operations other than through their respective interests in the Joint Venture. In connection with the Internal Reorganization, McKesson will cause all of the LLC Units in the Joint Venture indirectly held by McKesson to be contributed, directly or indirectly, to SpinCo. SpinCo is a holding company that was formed by McKesson in connection with the Joint Venture Transactions and does not own any material assets or have any material liabilities or operations other than through its interest in the Joint Venture.

Each of Change and McKesson have equal representation on the Joint Venture’s board of directors and all major operating, investing and financial activities require the consent of both Change and McKesson. As a result, neither Change nor McKesson consolidates the financial position and results of the Joint Venture. Instead, each of Change and McKesson accounts for its respective investment in the Joint Venture under the equity method of accounting.

For periods on and after August 22, 2016 (the date of SpinCo’s formation), this document presents SpinCo’s combined financial position, results of operations and related balances as (i) McKesson’s ownership of its investment in the Joint Venture carved out from McKesson’s consolidated financial statements and (ii) PF2 SpinCo, Inc. (formerly PF2 SpinCo LLC). All assets, liabilities, revenue and expenses related to McKesson’s interest in the Joint Venture and SpinCo are combined to form the basis for the combined financial statements.

The summary historical financial information set forth below and the financial statements included elsewhere in this document do not necessarily reflect what SpinCo’s results of operations, financial condition or



 

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cash flows would have been if SpinCo had operated as a stand-alone company during all periods presented, and, accordingly, such information should not be relied upon as an indicator of SpinCo’s future performance, financial condition or liquidity. This information is only a summary and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements of SpinCo and the notes thereto included elsewhere in this document.

 

     SpinCo  
     Nine Months
Ended
December 31,
2019
    Nine Months
Ended
December 31,
2018
    Year Ended
March 31,
2019
    Year Ended
March 31,
2018
    Period from
August 22, 2016
(inception)
to March 31,
2017
 
     (In millions)  

Summary Statement of Operations Data:

          

Revenue

   $ —       $ —       $ —       $ —       $ —    

Operating expenses

     2       —         —         —         —    

Operating income (loss)

     (2     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-operating (income) expense

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity earnings and charges in Joint Venture

     1,226       150       176       219       57  

Loss on dilution in the interest of the Joint Venture

     245       1       1       5       —    

(Loss) before income tax benefit (provision)

     (1,472     (151     (177     (224     (57
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax provision (benefit)

     (376     (40     (47     (309     (23
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (1,096   $ (111   $ (130   $ 85     $ (34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Summary Balance Sheet Data (at period end):

          

Cash and cash equivalents

   $ —       $ —       $ —       $ —       $ —    

Total assets

   $ 2,143     $ 3,538     $ 3,512     $ 3,701     $ 3,917  

Total debt

   $ —       $ —       $ —       $ —       $ —    

Total net Parent investment

   $ 2,124     $ 3,157     $ 3,138     $ 3,282     $ 3,192  

Summary Statement of Cash Flows Data:

          

Net cash provided by (used in) operating activities

   $ (2   $ —       $ —       $ —       $ —    

Net cash provided by (used in) investing activities

   $ —       $ —       $ —       $ —       $ —    

Net cash provided by (used in) financing activities

   $ 2     $ —       $ —       $ —       $ —    

As a result of displaying amounts in millions, rounding differences may exist in the table above.

Summary Historical Financial Data of McKesson

The following table sets forth the summary historical financial data of McKesson for the periods ended and at the dates indicated below. The summary historical consolidated statements of operations data and the summary statements of cash flows data for the nine months ended December 31, 2019 and 2018 and the summary historical consolidated balance sheet information as of December 31, 2019 were derived from the unaudited financial



 

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statements of McKesson incorporated by reference in this document. The summary historical consolidated balance sheet information as of December 31, 2018 was derived from the unaudited financial statements of McKesson not included or incorporated by reference in this document. The summary historical statements of operations data and the summary statements of cash flows data for the years ended March 31, 2019, 2018 and 2017 and the summary balance sheet data as of March 31, 2019 and 2018 were derived from the audited financial statements of McKesson incorporated by reference in this document. The summary balance sheet data as of March 31, 2017 was derived from the audited financial statements of McKesson not included or incorporated by reference in this document. Historical results are not necessarily indicative of the results expected for any future period, and interim results are not necessarily indicative of the results expected for the full fiscal year.

This information is only a summary and should be read in conjunction with the financial statements of McKesson and the notes thereto and the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” section contained in McKesson’s quarterly report on Form 10-Q for the quarter ended December 31, 2019, and McKesson’s annual report on Form 10-K for the year ended March 31, 2019, which are incorporated by reference into this document. McKesson has historically accounted for its investment in the Joint Venture using the equity method of accounting on a one-month reporting lag. McKesson discloses intervening events at the Joint Venture in the lag period that could materially affect consolidated financial statements, if applicable. See “Where You Can Find More Information; Incorporation By Reference.”

 

    McKesson Corporation  
    Nine Months
Ended
December 31,
2019
    Nine Months
Ended
December 31,
2018
    Year Ended
March 31,
2019
    Year Ended
March 31,
2018
    Year Ended
March 31,
2017
 
    (In millions)  

Summary Statement of Operations Data:

         

Revenue

  $ 172,516     $ 161,890     $ 214,319     $ 208,357     $ 198,533  

Cost of sales

    (163,829     (153,337     (202,565     (197,173     (187,262
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    8,687       8,553       11,754       11,184       11,271  

Operating expenses

    (6,861     (6,219     (10,868     (10,422     (4,149

Goodwill impairment charges

    (2     (591     —         —         —    

Restructuring, impairment and related charges

    (204     (288     —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    1,620       1,455       886       762       7,122  

Other income (expenses), net

    (15     144       182       130       77  

Equity earnings and charges from investment in Change Healthcare Joint Venture

    (1,478     (162     (194     (248     —    

Loss on debt extinguishment

                —         (122     —    

Interest expense

    (184     (194     (264     (283     (308
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (57     1,243       610       239       6,891  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit (expenses)

    111       (245     (356     53       (1,614
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from Continuing Operations

    54       998       254       292       5,277  

Income (loss) from discontinued operations, net of tax

    (12     1       1       5       (124
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

  $ 42     $ 999     $ 255     $ 297     $ 5,153  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (loss) attributable to Noncontrolling interest

    (163     (169     (221     (230     (83
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (loss) attributable to McKesson

  $ (121   $ 830     $ 34     $ 67     $ 5,070  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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    McKesson Corporation  
    Nine Months
Ended
December 31,
2019
    Nine Months
Ended
December 31,
2018
    Year Ended
March 31,
2019
    Year Ended
March 31,
2018
    Year Ended
March 31,
2017
 
    (In millions)  

Summary Balance Sheet Data (at period end):

         

Cash and cash equivalents

  $ 2,065     $ 1,849     $ 2,981     $ 2,672     $ 2,783  

Total assets

  $ 60,873     $ 61,011     $ 59,672     $ 60,381     $ 60,969  

Total debt

  $ 7,741     $ 8,736     $ 7,595     $ 7,880     $ 8,362  

Total stockholders’ equity

  $ 6,385     $ 9,185     $ 8,287     $ 10,057     $ 11,273  

Summary Statement of Cash Flows Data:

         

Net cash provided by (used in) operating activities

  $ (280   $ 141     $ 4,036     $ 4,345     $ 4,744  

Net cash (used in) investing activities

  $ (409   $ (1,151   $ (1,381   $ (2,993   $ (3,269

Net cash provided by (used in) financing activities

  $ (254   $ 317     $ (2,227   $ (3,084   $ (2,069

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 consolidated statements of operations data and the summary statements of cash flows data for the nine months ended December 31, 2019 and 2018 and the summary historical consolidated balance sheet information as of December 31, 2019 were derived from the unaudited financial statements of Change Healthcare Inc. included elsewhere in this document. The summary historical consolidated balance sheet information as of December 31, 2018 was derived from the unaudited financial statements of Change Healthcare Inc. not included or incorporated by reference in this document. 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 document. The summary balance sheet data as of March 31, 2017 was derived from the audited financial statements of Change Healthcare Inc., not included or incorporated by reference in this document. The unaudited financial statements of Change Healthcare Inc. have been prepared on the same basis as the audited financial statements and, in Change’s opinion, have included all adjustments, which include only normal recurring adjustments, necessary to present fairly in all material respects Change’s financial position and results of operations. Historical results are not necessarily indicative of the results expected for any future period, and interim results are not necessarily indicative of the results expected for the full fiscal year.

This information is only a summary and should be read in conjunction with the financial statements of Change Healthcare Inc. and the notes thereto and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section contained included elsewhere in this document.



 

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Change Healthcare Inc. is a holding company that was formed by the Legacy CHC Stockholders in connection with the Joint Venture Transactions and does not own any material assets or have any operations other than through its interest in the Joint Venture. Each of Change and McKesson have equal representation on the Joint Venture’s board of directors and all major operating, investing and financial activities require the consent of both Change and McKesson. As a result, neither Change nor McKesson consolidates the financial position and results of the Joint Venture. Instead, each of Change and McKesson accounts for its respective investment in the Joint Venture under the equity method of accounting.

