Excerpts from the Preliminary confidential offering memorandum, dated as of November 2, 2010.] Unless otherwise indicated or the context otherwise requires, the terms “MedAssets,” “we,” “our,” “us,” and the “company” refer to MedAssets, Inc. and its...
Exhibit 99.1
[Excerpts from the Preliminary confidential offering memorandum,
dated as of November 2, 2010.]
Unless otherwise indicated or the context otherwise requires,
the terms “MedAssets,” “we,”
“our,” “us,” and the “company”
refer to MedAssets, Inc. and its subsidiaries on a consolidated
basis.
On September 14, 2010, we entered into a Stock Purchase
Agreement (the “Purchase Agreement”) with Broadlane
Intermediate Holdings, Inc (“Broadlane”) and Broadlane
Holdings, LLC (“Broadlane LLC”), pursuant to which we
have agreed to acquire Broadlane and its subsidiaries (the
“Broadlane Acquisition”). In connection with the
Broadlane Acquisition, we will enter into a credit facility,
consisting of $750 million in secured first-lien
facilities, including a $600 million term loan facility
with a six-year maturity term and a $150 million revolving
facility with a five-year maturity (the “New Credit
Facility”). We intend to use the borrowings under the New
Credit Facility, together with the net proceeds from the
offering of notes pursuant to the Preliminary confidential
offering memorandum, to fund the purchase price of the Broadlane
Acquisition and to repay all outstanding indebtedness of
MedAssets and Broadlane (collectively, the
“Transactions”).
Summary
This summary highlights selected information about us and
this offering which is contained elsewhere in this offering
memorandum. This summary is not complete and does not contain
all of the information that you should consider before investing
in the notes. You should read the entire offering memorandum
carefully, especially the section describing the risks of
investing in our notes captioned “Risk factors,”
MedAssets’ consolidated financial statements and
accompanying footnotes thereto and the unaudited pro forma
condensed combined financial information included elsewhere in
this offering memorandum, before making any investment
decision.
Our
company
We are a leading provider of technology-enabled products and
services that together help mitigate the increasing financial
pressures faced by hospitals and health systems. These pressures
include lower revenues due to the increasing complexity of
healthcare reimbursement, rising bad debt and higher levels of
uncompensated care delivery and higher costs resulting from
increasing operational complexity, increasing clinical acuity,
and increased supply costs. Our solutions are designed to
improve operating margins and cash flow for hospitals and health
systems. We believe implementation of our full suite of
solutions has the potential to improve customer operating
margins by 1.5% to 5.0% of revenues by increasing revenue
capture and decreasing supply costs. Our customer base currently
includes over 125 health systems and, including those that are
part of our health system customers, more than 3,300 acute care
hospitals and over 40,000 ancillary or non-acute provider
locations.
We deliver our solutions through two business segments, Revenue
Cycle Management (“RCM”) and Spend Management. Our RCM
business offers a broad suite of tools that enable healthcare
providers to improve their revenue capture and cash collections
through patient admission and eligibility and the claim
preparation, submission and reimbursement process. Our Spend
1
Management business provides a comprehensive suite of services
that help our customers manage their non-labor expense
categories. Our solutions lower supply and medical device costs
and costs relating to supply utilization by managing the
procurement process through our group purchasing
organization’s portfolio of contracts, medical device
consulting services and business analytics and intelligence
technology solutions. Our group purchasing organization
(“GPO”) is the third largest GPO in the United States
based on annual spend managed.
Our technology-enabled solutions are delivered primarily through
company-hosted software, or software as a service
(“SaaS”), supported by enterprise-wide sales, account
management, implementation services and consulting. We employ an
integrated, customer-centric approach to delivering our
solutions that, when combined with the ability to deliver
measurable financial improvement, has resulted in high retention
of our large health system customers, and, in turn, a
predictable base of stable, recurring revenue.
According to the American Hospital Association, in 2008 the
average community hospital operating margin was 3.3% and
approximately 32% of community hospitals had negative total
margins. We believe that hospital and health system operating
margins will remain under long-term and continual financial
pressure due to shortfalls in available government
reimbursement, commercial insurance pricing leverage, and
continued escalation of supply utilization and operating costs.