 

     Change Healthcare Inc.  
     Nine Months
Ended
December 31,
2019
    Nine Months
Ended
December 31,
2018
    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

     2.5       0.2       1.1       0.2       0.8  

Accretion Expense

     47.2       —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (49.7     (0.2     (1.1     (0.2     (0.8

Loss from Equity Method Investment in Joint Venture

     104.5       65.8       70.5       58.7       43.1  

(Gain) Loss on Sale of Interests in Joint Venture

     —         (0.7     (0.7     —         —    

Interest expense

     1.2       —         —         —         —    

Interest (income)

     (1.2     —         —         —         —    

Amortization of debt discount and issuance costs

     0.4       —         —         —         —    

Unrealized gain (loss) on forward purchase contract

     (71.6     —         —         —         —    

Management fee (income)

     (1.6     (0.2     (0.4     (0.2     (0.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision (benefit)

     (81.3     (65.1     (70.5     (58.7     (43.1

Income tax (benefit)

     (0.6     (16.7     (18.6     (119.6     (16.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (80.7   $ (48.5   $ (51.9 )   $ 61.0     $ (26.3 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Summary Balance Sheet Data (at
period end):

          

Cash and cash equivalents

   $ 3.4     $ 3.6     $ 3.4     $ —       $ —    

Total assets

   $ 2,219.8     $ 1,300.5     $ 1,298.8     $ 1,374.0     $ 1,389.4  

Total debt

   $ 39.0     $ —       $ —       $ —       $ —    

Total stockholders’ equity

   $ 1,950.1     $ 1,129.2     $ 1,132.5     $ 1,176.6     $ 1,088.2  

Summary Statement of Cash Flows Data:

          

Net cash provided by operating activities

   $ —       $ 3.6     $ 3.4     $ —       $ —    

Net cash provided by (used in) investing activities

   $ (882.3   $ 6.5     $ 6.5     $ 0.2     $ —    

Net cash provided by (used in) financing activities

   $ 882.3     $ (6.5   $ (6.5   $ (0.2 )   $ —    


 

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As a result of displaying amounts in millions, rounding differences may exist in the table above.

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 consolidated statements of operations data and the summary statements of cash flows data for the nine months ended December 31, 2019 and 2018 and the summary historical consolidated balance sheet information as of December 31, 2019 were derived from the unaudited financial statements of Change Healthcare LLC included elsewhere in this document. The summary historical consolidated balance sheet information as of December 31, 2018 was derived from the unaudited financial statements of Change Healthcare LLC not included or incorporated by reference in this document. 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 financial statements of Change Healthcare LLC included elsewhere in this document. The summary balance sheet data as of March 31, 2017 was derived from the audited financial statements of Change Healthcare LLC, not included or incorporated by reference in this document. The unaudited condensed consolidated financial statements of Change Healthcare LLC have been prepared on the same basis as the audited consolidated financial statements and, in the Joint Venture’s opinion, have included all adjustments, which include only normal recurring adjustments, necessary to present fairly in all material respects Change Healthcare LLC’s financial position and results of operations. Historical results are not necessarily indicative of the results expected for any future period, and interim results are not necessarily indicative of the results expected for the full fiscal year.

This information is only a summary and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements of Change Healthcare LLC and the notes thereto included elsewhere in this document. Change Healthcare LLC adopted the new revenue recognition accounting standard Accounting Standards Codification (“ASC”) 606 effective April 1, 2019 on a modified retrospective basis. Financial results for reporting periods during fiscal year 2020 are presented in compliance with the new revenue recognition standard. Historical financial results for reporting periods prior to fiscal year 2020 are presented in conformity with the prior revenue recognition standard ASC 605.

 

    Change Healthcare LLC  
    Nine Months
Ended
December 31,

2019
    Nine Months
Ended
December 31,

2018
    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

  $ 2,288.3     $ 2,264.7     $ 3,043.1     $ 3,024.4     $ 283.5  

Postage revenue

    171.3       180.7       238.6       274.4       26.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue

    2,459.6       2,445.4       3,281.7       3,298.8       309.6  

Operating expenses:

         

Cost of operations (exclusive of depreciation and amortization below)

    998.9       1,007.3       1,354.7       1,407.9       133.7  

Research and development

    151.8       159.6       202.2       221.7       22.6  

Sales, marketing, general and administrative

    567.6       620.6       821.1       749.9       109.9  

Customer postage

    171.3       180.7       238.6       274.4       26.1  


 

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Index to Financial Statements
    Change Healthcare LLC  
    Nine Months
Ended
December 31,

2019
    Nine Months
Ended
December 31,

2018
    Year Ended
March 31,

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

2017
 
    (In millions)  

Depreciation and amortization

    226.1       208.1       278.0       278.4       26.5  

Accretion and changes in estimate with related parties, net

    10.3       13.3       19.3       (50.0     (24.5

Gain on Sale of the Extended Care Business

    —         (111.4     (111.4     —         —    

Impairment of long-lived assets and other exit related costs

    —         —         0.7       0.8       48.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    2,126.0       2,078.2       2,803.2       2,883.0       343.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    333.6       367.2       478.5       415.8       (33.4

Interest expense, net

    219.7       241.8       325.4       292.5       22.4  

Loss on extinguishment of debt

    19.4       —         —         —         70.1  

Contingent consideration

    1.8       (0.9     (0.8     —         —    

Other, net

    (10.9     (13.8     (18.3     (17.2     (1.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision (benefit)

    103.6       140.0       172.2       140.5       (124.6

Income tax provision (benefit)

    0.6       1.0       (4.5     (51.9     (41.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 103.0     $ 139.0     $ 176.7     $ 192.4     $ (83.6 )
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Summary Balance Sheet Data (at period end):

         

Cash and cash equivalents

  $ 74.2     $ 90.2     $ 47.7     $ 48.9     $ 185.7  

Total assets

  $ 6,290.7     $ 6,241.9     $ 6,204.1     $ 6,200.9     $ 6,283.5  

Total debt

  $ 4,828.0     $ 5,794.9     $ 5,789.9     $ 5,920.9     $ 5,959.1  

Tax receivable obligations to related parties

  $ 203.1     $ 207.2     $ 212.7     $ 223.2     $ 298.1  

Members’ equity (deficit)

  $ 212.3     $ (945.4   $ (904.8   $ (1,066.2   $ (1,273.4 )

Summary Statement of Cash Flows Data:

         

Net cash provided by operating activities

  $ 401.0     $ 248.8     $ 287.7     $ 324.8     $ (40.7 )

Net cash provided by (used in) investing activities

  $ (176.4   $ (33.4   $ (105.7   $ (260.7   $ (11.2 )

Net cash (used in) financing activities

  $ (199.5   $ (172.6   $ (182.1   $ (197.5   $ 240.1  

Summary Operational and Other Data(1):

         

Adjusted EBITDA(2)

  $ 731.4     $ 677.8     $ 935.0     $ 943.8     $ 82.1  

Adjusted Net Income(2)

  $ 334.4     $ 284.1     $ 409.9     $ 449.7     $ 25.2  

As a result of displaying amounts in millions, rounding differences may exist in the table above.

 

(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 does 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.

To properly and prudently evaluate the Joint Venture’s business, we encourage you to review the financial statements included elsewhere in this document, 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.

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

 

     Nine Months
Ended
December 31,

2019
     Nine Months
Ended
December 31,

2018
     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)

   $ 103.0      $ 139.0      $ 176.7     $ 192.4     $ (83.6

Interest expense, net

     219.7        241.8        325.4       292.5       22.4  

Income tax provision (benefit)

     0.6        1.0        (4.5     (51.9     (41.0

Depreciation and amortization(a)

     226.1        208.1        278.0       278.4       26.5  


 

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     Nine Months
Ended
December 31,

2019
    Nine Months
Ended
December 31,

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

Amortization of capitalized software developed for sale

     10.5       10.9       14.7       18.3       1.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 559.8     $ 600.8     $ 790.3     $ 729.7     $ (74.2

Adjustments to EBITDA:

          

Equity compensation(b)

     24.9       16.4       20.1       24.7       0.7  

Acquisition accounting adjustments(c)

     1.4       3.2       3.5       2.6       0.1  

Acquisition and divestiture-related costs(d)

     2.6       11.5       13.1       1.8       —    

Transaction-related costs(e)

     —         —         —         4.6       43.3  

Integration and related costs(f)

     67.0       79.8       114.5       107.2       8.8  

Management fees and related costs(g)

     7.7       7.9       10.5       11.5       0.9  

Implementation costs related to recently issued accounting standards(h)

     —         7.2       8.3       26.6       1.6  

Strategic initiative, duplicative and transition
costs(i)

     14.3       19.0       27.3       12.3       0.9  

Severance costs(j)

     14.3       14.3       17.7       38.3       2.2  

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

     10.3       13.3       19.3       (50.0     (24.5

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

     (1.3     3.7       4.2       0.8       48.7  

Loss on extinguishment of debt(m)

     19.4       —         —         —         70.1  

Gain on Sale of the Extended Care Business(n)

     —         (111.4     (111.4     —         —    

Contingent consideration(o)

     1.8       (0.9     (0.8     —         —    

Other non-routine, net(p)

     9.2       12.9       18.4       33.8       3.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA Adjustments

     171.6       77.0       144.7       214.2       156.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(q)

   $ 731.4     $ 677.8     $ 935.0     $ 943.8     $ 82.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a result of displaying amounts in millions, rounding differences may exist in the table above.

 

(a)

Total depreciation and amortization includes $104.6 million and $110.3 million of amortization of identifiable intangible assets for the nine months ended December 31, 2019 and 2018, respectively, and $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



 

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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.

(e)

Represents costs associated with the Joint Venture Transactions following the close of the Joint Venture 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 “Other Agreements and Other Related Party 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 Joint Venture 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:

 

    Nine Months
Ended
December 31,

2019
    Nine Months
Ended
December 31,

2018
    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

    3.1       7.6       12.1       19.5       —    

Other(i)

    6.1       5.3       6.3       9.1       3.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other non-routine, net:

  $ 9.2     $ 12.9     $ 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, $3.9 million and $1.1 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, the period from June 17, 2016 (inception) to March 31, 2017 and for the



 

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nine months ended December 31, 2018, respectively. The following table sets forth a reconciliation of net income (loss) to Adjusted Net Income:

 

     Nine Months
Ended
December 31,

2019
     Nine Months
Ended
December 31,

2018
     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)

   $ 103.0      $ 139.0      $ 176.7      $ 192.4      $ (83.6

EBITDA Adjustments(a)

     171.6        77.0        144.7        214.2        156.3  

Amortization resulting from acquisition method adjustments(b)

     104.6        110.3        146.5        174.1        16.6  

Tax Effects of EBITDA Adjustments and amortization expense(c)

   $ (44.8    $ (42.1    $ (58.0    $ (130.9    $ (64.1
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Net Income

   $ 334.4      $ 284.1      $ 409.9      $ 449.7      $ 25.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (a)

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

  (b)

Represents amortization of identifiable intangible assets that arose from the application of acquisition method accounting following a business combination. Such amounts exclude amortization of software developed following such business combinations. By excluding the impact of the increase in amortization expense due to fair value adjustments made as part of the acquisition accounting for such intangible assets, 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, foster comparability of the Joint Venture’s results and facilitate comparison of the Joint Venture’s results with other companies in its industry. 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 such replacements of identifiable intangible assets that arose from the application of acquisition method accounting following a business combination.

  (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. 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 document.



 

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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 document.

 

     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



 

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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.

(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 Joint Venture Transactions following the close of the Joint Venture 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.



 

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(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 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.



 

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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 document.

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 document.

 

     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.

 

     Core MTS  
     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 Joint Venture 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.



 

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  (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.

Summary Unaudited Pro Forma Condensed Combined Financial Information of Change and SpinCo

The following summary unaudited pro forma condensed combined financial information gives effect to the Transactions, including the consummation of the exchange offer and, if necessary, the spin-off followed immediately by the consummation of the Merger of SpinCo, a wholly-owned subsidiary of McKesson, with and into Change. The summary unaudited pro forma condensed combined statement of operations information is presented as if the Transactions occurred on April 1, 2018. The summary unaudited pro forma condensed combined balance sheet information is presented as if these transactions occurred on December 31, 2019. The summary unaudited pro forma condensed combined financial information is derived from Change’s, SpinCo’s and the Joint Venture’s respective historical consolidated financial statements for each period presented. The summary unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not necessarily reflect the operating results or financial position that would have occurred if the Transactions had been consummated on the dates indicated, nor is it necessarily indicative of the results of operations or financial condition that may be expected for any future period or date. Actual results may differ significantly from those reflected in the summary unaudited condensed combined financial information for a number of reasons, including differences between the assumptions used to prepare the pro forma condensed combined financial statements and actual amounts. Accordingly, such information should not be relied upon as an indicator of future performance, financial condition or liquidity.

Summary Unaudited Pro Forma

Condensed Combined Statement of

Operations of Change Healthcare Inc. and SpinCo

(in millions, except per share amounts)

 

     Nine Months
Ended
December 31,
2019
    Year Ended
March 31,

2019
 

Total revenue

   $ 2,447     $ 3,125  

Operating income (loss)

   $ 41     $ 11  

Net income (loss)

   $ (70   $ (160
  

 

 

   

 

 

 

Net income (loss) per share:

    

Basic

   $ (0.22   $ (0.50
  

 

 

   

 

 

 

Diluted

   $ (0.22   $ (0.50
  

 

 

   

 

 

 

Weighted average common shares outstanding:

    

Basic

     319,387,487       319,387,487  

Diluted

     319,387,487       319,387,487  


 

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Summary Unaudited Pro Forma

Condensed Combined

Balance Sheet of Change Healthcare Inc. and SpinCo (in millions)

 

     At
December 31,

2019
 

Total assets

   $ 12,061  

Long-term debt

   $ 4,959  

Shareholders’ equity

   $ 5,143  

Summary Comparative Historical and Pro Forma Per Share Data

The following tables set forth certain historical and pro forma per share data for Change and McKesson. The Change historical data have been derived from and should be read together with Change’s unaudited consolidated financial statements and related notes contained for the nine months ended December 31, 2019 and Change’s audited consolidated financial statements and related notes thereto for the year ended March 31, 2019, which are each included elsewhere in this document. The Change pro forma data have been derived from the unaudited pro forma condensed combined financial statements of Change, the Joint Venture and SpinCo included elsewhere in this document. The McKesson historical data have been derived from and should be read together with the unaudited consolidated financial statements of McKesson and related notes thereto contained in McKesson’s quarterly report on Form 10-Q for the quarter ended December 31, 2019 and the audited consolidated financial statements of McKesson and related notes thereto contained in McKesson’s annual report on Form 10-K for the year ended March 31, 2019, which are each incorporated by reference into this document. The McKesson pro forma data reflect the historical consolidated McKesson financial statements adjusted to remove the effects of McKesson’s ownership of its investment in the Joint Venture.

This summary comparative historical and pro forma per share data is being presented for illustrative purposes only. McKesson, Change and SpinCo may have performed differently had the Transactions occurred prior to the periods or at the date presented. You should not rely on the pro forma per share data presented as being indicative of the results that would have been achieved had SpinCo been separated from McKesson and combined with Change during the periods or at the date presented or of the actual future results or financial condition of McKesson, Change or SpinCo to be achieved following the Transactions.

 

     Nine Months
Ended or At
December 31,

2019
    Year Ended
March 31,

2019
 
     (shares in millions)  

Change Healthcare Inc.

    

Net income (loss) available to common shareholders per share:

    

Historical:

    

Basic

   $ (0.67   $ (0.69

Diluted

   $ (0.67   $ (0.69

Pro Forma:

    

Basic:

   $ (0.22)     $ (0.50

Diluted:

   $ (0.22)     $ (0.50

Weighted average shares:

    

Historical:

    

Basic

     121       76  

Diluted

     121       76  

Pro Forma:

    

Basic:

     319       319  

Diluted:

     319       319  

Net book value per share of common stock:

    

Historical

   $ 6.48     $ 4.50  

Pro Forma

   $ 16.12    

 



 

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     Nine Months
Ended or At
December 31,

2019
    Year Ended
March 31,
2019
 
     (shares in millions)  

McKesson Corporation

    

Net income (loss) available to common shareholders per share:

    

Historical:

    

Basic

   $ (0.60   $ 0.17  

Diluted

   $ (0.60   $ 0.17  

Pro forma:

    

Basic

   $ 5.95     $ 0.99  

Diluted

   $ 5.91     $ 0.99  

Weighted average shares:

    

Historical:

    

Basic

     183       196  

Diluted

     183       197  

Pro forma:

    

Basic

     166       179  

Diluted

     167       180  

Dividends declared per share of common stock

   $ 1.21     $ 1.51  

Book value per share of common stock:

    

Historical

   $ 34.89     $ 42.28  

Pro forma

   $ 29.04     $ 31.57  

 

     As of and for the
Nine Months Ended
December 31, 2019
 

Equivalent pro forma(a):

  

Net income available to common shareholders per share—Basic

   $ (2.26

Net income available to common shareholders per share—Diluted

   $ (2.26

Book value per share of common stock

   $ 165.73  

 

(a)

Equivalent pro forma per share data is calculated by multiplying the Change pro forma per share amounts by the exchange ratio of 10.2797 shares of SpinCo Common Stock for each share of McKesson Common Stock tendered in the exchange offer, which represents the indicative exchange ratio that would have been in effect following the official close of trading on the NYSE and Nasdaq on February 7, 2020 (the last trading day before the commencement of the exchange offer), and is calculated as the average price of McKesson Common Stock of $156.0365 per share divided by 93.0% of the average price of Change Common Stock of $16.3216 per share, reflecting a discount of 7.0%.

Historical Common Stock Market Price and Dividend Data

Historical market price data for SpinCo has not been presented as there is no established trading market for SpinCo Common Stock separate from McKesson Common Stock.

Shares of McKesson Common Stock currently trade on the NYSE under the symbol “MCK.” On February 3, 2020, the last trading day before the first public filing of the registration statement in connection with the Transactions, the last sale price of McKesson Common Stock reported by the NYSE was $143.90.

Shares of Change Common Stock currently trade on Nasdaq under the symbol “CHNG.” On February 3, 2020, the last trading day before the first public filing of the registration statement in connection with the Transactions, the last sale price of Change Common Stock reported by Nasdaq was $15.45.



 

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The following table sets forth the high and low sale prices of McKesson Common Stock and Change Common Stock for the periods indicated as well as the dividends per share paid by McKesson to holders of McKesson Common Stock and Change to holders of Change Common Stock for these periods.