Our suite of solutions directly addresses this problem in an
ever-growing marketplace. According to the U.S. Centers for
Medicare & Medicaid Services (“CMS”),
spending on healthcare in the United States was estimated to be
$2.5 trillion in 2009, or 17.6% of United States Gross
Domestic Product, or GDP. Healthcare spending is projected to
grow at a rate of approximately 6.1% per annum, and reach almost
$4.3 trillion by 2018, or 20.3% of GDP. In 2009, spending on
hospital care was estimated to be $760.6 billion,
representing the single largest component. Additionally, the
potential hospital supply chain market comprised of
medical/surgical supplies, prescription drugs and purchased
services is approximately $320 billion in size and growing
at approximately 6.0% to 7.0% annually driven by increases in
underlying purchases by healthcare providers, increasing supply
costs and technological advances.
Following the closing of the Broadlane Acquisition, the Company
will have approximately 85%
year-over-year
recurring revenue with a high degree of revenue visibility due
to typical contract lengths of three to five years. High
customer retention results in revenue certainty, as our RCM
business and the spend management businesses for both MedAssets
and Broadlane maintain greater than
90-95%
contract renewal rates. After giving effect to the pending
acquisition of Broadlane for the twelve months ended
September 30, 2010, we would have generated
$556 million of pro forma revenue and $190 million of
pro forma Adjusted EBITDA (including $20 million of
expected cost savings). Our common stock has been publicly
traded on the Nasdaq Global Select Market under the ticker
symbol “MDAS” since December 13, 2007 and as of
October 29, 2010, we had a market capitalization in excess
of $1 billion.
Our business
segments
Revenue Cycle
Management
We are one of the largest providers of revenue cycle management
solutions to hospitals and health systems and currently have
more than 2,200 hospital customers. Our RCM segment provides a
comprehensive suite of products and services spanning the
hospital revenue cycle workflow from patient check-in to patient
discharge including patient access and financial responsibility,
charge capture and integrity, pricing analysis, claims
processing and denials
2
management, payor contract management, revenue recovery and
accounts receivable services. Our workflow solutions, together
with data management, decision support, performance analytics
and compliance and audit tools, increase revenue capture and
cash collections, reduce accounts receivable balances and
increase regulatory compliance. Based on our analysis of certain
customers that have implemented a portion of our products and
services, we estimate that implementation of our full suite of
revenue cycle management solutions has the potential to increase
a typical health system’s revenue by 1.0% to 3.0%.
Our RCM segment generated revenue of $233 million for the
twelve-month period ended September 30, 2010 and accounted
for 61.3% of our total consolidated revenue.
Spend
Management
Our Spend Management segment provides a comprehensive suite of
technology-enabled services that help our customers manage their
non-labor expense categories. Our solutions lower supply and
medical device costs and costs related to supply utilization by
managing the procurement process through our GPO’s
portfolio of contracts, consulting services and business
analytics and intelligence tools. Based on our analysis of
certain customers that have implemented a portion of our
products and services, we estimate that implementation of our
full suite of spend management solutions has the potential to
decrease a typical health system’s supply expenses by 3.0%
to 10.0%, which equates to an increase in operating margin of
0.5% to 2.0% of revenue.
Through our Spend Management segment, we manage over
$14 billion of annual spend through our GPO and over
$10 billion through our other Spend Management offerings on
behalf of 1,700 hospital customers, making us the third-largest
GPO in the nation. GPOs primarily derive their revenue from
administrative fees earned from vendors based on a percentage of
dollars spent by their hospital and health system customers. In
addition to GPO services, we offer supply chain analytics and
strategic data services, medical device, or Physician Preference
Item (PPI) cost management services, and capital
equipment-market research and demand analysis.
Our spend management segment generated revenue of
$147 million for the twelve-month period ended
September 30, 2010 and accounted for 38.7% of our total
consolidated revenue.