 

     McKesson
Per Share
Dividends
     McKesson
Common Stock
     Change
Per Share
Dividends
     Change
Common Stock
 
     High      Low      High      Low  

Year Ended March 31, 2020

                 

First Quarter

   $ 0.39      $ 135.75      $ 111.71      $ —        $ 15.30      $ 13.53  

Second Quarter

   $ 0.41      $ 150.82      $ 131.39      $ —        $ 15.50      $ 11.24  

Third Quarter

   $ 0.41      $ 154.79      $ 128.26      $ —        $ 16.73      $ 11.25  

Fourth Quarter (through February 13, 2020)

   $ —          $ 169.67      $ 135.22      $ —        $ 17.57      $ 15.17  

Year Ended March 31, 2019

                 

First Quarter

   $ 0.34      $ 160.84      $ 131.43      $ —          N/A        N/A  

Second Quarter

   $ 0.39      $ 139.86      $ 122.49      $ —          N/A        N/A  

Third Quarter

   $ 0.39      $ 138.94      $ 106.11      $ —          N/A        N/A  

Fourth Quarter

   $ 0.39      $ 137.16      $ 109.16      $ —          N/A        N/A  

Year Ended March 31, 2018

                 

First Quarter

   $ 0.28      $ 169.29      $ 133.82      $ —          N/A        N/A  

Second Quarter

   $ 0.34      $ 168.87      $ 145.13      $ —          N/A        N/A  

Third Quarter

   $ 0.34      $ 164.29      $ 134.25      $ —          N/A        N/A  

Fourth Quarter

   $ 0.34      $ 178.86      $ 137.10      $ —          N/A        N/A  

Year Ended March 31, 2017

                 

First Quarter

   $ 0.28      $ 188.43      $ 154.33      $ —          N/A        N/A  

Second Quarter

   $ 0.28      $ 199.43      $ 163.57      $ —          N/A        N/A  

Third Quarter

   $ 0.28      $ 166.90      $ 114.53      $ —          N/A        N/A  

Fourth Quarter

   $ 0.28      $ 153.07      $ 134.17      $ —          N/A        N/A  


 

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RISK FACTORS

You should carefully consider each of the following risks and all of the other information contained and incorporated by reference in this document and the exhibits hereto. See “Where You Can Find More Information; Incorporation by Reference.” Many of the risks described below relate principally to the business of the Joint Venture and the industry in which the Joint Venture operates, while others relate principally to the Transactions and participation in the exchange offer. The remaining risks relate principally to the securities markets generally and ownership of shares of Change Common Stock. The risks described below are not the only risks to participating in the exchange offer or that Change currently faces or will face after the consummation of the Transactions.

Risks Related to the Transactions

Sales of Change Common Stock after consummation of the Transactions may negatively affect the market price of Change Common Stock.

The shares of Change Common Stock to be issued in the Merger to holders of SpinCo Common Stock will generally be eligible for immediate resale. The market price of Change Common Stock could decline as a result of sales of a large number of shares of Change Common Stock in the market after the consummation of the Transactions, or even the perception that these sales could occur.

Immediately after consummation of the Merger, approximately 51% of the outstanding shares of Change Common Stock are expected to be held by pre-Merger holders of McKesson Common Stock, and approximately 49% of the outstanding shares of Change Common Stock are expected to be held by pre-Merger holders of Change Common Stock, in each case on a fully diluted basis in the aggregate, including Change employees who hold outstanding equity awards issued pursuant to Change’s equity incentive plans and investors who hold Change’s purchase contracts (and assuming the maximum number of shares of Change Common Stock issuable upon automatic settlement of such purchase contracts, and excluding any shares of Change Common Stock that a pre-Merger holder of McKesson Common Stock may have held, or vice-versa). Currently, holders of McKesson Common Stock may include index funds that have performance tied to the Standard & Poor’s 500 Index or other stock indices, and institutional investors subject to various investing guidelines. Because Change may not be included in these indices following the consummation of the Transactions or may not meet the investing guidelines of some of these institutional investors, these index funds and institutional investors may decide to or may be required to sell the Change Common Stock that they receive in the Transactions. In addition, the investment fiduciaries of McKesson’s defined contribution and defined benefit plans may decide to sell any Change Common Stock that the trusts for these plans receive in the Transactions, or may decide not to participate in the exchange offer, in response to their fiduciary obligations under applicable law.

In addition, after a 90-day period following the consummation of the Transactions, the Sponsors will have the right, subject to certain exceptions and conditions, to require Change to register their shares of Change Common Stock under the Securities Act of 1933, as amended (the “Securities Act”), and they will have the right to participate in future registrations of securities by Change. Registration of any of these outstanding shares of Change Common Stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. Immediately after consummation of the Merger, the Sponsors are expected to hold approximately 25% of the outstanding shares of Change Common Stock based on their holdings as of December 31, 2019.

Sales of Change Common Stock following consummation of the Transactions, or the perception that these sales may occur, may also make it more difficult for Change to sell equity securities in the future at a time and at a price that it deems appropriate in order to raise capital.

 

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The historical and pro forma financial information that is included in this document may not be representative of the results SpinCo would have achieved as a stand-alone public company and may not be a reliable indicator of Change’s results following consummation of the Transactions.

The historical combined financial statements and unaudited pro forma condensed combined financial statements that are included in this document have been presented using the historical results of operations, cash flows, assets and liabilities of (i) McKesson’s ownership of its equity method investment in the Joint Venture carved out from McKesson’s consolidated financial statements and (ii) PF2 SpinCo, Inc. (formerly PF2 SpinCo LLC). As a result, these historical and pro forma financial statements may not necessarily reflect what SpinCo’s financial condition, results of operations or cash flows would have been had SpinCo been an independent, stand-alone entity during the periods presented or those that Change will achieve in the future.

The conditions precedent to the consummation of the Distribution may not be satisfied or waived, and the Distribution (including the exchange offer and the spin-off, if any) may therefore not be consummated.

The Separation Agreement and the Merger Agreement each contain a number of conditions that must be fulfilled prior to the consummation of the Distribution. If these conditions are not satisfied or waived, the Distribution will not be consummated. Those conditions include, among others: the filing with the SEC, and effectiveness, of an applicable registration statement or other form as determined by McKesson or as otherwise required by the SEC for the commencement of the exchange offer and the consummation of the Distribution; the absence of any stop order suspending the effectiveness of such filing or other proceedings for such purpose; the execution and delivery of each of the Ancillary Agreements by each of the parties thereto; the taking of all actions necessary or appropriate under applicable federal, state or foreign securities or “blue sky” laws; the obtaining of all material governmental approvals and consents and all material permits, registrations and consents from third parties; the absence of any applicable law that prohibits the consummation of the Distribution, the Merger or the other transactions contemplated by the Separation Agreement; the receipt of the McKesson Tax Opinions by McKesson; and the receipt of the Change Tax Opinion by Change. In addition, the Merger Agreement may be terminated in certain circumstances, including by one party upon the material breach by the other party of any representation, warranty or covenant of such party set forth in the Merger Agreement that is not cured after thirty (30) days’ notice of an opportunity to cure, and any termination of the Merger Agreement prior to the Distribution would automatically result in the termination of the Separation Agreement. See “The Merger Agreement—Conditions to the Merger,” “The Merger Agreement—Termination” and “The Separation and Distribution Agreement—The Distribution.”

If the Distribution or any transaction included in the Internal Reorganization does not qualify as a transaction that is tax-free for U.S. federal income tax purposes or the Merger does not qualify as a tax-free “reorganization,” including as a result of actions taken in connection with the Internal Reorganization, the Distribution or the Merger or as a result of subsequent acquisitions of shares of McKesson, Change or SpinCo, then McKesson and/or holders of McKesson Common Stock that received SpinCo Common Stock in the Distribution may be required to pay substantial U.S. federal income taxes, and, in certain circumstances, SpinCo and Change may be required to indemnify McKesson for all or part of any such tax liability.

The consummation of the Transactions is conditioned on the receipt by McKesson of the McKesson Tax Opinions and by Change of the Change Tax Opinion. The opinions will be based on, among other things, currently applicable law and certain representations made by, and certain assumptions permitted by, McKesson, SpinCo and Change. An opinion of counsel represents counsel’s best legal judgment, such opinion is not binding on the IRS or the courts, and the IRS or the courts may not agree with the opinion. Any change in currently applicable law, which may be retroactive, or the failure of any representation or assumption to be true, correct and complete in all material respects, could adversely affect the conclusions reached by counsel in the opinions.

It is intended that 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

 

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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 (but not to McKesson stockholders) pursuant to Section 355(e) of the Code if there were a 50 percent or greater change in ownership of either McKesson or SpinCo (including stock of Change after the Merger), directly or indirectly, as part of a plan or series of related transactions that include the Distribution. For this purpose, certain acquisitions of McKesson, SpinCo or Change stock within the period beginning two years before the Distribution and ending two years after the Distribution are presumed to be part of such a plan, although McKesson may be able to rebut that presumption. While the Merger will be treated as part of such a plan for purposes of the test, standing alone the Merger alone should not cause the Distribution to be taxable to McKesson under Section 355(e) of the Code because McKesson stockholders will hold more than 50 percent of Change’s outstanding stock immediately following the Merger. Nevertheless, if the IRS were to determine that other acquisitions of McKesson, SpinCo or Change stock, either before or after the Distribution, were part of a plan or series of related transactions that included the Distribution, such determination could result in significant tax to McKesson. In connection with the McKesson Tax Opinions, McKesson, SpinCo and Change have made and will make certain representations to support the conclusion that the Distribution is not part of any such plan or series of related transactions other than the Merger. In certain circumstances and subject to certain limitations, under the Tax Matters Agreement Change is required to indemnify McKesson if the Distribution becomes taxable as a result of certain actions by Change or SpinCo or as a result of certain changes in ownership of the stock of Change or SpinCo after the Merger. If McKesson were to recognize gain on the Distribution for reasons not related to a disqualifying action by SpinCo or Change, McKesson would not be entitled to be indemnified under the Tax Matters Agreement and the resulting tax to McKesson could have a material adverse effect on McKesson. If Change is required to indemnify McKesson if the Distribution is taxable, this indemnification obligation could be substantial and could have a material adverse effect on Change, including with respect to its financial condition and results of operations.

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 Change will enter into with McKesson in connection with the Transactions, if the election under Section 336(e) of the Code takes effect, in certain circumstances Change will be required to enter into a new tax receivable agreement pursuant to which Change 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 below under “Risks Related to Change’s Organizational Structure—The amounts Change or the Joint Venture will be required to pay under Change’s tax receivable agreements could be significant and, in certain circumstances, could differ significantly (in both timing and amount) from the underlying tax benefits Change actually realizes.” 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 Change and its subsidiaries.

Change may be affected by significant restrictions following consummation of the Transactions in order to avoid significant tax-related liabilities.

The Tax Matters Agreement generally prohibits SpinCo, Change and their affiliates from taking certain actions that could cause the Distribution, the Merger and certain related transactions to fail to qualify as tax-free transactions.

Furthermore, unless an exception applies, for a two-year period following the date of the Distribution:

 

   

none of SpinCo, Change or any of their respective subsidiaries may discontinue the active conduct of the Core MTS business;

 

   

Change may not redeem or repurchase any of its stock;

 

   

neither Change nor SpinCo may engage in certain mergers or consolidations;

 

   

none of Change, SpinCo or any of SpinCo’s subsidiaries may sell or issue any of its own stock or stock rights;

 

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none of SpinCo, Change or any of their respective subsidiaries may enter into any transaction or series of transactions as a result of which one or more persons would acquire (directly or indirectly) an amount of stock of SpinCo and/or Change (taking into account the stock of SpinCo acquired pursuant to the Merger) that would reasonably be expected to cause the failure of the tax-free status of the Distribution, the Merger and certain related transactions; and

 

   

none of SpinCo, Change or any of their respective subsidiaries may amend its certificate of incorporation or take any other action affecting the relative voting rights of any stock or stock rights of Change, SpinCo or their respective subsidiaries.

If SpinCo or Change intends to take certain restricted actions, it must notify McKesson of the proposal to take such action and either obtain a ruling from the IRS or an unqualified opinion acceptable to McKesson to the effect that such action will not affect the tax-free status of the Transactions. However, this will not relieve Change of any responsibility to indemnify McKesson for tax-related losses.

Due to these restrictions and indemnification obligations under the Tax Matters Agreement, Change may be limited in its ability to pursue strategic transactions, equity or convertible debt financings or other transactions that may otherwise be in Change’s best interests.

If the Merger does not qualify as a tax-free “reorganization” under Section 368(a) of the Code, participating McKesson stockholders may be required to pay substantial U.S. federal income taxes.

The obligations of McKesson, Change and SpinCo to consummate the Merger are conditioned, respectively, on the receipt by McKesson of the McKesson Merger Tax Opinion and by Change of the Change Tax Opinion, in each case, to the effect that the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. These opinions will be based upon, among other things, certain representations and assumptions as to factual matters. The failure of any factual representation or assumption to be true, correct and complete in all material respects could adversely affect the validity of the opinions. An opinion of counsel represents counsel’s best legal judgment, such opinion is not binding on the IRS or the courts, and the IRS or the courts may not agree with the opinion. In addition, the opinions will be based on current law, and cannot be relied upon to the extent current law changes with retroactive effect. If the Merger were taxable, participating McKesson stockholders would be considered to have made a taxable sale of their SpinCo Common Stock to Change, and McKesson stockholders would recognize taxable gain or loss on their receipt of Change Common Stock in the Merger.

Tendering holders of McKesson Common Stock may receive a reduced premium or no premium in the exchange offer.

The exchange offer is designed to permit you to exchange your shares of McKesson Common Stock for shares of SpinCo Common Stock, calculated as set forth in this document. Stated another way, for each $100 of your McKesson Common Stock accepted in the exchange offer, you will receive approximately $107.53 of SpinCo Common Stock. The value of the McKesson Common Stock will be based on the calculated per-share value for the McKesson Common Stock on the NYSE and the value of the SpinCo Common Stock will be based on the calculated per-share value of Change Common Stock on Nasdaq, in each case calculated by reference to the simple arithmetic average of the daily VWAP on each of the Valuation Dates.

The number of shares you can receive is, however, subject to an upper limit of 11.4086 shares of SpinCo Common Stock for each share of McKesson Common Stock accepted in the exchange offer. As a result, you may receive less than $107.53 of SpinCo Common Stock for each $100 of McKesson Common Stock, depending on the calculated per-share values of McKesson Common Stock and SpinCo Common Stock at the expiration date. Because of the limit on the number of shares of SpinCo Common Stock you may receive in the exchange offer, if there is a drop of sufficient magnitude in the trading price of Change Common Stock relative to the trading price of McKesson Common Stock, or if there is an increase of sufficient magnitude in the trading price of McKesson Common Stock relative to the trading price of Change Common Stock, you may not receive $107.53 of SpinCo Common Stock for each $100 of McKesson Common Stock, and could receive much less.

 

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For example, if the calculated per-share value of McKesson Common Stock was $158.32 (the highest closing price for McKesson Common Stock on the NYSE during the three-month period prior to commencement of the exchange offer) and the calculated per-share value of SpinCo Common Stock was $12.75 (the lowest closing price for Change Common Stock on Nasdaq during that three-month period), the value of SpinCo Common Stock, based on the Change Common Stock price, would be approximately $91.88 for each $100 of McKesson Common Stock accepted for exchange. The exchange offer does not provide for a minimum exchange ratio. See “The Exchange Offer—Terms of the Exchange Offer.”

If the upper limit on the number of shares of SpinCo Common Stock that can be received for each share of McKesson Common Stock tendered has been reached at the expiration of the exchange offer period, then the exchange ratio will be fixed at the upper limit. If the trading price of McKesson Common Stock were to increase during the last two trading days of the exchange offer, the average price of McKesson Common Stock used to calculate the exchange ratio would likely be lower than the closing price of shares of McKesson Common Stock on the expiration date of the exchange offer. As a result, you may receive fewer shares of SpinCo Common Stock, and therefore effectively fewer shares of Change Common Stock, for each $100 of shares of McKesson Common Stock than you would have if the average price of McKesson Common Stock were calculated on the basis of the closing price of shares of McKesson Common Stock on the expiration date of the exchange offer or on the basis of an averaging period that includes the last two trading days prior to the expiration of the exchange offer period. Similarly, if the trading price of Change Common Stock were to decrease during the last two trading days prior to the expiration of the exchange offer period, the average Change Common Stock price used to calculate the exchange ratio would likely be higher than the closing price of Change Common Stock on the expiration date. This could also result in your receiving fewer shares of SpinCo Common Stock, and therefore effectively fewer shares of Change Common Stock, for each $100 of McKesson Common Stock than you would otherwise receive if the average Change Common Stock price were calculated on the basis of the closing price of Change Common Stock on the expiration date or on the basis of an averaging period that included the last two trading days prior to the expiration of the exchange offer period.

There is no assurance that holders of shares of McKesson Common Stock that are exchanged for SpinCo Common Stock in the exchange offer will be able to sell the shares of Change Common Stock after receipt in the Merger at prices comparable to the calculated per-share value of SpinCo Common Stock at the expiration date.

Following the exchange of shares of Change Common Stock for shares of SpinCo Common Stock in the Merger, the former holders of shares of SpinCo Common Stock may experience a delay prior to receiving their shares of Change Common Stock or their cash in lieu of fractional shares, if any.

Following the exchange of shares of Change Common Stock for shares of SpinCo Common Stock, the former holders of SpinCo Common Stock will receive their shares of Change Common Stock and their cash in lieu of fractional shares, if any, only upon surrender of all necessary documents, duly executed, to the transfer agent. Although Change expects that Nasdaq will create a “when issued” market for the new shares of Change Common Stock issuable to holders of McKesson Common Stock whose shares of McKesson Common Stock are accepted in the exchange offer, the creation of a “when issued” market is outside the control of Change, and there can be no assurance that such a market will develop. Until the distribution of the shares of Change Common Stock to the individual holder of SpinCo Common Stock has been completed, the relevant holder of shares of Change Common Stock will not be able to sell its shares of Change Common Stock. Consequently, in case the market price for Change Common Stock should decrease during that period, the relevant stockholders would not be able to stop any losses by selling the shares of Change Common Stock. Similarly, the former holders of SpinCo Common Stock who received cash in lieu of fractional shares, if any, will not be able to invest the cash until the distribution to the relevant stockholder has been completed, and they will not receive interest payments for this time period.

 

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The Pricing Mechanism for the exchange offer will not be fixed prior to the launch of the exchange offer, but will be instead determined while the exchange offer is open, creating a risk of arbitrage trading during the exchange offer that could impact the final exchange ratio.

The exchange offer does not set forth a fixed exchange ratio at the outset of the exchange offer. Rather, the exchange offer price is expressed as a ratio of SpinCo Common Stock for each $100 of McKesson Common Stock validly tendered and accepted for exchange pursuant to the exchange offer (subject to the limit on the exchange ratio that could result from the upper limit, as described in greater detailed in this document). The Pricing Mechanism for the exchange offer will calculate the values of McKesson Common Stock and SpinCo Common Stock by reference to a simple arithmetic average of daily VWAPs over the three Valuation Dates. The per-share values for McKesson Common Stock will be determined by McKesson by reference to the simple arithmetic mean of the daily VWAP of McKesson Common Stock on the NYSE over the three Valuation Dates. Similarly, the per-share values for SpinCo Common Stock will be determined by McKesson by reference to the simple arithmetic mean of the daily VWAP of Change Common Stock on Nasdaq over the Valuation Dates (since each share of SpinCo Common Stock will be converted into one share of Change Common Stock in the Merger). If the exchange offer is extended, the Valuation Dates will reset to the period of three consecutive trading days ending on and including the second trading day preceding the revised expiration date, as it may be extended. The final exchange ratio will be announced by press release and be available on the website www.dfking.com/McKesson, in each case by 11:59 p.m., New York City time, at the end of the second trading day preceding the expiration date of the exchange offer, as it may be extended, and therefore provides for a two business day window between pricing and exchange offer’s expiration. See “The Exchange Offer—Terms of the Exchange Offer—Pricing Mechanism.”