The Broadlane
Acquisition
On September 14, 2010, we entered into an agreement to
acquire Broadlane, a leading provider of supply chain
management, strategic sourcing of supplies and services, capital
equipment lifecycle management, medical device or PPI cost
management, centralized procurement, clinical and lean process
consulting, which preserves or enhances value through the
elimination of processes, and clinical workforce optimization
solutions. Broadlane maintains a customer base that includes
over 1,100 acute care hospitals, more than 7,600
sub-acute
care facilities and over 48,000 physician practices, managing
more than $10 billion in annual spend through their GPO,
which we believe makes Broadlane the fifth largest GPO in the
United States based on annual spend managed. For the
twelve-month period ended September 30, 2010, Broadlane had
revenue and Adjusted EBITDA of $175 million and
$47 million, respectively. Broadlane’s compound annual
growth rates of revenue and Adjusted EBITDA for the period from
2007 to 2009 were 8.6% and 7.6%, respectively.
3
Through its GPO and its capital equipment and workforce
management solutions, Broadlane maintains a competitive contract
portfolio and uses its proprietary technology and its
competitive sourcing methods to help its customers manage their
expense categories. Broadlane also provides a broad array of
other cost management solutions, including supply chain
outsourcing, clinical consulting and lean process consulting
services to its healthcare provider customers.
Under the terms of the agreement, we have agreed to purchase
Broadlane for approximately $850 million in cash, with
$725 million to be paid at closing and $125 million to
be paid in January 2012, subject to adjustments and to certain
limitations on such payment contemplated by the debt financing
described elsewhere in this offering memorandum [such
$125 million payment is referred to in this Exhibit 99.1 as
the “deferred payment”]. The waiting period under the
Xxxx-Xxxxx-Xxxxxx
Antitrust Improvements Act of 1976 was terminated with respect
to the Broadlane Acquisition on October 14, 2010 and the
transaction is subject only to customary closing conditions.
After giving effect to the pending acquisition of Broadlane for
the twelve months ended September 30, 2010, we would have
generated $556 million of pro forma revenue and
$190 million of pro forma Adjusted EBITDA (including
$20 million of expected cost savings).
We believe the acquisition of Broadlane will:
• Enhance our ability to sell and deliver
differentiated value to customers. The combination
with Broadlane will significantly enhance our position as the
third largest GPO with total combined annual spend managed of
approximately $23 billion. The combination of our existing
flexible GPO contracting model where customers can utilize
several supply vendors simultaneously with Broadlane’s
high-compliance GPO contracting model, that typically leads to
its customers using Broadlane’s supply vendors on a more
exclusive basis, will result in a comprehensive and adaptable
portfolio of low-cost, high value-add GPO contracting solutions
for our customers. The addition of Broadlane also gives us an
expanded and more comprehensive suite of supply chain management
capabilities, including supply chain outsourcing, supply chain
analytics and data services, lean process consulting, and a
workforce management solution. We believe this improved scale
and enhanced product offerings will enable us to continue to
capitalize on the attractive industry fundamentals and strong
demand for these solutions.
• Strengthen our leading presence in Spend
Management. We expect that the acquisition will
significantly expand our footprint with hospital and acute care
customers creating increased cross-selling and up-selling
opportunities. We intend to leverage our larger national sales
force and customer service teams to expand utilization of
solutions by existing customers and introduce capabilities and
solutions to new customers.
• Allow us to realize significant cost
savings. We expect to generate substantial cost
savings by eliminating duplicative corporate overhead, redundant
staff and operations, back office and other non-employee related
expenses. We expect to achieve at least $20 million of
costs savings in 2011 and to incur between approximately $15 and
$20 million in one-time charges to achieve these savings.
• Allow us to realize potential revenue
synergies through GPO contract optimization. In
addition to the opportunity to increase our penetration rate
across a broader customer base, we expect to review all
contracts and migrate to the
best-of-breed
4
contract pricing, which is likely to improve savings for
customers and result in an increase in our revenue.
Our competitive
strengths
Comprehensive and flexible suite of
solutions. Our proprietary applications are
primarily delivered through SaaS-based software and are designed
to integrate with our customers’ existing systems and work
processes, rather than replacing enterprise software systems. As
a result, our solutions are scalable and generally require
minimal or no upfront investment by our customers.
Broadlane’s high compliance GPO model and our more flexible
GPO model will form a more comprehensive GPO solution and
Broadlane’s complementary technology and clinical
consulting expertise will enhance our cost management
capabilities. In addition, our products have been recognized as
industry leaders, with our claims management and payor contract
management software tools ranked first for the fourth
consecutive year by KLAS Enterprises LLC, an independent
organization that measures and reports on healthcare technology
vendor performance. Moreover, we can offer our customers an
opportunity to leverage our enhanced, comprehensive and flexible
set of product and service capabilities in order to help
transform their operations through fundamental and sustainable
process change and to increase cost savings, revenue capture
and/or cash
flows.