As the Pricing Mechanism results in the final exchange ratio being fixed two business days before the expiration of the exchange offer, the value of McKesson Common Stock and Change Common Stock may change after the final exchange ratio is fixed by the Pricing Mechanism. The difference between the changing prices of publicly traded McKesson Common Stock and Change Common Stock and the fixed exchange ratio could allow for investors to engage in arbitrage trading during the final two business days prior to the expiration of the exchange offer, which could affect the price of McKesson Common Stock, Change Common Stock or both. Such trading could impact the value of the consideration received by holders of McKesson Common Stock participating in the exchange offer.

Arbitrage trading during the exchange offer could adversely impact the price of Change Common Stock.

The shares of SpinCo Common Stock to be received by holders of McKesson Common Stock who validly tender such stock in the exchange offer will be issued at a discount to the per-share value of Change Common Stock. During the exchange offer, the existence of this discount could negatively affect the market price of Change Common Stock. See “The Exchange Offer—Terms of the Exchange Offer—General.” Prospective buyers of Change Common Stock could choose to acquire shares of Change Common Stock indirectly by purchasing shares of McKesson Common Stock and then tender such shares in the exchange offer. Additionally, certain market participants may use a hedging strategy to manage risk in the context of split-off transactions that involves shorting Change Common Stock. Both occurrences, or either individually, could result in a decrease in the price of Change Common Stock. See “The Exchange Offer—Terms of the Exchange Offer—General.”

Ownership of Change Common Stock will entitle holders to different rights than ownership of McKesson Common Stock.

There are differences between the rights that holders of McKesson Common Stock have with respect to McKesson compared to the rights that holders of Change Common Stock have with respect to Change. The differences relate to, among other things, rights with respect to the appointment and removal of directors, stockholder actions by written consent, the forums in which certain types of stockholder actions may be brought and procedures for amending the bylaws. For a further discussion, see “Comparison of Rights of Holders of McKesson Common Stock and Change Common Stock.”

 

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Risks Related to Change’s Business and Industry

Change faces significant competition, which may harm its business, results of operations or financial condition.

Change faces substantial competition from many healthcare information systems companies and other information technology (“IT”) and other technology companies within the healthcare IT and services markets. Change also competes with certain of its customers that provide internally some of the same solutions that it offers. This vigorous competition requires Change to provide high quality, innovative products at a competitive price. These competitive threats will likely remain or expand in the future. Change’s key competitors include:

 

   

healthcare transaction processing companies, including those providing electronic data interchange (“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 Electronic Health Records (“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 Change offers. There have been a number of recent entrants that have successfully marketed competitive solutions and they may expand these offerings in the future. Change 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 product obsolescence, loss of market share or erosion of prices. The extent of this competition varies by the size of companies, geographical coverage and scope and breadth of products and services offered. Within certain of the markets in which Change operates, its competitors are significantly larger and have greater financial or other resources 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.

 

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Change cannot guarantee that it will be able to upgrade its existing solutions or services, or introduce new solutions or services at the same rate as its competitors, or at all, nor can it guarantee that such upgrades or new solutions or services will achieve market acceptance over or among competitive offerings, or at all. Competitors may also commercialize products, services or technologies that render Change’s solutions obsolete or less marketable.

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

Competition with some customers, or decisions by customers to perform internally some of the same solutions or services that Change offers, could harm Change’s business, results of operations or financial condition.

Some of Change’s existing customers compete with it, or may do so in the future, and some customers belong to alliances that compete with Change, or may do so in the future, either with respect to the solutions or services Change provides to them now, or with respect to other lines of business. For example, some 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 Change, and additional payers may do so in the future. The ability of payers to replicate these solutions and the ability of providers to connect directly with payers may adversely affect the terms and conditions Change is able to negotiate in its agreements with payers and its transaction volume with them, which directly relates to its revenue. In addition, to the extent that customers elect to perform internally any of the business processes Change’s solutions address, either because they believe they can provide such processes more efficiently internally or otherwise, Change may lose such customers, or the volume of its business with such customers may be reduced, which could harm its 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 Change’s 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 Change’s solutions or services, or less demand for them, or both. In addition, when Change’s customers combine, they often consolidate infrastructure including IT systems, which in turn may erode the diversity of Change’s customer and revenue base. Any of these effects could harm Change’s business, results of operations or financial condition.

If Change is unable to retain its existing customers or attract new customers, its business, financial condition or results of operations could suffer.

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

Success in retaining and attracting customers will also depend, in part, on the ability of Change to innovate successfully and be responsive to technological developments, pricing pressures and changing business models.

To remain competitive in the evolving healthcare IT markets, Change must continuously upgrade its 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 existing solutions, resulting in pricing pressure or rendering such solutions obsolete or not competitive. In addition, because Change delivers enterprise-wide and single entity clinical, patient care, financial, imaging, supply chain and strategic management software solutions to payers, hospitals, physicians and other providers, its ability to integrate these software

 

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solutions could be challenged, which may impair its ability to retain customers and harm its reputation with existing and prospective customers. Change also may not be able to retain or attract customers if its solutions contain errors or otherwise fail to perform properly, if its pricing structure is not competitive or if it is unable to renegotiate customer contracts upon expiration.

Change’s revenue depends in part upon maintaining high customer retention rates and its future growth depends on attracting new customers. If Change is unable to maintain customer retention rates, or to attract new customers, its business, results of operations or financial condition could be adversely impacted.

If Change is unable to connect to a large number of payers and providers, its solutions would be limited and less desirable to customers.

Change’s business largely depends upon its 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 Change offers to providers, such as claims management and submission services, depends in part on its ability to connect to a large number of payers, which allows it to streamline and simplify workflows for providers. These connections may be made either directly or through a clearinghouse. Change may not be able to maintain its connections with a large number of payers on satisfactory terms and 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 Change’s solutions to be less attractive to provider customers. In addition, payer customers view Change’s 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 Change’s solutions. Competing EDI service providers can easily establish connections with payers and providers and thereby may replicate these solutions. Any 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 Change’s electronic transaction processing systems to be less desirable to healthcare constituents, which would reduce the number of transactions that Change processes, which would reduce its revenue and could have a material adverse impact on its business, results of operations or financial condition.

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

Change’s solutions must interoperate with its 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 Change’s customers and their vendors are changing rapidly and Change must continue to adapt to these changes in a timely and effective manner at an acceptable cost. In addition, Change’s customers and their vendors may implement new technologies into their existing networks and systems infrastructures that may not immediately interoperate with Change’s solutions. Change’s continued success will depend on its ability to adapt to changing technologies, manage and process ever-increasing amounts of data and information and improve the performance, features and reliability of its services in response to changing customer and industry demands. If Change encounters complications related to network configurations or settings, it may have to modify its solutions to enable them to interoperate with customers’ and their vendors’ networks and manage customers’ transactions in the manner intended. For example, if customers or their vendors implement new encryption protocols, it may be necessary for Change to obtain a license to implement or interoperate with such protocols, and there can be no assurance that Change will be able to obtain such a license on acceptable terms, if at all. These difficulties, and other difficulties Change may experience, could delay or prevent the successful design, development, testing, introduction or marketing of its solutions. As a consequence of any of the foregoing, Change’s ability to sell its solutions may be impaired, which could have a material adverse impact on Changes’ business, results of operations or financial condition.

 

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

Change has entered into contracts with channel partners to market and sell some of its solutions. Most of these contracts are on a non-exclusive basis. However, under contracts with some channel partners, Change may be bound by provisions that restrict its ability to market and sell solutions to potential customers. Change’s 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, Change may be unable to realize acceptable margins, but if the payments prove to be too low, 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 by competitors. If any of these channel partners is unsuccessful in marketing Change’s solutions or seeks to amend the financial or other terms of the contracts they have with Change, Change may need to broaden its marketing efforts to increase focus on the solutions they sell and alter its distribution strategy, which may divert planned efforts and resources from other projects and increase its costs generally. In addition, as part of the packages these channel partners sell, they may offer a choice to their customers between solutions that Change supplies and similar solutions offered by competitors or by the channel partners directly. If Change’s solutions are not chosen for inclusion in these packages, the revenue Change earns from its channel partner relationships will decrease. Lastly, Change could be subject to claims and liability as a result of the activities, products or services of these channel partners or other resellers of Change’s solutions. Even if these claims do not result in liability, investigating and defending these claims could be expensive, time-consuming and result in adverse publicity that could have a material adverse impact on Change’s business, results of operations or financial condition.

Change’s business strategy and future success depend on its ability to cross-sell its solutions.

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

If Change is unable to successfully expand its sales force productivity, sales of its solutions and the growth of its business and financial performance could be harmed.

Change continues to invest significantly in its sales force to obtain new customers and increase sales to existing customers. There is significant competition for sales personnel with the required skills and technical knowledge. Change’s ability to achieve significant revenue growth and profitably will depend, in large part, on its success in recruiting, training and retaining sufficient numbers of sales personnel to support its sales efforts. A portion of current sales personnel are new to Change. New hires require significant training and may require a lengthy onboarding process before they achieve full productivity. Recent hires and planned hires may not become productive as quickly as expected, and Change may be unable to hire or retain sufficient numbers of qualified individuals in the markets where it does business or plans to do business. If Change is unable to recruit, train and retain a sufficient number of productive sales personnel, sales of its solutions and the growth of its business could be harmed. Additionally, if efforts to improve sales force productivity do not result in increased revenue, operating results could be negatively impacted due to increased operating expenses associated with these efforts.

 

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Change has faced and will continue to face pressure to reduce prices, which may reduce its 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 Change to add functionality and keep prices competitive in order to retain market share. Likewise, as a result of Medicare or Medicaid payment reductions and other reimbursement changes, Change’s provider customers have sought, and may attempt in the future to seek, price concessions. If Change is unable to reduce costs sufficiently to offset declines in prices, or if Change is unable to introduce new, innovative offerings with higher margins, its business, results of operations or financial condition may be materially adversely impacted.

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 Change provides 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 Change’s solutions. If Change is forced to further reduce prices, margins will decrease and results of operations could deteriorate, unless Change is able to achieve corresponding reductions in expenses.

Change will incur transaction-related costs in connection with the Transactions.

Change has incurred and expects to incur additional non-recurring direct and indirect costs associated with the Transactions. These costs and expenses have included and will include additional fees paid to financial, legal and accounting advisors, filing fees, printing expenses and other related charges. There may also be additional unanticipated costs in connection with the Transactions. Although Change expects that the benefits of the Transactions will offset the transaction expenses over time, a net benefit may not be achieved in the near term or at all.

Change 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 its business, results of operations or financial condition.

A significant portion of Change’s revenue attributable to the ongoing use of or subscription to a service or solution after an initial sale or renewal without additional selling efforts is earned on a per transaction basis (or is derived from transaction-related services). As a result, even its revenue is tied to customer transaction, payment and reimbursement volumes 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 customer contracts. In addition, some contracts with customers generally can be terminated or not renewed without penalty and on little or no advance notice. As a result, this “recurring” revenue is highly dependent on Change maintaining its 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 Change’s 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 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 transaction volumes. In addition, such events could

 

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decrease payer or provider demand for Change’s solutions, which could further adversely impact revenue, including “recurring” revenue.

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

 

   

the financial stability of 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 Change’s business, results of operations or financial condition.

An economic downturn or volatility could have a material adverse impact on Change’s 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 Change’s solutions. As a result of volatile or uncertain economic conditions, Change may experience the negative effects of increased financial pressures on payer and provider customers. For instance, Change’s business could be negatively impacted by increased competitive pricing pressure and a decline in Change’s customers’ creditworthiness, which could result in Change incurring increased bad debt expense. Additionally, volatile or uncertain economic conditions in the United States and other parts of world could lead government customers to terminate, or elect not to renew, existing contracts with Change, or not enter into new contracts with it. If Change is not able to timely and appropriately adapt to changes resulting from a weak economic environment, it could have a material adverse impact on Change’s business, results of operations or financial condition.

Change’s ability to generate revenue could suffer if it does not continue to update and improve existing solutions and develop new ones.

Change must continually improve the functionality of its 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, customers may request that solutions be customized to satisfy particular security protocols, modifications and other contractual terms in excess of industry norms and standard configurations. Change 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 served by Change is rapid, and there are frequent new product and service introductions by competitors and channel partners who use Change’s solutions in their offerings. If Change does not respond successfully to technological and regulatory changes, as well as evolving industry standards and customer demands, its solutions may become obsolete. Technological changes

 

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also may result in the offering of competitive solutions at lower prices than Change is charging for its solutions, which could result in Change losing sales unless it lowers the prices it charges or provides additional efficiencies or capabilities to the customer. If Change lowers its prices on some of its solutions, it will need to increase margins on other solutions in order to maintain overall profitability.

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.

The future financial results of Change will depend in part on whether 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 existing or prospective customers. In addition, deployment of new or updated solutions may require the use of additional resources for training 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 Change’s business, results of operations or financial condition.

There are increased risks of performance problems and breaches during times when Change is making significant changes to its solutions or to systems Change uses to provide its solutions. In addition, changes to its 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, Change’s solutions and the software and systems Change uses to provide its solutions must be continually updated and enhanced. Because some of the software and systems that Change uses to provide solutions to customers are inherently complex, changing, updating, enhancing and creating new versions of Change’s solutions or the software or systems Change uses to provide its solutions create a risk of errors or performance problems, despite testing and quality control. Change 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 Change’s new, updated or enhanced solutions do not have performance problems, technical and customer service personnel may have difficulties installing them or providing any necessary training and support to customers, and customers may not follow Change’s guidance on appropriate training, support and implementation for such new, updated or enhanced solutions. In addition, changes in technology and systems may not provide the additional functionality or other benefits that were expected.

Implementation of changes in Change’s 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, Change cannot be sure that the testing will uncover all problems that may occur in actual use.

Change also periodically implements efficiency measures and other cost-saving initiatives to improve Change’s 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 Change’s organization, systems and processes.

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

 

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Change’s business will suffer if Change fails to successfully integrate acquired businesses and technologies or to appropriately assess the risks in particular transactions.

Change historically has acquired, and in the future may acquire, businesses, technologies, services, product lines and other assets. The successful integration of any businesses and assets Change has acquired or may acquire can be critical to Change’s future performance. The amount and timing of the expected benefits of any acquisition, including potential synergies, are subject to risks and uncertainties. These risks and uncertainties include, but are not limited to, those relating to:

 

   

Change’s ability to maintain relationships with the customers and suppliers of the acquired business;

 

   

Change’s ability to cross-sell solutions to customers with which Change has established relationships and those with which the acquired businesses have established relationships;

 

   

Change’s ability to retain or replace key personnel of the acquired business;

 

   

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

 

   

Change’s 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 Change has 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.

Change cannot guarantee that any acquired businesses, technologies, services, product lines or other assets will be successfully integrated with Change’s 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 Change’s business, results of operations or financial condition.

Although Change’s management attempts to evaluate the risks inherent in each transaction and to evaluate acquisition candidates appropriately, Change may not properly ascertain all such risks and the acquired businesses or other assets may not perform as Change expects or enhance the value of Change as a whole. Acquired companies or businesses also may have larger than expected liabilities that are not covered by the indemnification, if any, that Change is able to obtain from the sellers. Furthermore, the historical financial statements of the companies Change has acquired or may acquire in the future are prepared by management of such companies and are not independently verified by Change’s management. In addition, any pro forma financial statements prepared by Change 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 Change will continue to acquire businesses at valuations consistent with Change’s prior acquisitions or that Change will complete acquisitions at all. If Change is unable to successfully complete and integrate strategic acquisitions in a timely manner, Change’s business and growth strategies could be negatively affected.

Change may not realize the anticipated benefits of divestitures.

From time to time Change may divest assets or businesses. Change 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 Change’s strategic objectives or cause Change to incur

 

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additional expenses with respect to assets or a business that Change wants to dispose of, or Change may dispose of assets or a business at a price or on terms that are less favorable than Change anticipated. Additionally, such dispositions could result in disruption to other parts of Change’s business, potential loss of employees or customers, exposure to unanticipated liabilities or result in ongoing obligations and liabilities to Change following any such divestiture. For example, in connection with a disposition, Change may be contractually obligated with respect to certain continuing obligations to customers, vendors, or other third parties and Change 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 Change’s business, results of operations or financial condition.

Change’s business would be adversely affected if Change cannot obtain, process or distribute the highly regulated data Change requires to provide its solutions.

Change’s business relies on Change’s 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 Change or its data suppliers and processors to obtain such data in a compliant manner could have a harmful effect on Change’s ability to use and disclose such data which in turn could impair Change’s functions and operations, including Change’s ability to share such data with third parties or incorporate it into Change’s services and offerings. In addition to complying with requirements in obtaining the data, the use, processing and distribution of such data may require Change or its 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 Change. Moreover, Change may be subject to claims or liability for use or disclosure of information by reason of lack of valid notice, permission, or waiver. Change has policies and procedures in place addressing the proper handling and use of data, but could face claims that Change’s data practices may occur in a manner not permitted under applicable laws or Change’s agreements 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 Change to unexpected costs and adversely affect Change’s operating results.

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

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

Some of Change’s solutions are intended to provide information to healthcare professionals in the course of delivering patient care. Although Change’s contracts disclaim liability for medical decisions and responsibility

 

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for patient care, if use of or inability to use Change’s solutions leads to faulty clinical decisions or injury to patients, such disclaimers may be unenforceable and Change could be subject to claims or litigation, including product liability and warranty claims, by healthcare professionals, their patients or 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. Change could experience material warranty or product liability losses in the future and incur significant costs to defend these claims. In addition, if any of Change’s products or services are, or are alleged to be, defective, Change 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, Change 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 Change’s reputation, decrease demand for Change’s solutions, lead to withdrawals of Change’s solutions or impair Change’s ability to successfully launch and market Change’s solutions in the future. Product liability, warranty and recall costs may have a material adverse effect on Change’s business, financial condition, results of operations and cash flows.

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

Change attempts to limit, by contract, Change’s liability for damages arising from Change’s negligence, errors, mistakes or security breaches. However, contractual limitations on liability may not be accepted by Change’s customers, may not be enforceable or may otherwise not provide sufficient protection to Change from liability for damages. Change maintains 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 Change’s 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 Change, investigating and defending against them could be expensive and time consuming and could divert management’s attention away from Change’s operations. In addition, negative publicity caused by these events may negatively impact Change’s customer relationships, market acceptance of Change’s solutions, including unrelated solutions, or may harm Change’s reputation and business.

 

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

Change’s data and network operations centers are essential to Change’s business. Change’s business operations depend on Change’s ability to maintain and protect Change’s network and computer systems, many of which are located in Change’s primary data and operations centers that Change owns and operates and some of which are outsourced to certain third-party hosting providers. Change has consolidated several satellite data centers and plans to continue such consolidation. Change also provides remote and cloud hosting services that involve operating both Change’s software and the software of vendors for Change’s customers. The ability to access the systems, applications, and data that Change hosts and supports on demand is important to Change’s customers.

Change’s operations and facilities are vulnerable to interruption and/or damage from a number of sources, many of which are beyond Change’s 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 Change’s solutions, which could impair or prohibit Change’s ability to provide Change’s solutions, reduce the attractiveness of Change’s solutions to Change’s customers and could have a material adverse impact on Change’s business, results of operations or financial condition. If customers’ access to Change’s solutions is interrupted because of problems in the operation of Change’s or their facilities, Change could be in breach of Change’s 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.

Change attempts 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 Change’s precautions cannot protect against all risks. Any significant instances of system downtime could negatively affect Change’s reputation and ability to provide Change’s solutions or remote hosting services, which could have a material adverse impact on Change’s business, results of operations or financial condition.

Change also relies on a number of vendors, such as cloud service providers, to provide Change with a variety of solutions and services, including cloud-based data hosting, telecommunications and data processing services necessary for Change’s transaction services and processing functions and software developers for the development and maintenance of certain software products Change uses to provide Change’s solutions. As a result, Change’s 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, Change’s business and operations could be disrupted, Change’s brand and reputation could be harmed and Change’s financial condition or operating results could be adversely affected.

Breaches and failures of Change’s IT systems and the security measures protecting them, and the sensitive information Change transmits, uses and stores, expose Change to potential liability and reputational harm.

Change’s business relies on sophisticated information systems to obtain, rapidly process, analyze, and manage data, affecting Change’s ability to manufacture, purchase, distribute, and process products and services. To the extent Change’s IT systems are not successfully implemented or fail, Change’s business and results of operations may be adversely affected. Change’s business and results of operations may also be adversely affected if a vendor servicing Change’s 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, Change’s business relies to a

 

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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, Change seeks 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 Change’s security management efforts with respect to physical and technological infrastructure, employee training, vendor (and sub-vendor) controls and contractual relationships, Change’s infrastructure, data or other operation centers and systems used in connection with Change’s business operations, including the internet and related systems of Change’s vendors (including vendors to which Change outsources 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 Change’s 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 Change develops or procure from third parties could compromise Change’s 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 Change’s network, expose Change to risks including risks to Change’s ability to provide Change’s solutions and fulfill contractual demands, management distraction and the obligation to devote significant financial and other resources to mitigate such problems and increases to Change’s 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 Change’s possession or Change’s 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 Change’s security management efforts can cause existing customers to terminate their relationship with Change and deter existing or prospective customers from using or purchasing Change’s solutions in the future. These events can have a material adverse impact on Change’s business, results of operations, financial condition and reputation.

Because Change’s products and services involve the storage, use and transmission of personal information of consumers, Change 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 Change stores. Vendor, insider or employee cyber and security threats also occur and are a significant concern for all companies, including Change. 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 Change maintains liability insurance coverage including coverage for errors and omissions and cyber-liability, claims may not be covered or could exceed the amount of Change’s applicable insurance coverage, if any, or such coverage may not continue to be available on acceptable terms or in sufficient amounts.

 

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

Change’s ability to deliver its 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, Change’s 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 Change’s customers.

Change’s solutions are designed to operate without interruption in accordance with Change’s service level commitments. However, Change has experienced limited interruptions in these systems in the past, including server failures that temporarily slow down the performance of Change’s solutions, and Change may experience more significant interruptions in the future. Change relies on internal systems as well as vendors, including bandwidth and telecommunications equipment providers, to provide its solutions. Change does 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 Change’s solutions and prevent or inhibit the ability of Change’s customers to access Change’s solutions.

If a catastrophic event were to occur with respect to one or more of these systems or facilities, Change may experience an extended period of system unavailability, which could result in substantial costs to remedy those problems or negatively impact Change’s relationship with Change’s partners, Change’s business, results of operations and financial condition. To operate without interruption, both Change and its 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 Change’s own systems to handle current or higher volume of use could significantly harm Change’s business. Change exercises limited control over these vendors, which increases Change’s vulnerability to problems with services they provide. Any errors, failures, interruptions or delays experienced in connection with these vendor technologies and information services or Change’s own systems could negatively impact Change’s relationships with partners and adversely affect Change’s business and could expose Change to liabilities. Although Change maintains insurance for Change’s business, the coverage under Change’s policies may not be adequate to compensate Change for all losses that may occur. In addition, Change cannot provide assurance that it will continue to be able to obtain adequate insurance coverage at an acceptable cost.

The reliability and performance of Change’s 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 damage to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could

 

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reduce the level of Internet usage as well as the availability of the internet to Change for delivery of Change’s internet-based solutions.

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

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

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

Almost all of Change’s 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 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.

Change is unable to predict the full impact of the ACA and other health reform initiatives on Change’s 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 Change’s 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 Change’s business.

While many of the provisions of the ACA and other health reform initiatives may not be directly applicable to Change, such initiatives affect the businesses of Change’s customers and the Medicaid programs of the states with which Change has contracts. For example, as a result of Medicare payment reductions and other

 

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reimbursement changes mandated under the ACA, Change’s customers may attempt to seek price concessions from Change or reduce their use of Change’s 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 Change’s 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 Change’s customers, which could have a material adverse impact on Change’s 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 Change’s 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 Change and its customers, may encourage more companies to enter Change’s markets, may provide advantages to Change’s competitors and may result in the development of technology solutions that compete with Change’s. Any such initiatives also may result in a reduction of expenditures by existing or potential customers, which could have a material adverse impact on Change’s 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 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 2029.

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 Change serves or is planning to serve. In addition, Change’s 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 Change provides. For example, use of Change’s 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 Change’s eligibility and enrollment solutions.

The healthcare industry has changed significantly in recent years, and Change expects that significant changes will continue to occur. The timing and impact of developments in the healthcare industry are difficult to

 

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predict. Change cannot be sure that the markets for Change’s solutions will continue to exist at their current levels, will not change in ways that adversely affect Change or that Change 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 Change’s compliance efforts and Change’s 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 Change’s customers are subject to various requirements, Change may be impacted as a result of Change’s contractual obligations even when Change is 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 Change provides, and these laws and regulations may be applied to Change’s solutions in ways that Change does 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 Change’s operations, the use of Change’s solutions and Change’s ability to market new solutions, or could create unexpected liabilities for Change.

Change 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 Change’s operations as a result of the payment and remittance services Change offers directly or through vendors. Additionally, laws and regulations governing how Change communicates with Change’s customers and Change’s customers’ patients may impact Change’s operations and, if not followed, would result in fines, penalties and other liabilities and adverse publicity and injury to Change’s reputation.

Change is 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 Change’s 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 Change’s operations, the use of Change’s solutions and Change’s ability to market new solutions, or could create unexpected liabilities for Change. Change has attempted to structure Change’s operations to comply with laws, regulations and other requirements applicable to Change directly and to Change’s customers and contractors, but there can be no assurance that Change’s operations will not be challenged or impacted by enforcement initiatives. Change has been, and in the future may become, involved in governmental investigations, audits, reviews and assessments. Certain of Change’s 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 Change’s solutions violate, or cause Change’s customers to violate, applicable laws, regulations or other requirements could subject Change or its customers to civil or criminal penalties. Such a determination also could require Change to modify or terminate portions of Change’s business, disqualify Change from serving customers that do business with government entities or cause Change to refund some or all of Change’s service fees or otherwise compensate Change’s customers. In addition, failure to satisfy laws, regulations or other requirements could adversely affect demand for Change’s solutions and could force Change 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 Change’s reputation and could adversely affect Change’s ability to retain and attract customers. Laws, regulations and other requirements impacting Change’s 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

 

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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, Change is directly subject to certain provisions of the regulations as a “Business Associate.” Change is also directly subject to the HIPAA privacy and security regulations as a “Covered Entity” with respect to Change’s operations as a healthcare clearinghouse and with respect to Change’s 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 Change’s customers, Change is permitted to use and disclose protected health information to perform Change’s 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 Change is permitted to de-identify protected health information and use de-identified information for Change’s purposes, determining whether such protected health information has been sufficiently de-identified to comply with the HIPAA privacy standards and Change’s contractual obligations may require complex factual and statistical analyses and may be subject to interpretation.

If Change is unable to properly protect the privacy and security of protected health information entrusted to it, Change could be found to have breached Change’s contracts with Change’s 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 Change has failed to comply with applicable HIPAA privacy and security standards, Change 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 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 Change has implemented and maintained policies, processes and a compliance program infrastructure (e.g., a Privacy Office) to assist Change in complying with these laws and regulations and Change’s contractual obligations, Change cannot provide assurance regarding how these laws and regulations will be interpreted, enforced or applied to Change’s operations. In addition to the risks associated with enforcement activities and potential contractual liabilities, Change’s ongoing efforts to comply with evolving laws and regulations at the federal and state levels also might require Change 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

 

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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 Change’s 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 Change believes these solutions comply with current regulatory and security requirements in the jurisdictions in which Change provides these solutions, there can be no assurance that such requirements will not change or that Change 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 Change’s 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 Change’s operational costs, prevent Change from providing Change’s solutions, and/or impact Change’s ability to invest in or jointly develop Change’s solutions. Change also may face audits or investigations by one or more domestic or foreign government agencies relating to Change’s 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 Change’s business. Any failure or perceived failure by Change or by Change’s solutions to comply with these laws and regulations may subject Change to legal or regulatory actions, damage Change’s reputation or adversely affect Change’s ability to provide Change’s 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 Change’s policies and processes or the operation of Change’s solutions, Change may need to expend resources in order to change Change’s business operations, policies and processes or the manner in which Change provides its solutions. This could adversely affect Change’s business, financial condition and results of operations.

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 Change’s 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,

 

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Change may be required to apply additional resources to Change’s existing processes to assist Change’s affected customers in complying with this rule.

Despite Change’s security management efforts with respect to physical and technological infrastructure, employee training, vendor (and sub-vendor) controls and contractual relationships, Change’s infrastructure, data or other operation centers and systems used in Change’s business operations, including the internet and related systems of Change’s vendors (including vendors to whom Change outsources 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 Change’s systems and data. See “—Breaches and failures of Change’s IT systems and the security measures protecting them, and the sensitive information Change transmits, uses and stores, expose Change 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 adv