Strong free cash flow generation. On a
standalone basis, MedAssets has historically demonstrated growth
in top-line revenue and operating margins, leading to consistent
free cash flow generation and deleveraging. We have grown
Adjusted EBITDA faster than revenue by focusing on core
operational growth, operational leverage and a commitment to
process efficiency through lean management initiatives. Our
Adjusted EBITDA grew to $123 million for the twelve-month
period ended September 30, 2010 from $85 million in
2007 (after giving effect to the acquisition of Accuro
Healthcare Solutions Inc. (“Accuro”)), resulting in a
compound annual growth rate of 14.4%, while revenue grew to
$380 million for the same period from $274 million in
2007 (after giving effect to the acquisition of Accuro),
resulting in a compound annual growth rate of 12.6%. Our
standalone business has minimal capital expenditures
requirements (8.3% and 7.4% of sales in 2009 and the
twelve-month period ended September 30, 2010,
respectively), contributing to free cash flow generation of 9.4%
of sales and 10.3% of sales (free cash flow defined as operating
cash flow less capital expenditures and capitalized
research & development expenses) in the same time
periods. These cash flow trends have allowed us to maintain a
consistent track record of paying down debt. As an example, in
June 2008, we completed our largest prior transaction, the
$358 million acquisition of Accuro, increasing our total
bank debt to $274 million. As a result of strong cash flow
generation and Adjusted EBITDA growth, we reduced our total bank
debt to $174 million at September 30, 2010.
Successful history of growing our business and integrating
acquired businesses. Since our inception, we have
successfully acquired and integrated twelve significant
companies into the RCM and SM segments. For example, in 2003, we
extended our spend management solutions by acquiring Aspen
Healthcare Metrics LLC, a performance improvement consulting
firm, and created a platform for our revenue cycle management
solutions by acquiring OSI Systems, Inc. We have continued to
successfully grow these segments organically and by acquiring
companies with products and services that are complementary to
our own and supporting these acquired products and services with
our enterprise-wide sales, account management, consulting and
implementation services. Our financial performance since closing
the Accuro acquisition illustrates our ability to successfully
integrate a transformational acquisition and achieve projected
synergies. The successful integration of Accuro and other
acquisitions and our focus on
5
improving operating results has contributed to an expansion of
our Adjusted EBITDA margin from 31.0% in 2007 to 32.3% for the
twelve-month period ended September 30, 2010.
Experienced and driven sales force. We
currently employ highly-trained and focused sales and client
service teams of approximately 250 people. Our sales and
client service teams provide national coverage for establishing
and managing customer relationships and maintain close
relationships with senior management of hospitals and health
systems, as well as other operationally-focused executives
involved in areas of revenue cycle management and spend
management. Our large sales and client service teams allow us to
have personnel that focus on enterprise sales, which we define
as selling a comprehensive solution to healthcare providers, and
on technical sales, which we define as sales of individual
products and services. We utilize a highly consultative sales
process during which we gather extensive customer financial and
operating data that we use to demonstrate that our solutions can
yield significant near-term financial improvement. Our sales and
client service teams’ compensation is highly variable and
designed to drive profitable growth in sales to both current
customers and new prospects and to support customer satisfaction
and retention efforts. We expect to leverage our existing highly
consultative sales and client service teams and increased scale
to drive additional growth across the combined company’s
suite of products and solutions to both new and existing
customers.
Long-term and expanding customer
relationships. MedAssets and Xxxxxxxxx each
collaborate with our customers throughout the duration of our
relationships to ensure anticipated financial improvement is
realized and to identify additional solutions that can yield
incremental financial improvement. Our ability to provide
measurable financial improvement and expand the value of our
solutions over time has allowed us to develop strong
relationships with our customers’ senior management teams.
Our collaborative approach and ability to deliver measurable
financial improvement has resulted in high retention of our
large health system customers and, in turn, a predictable base
of stable, recurring revenue. Our ability to expand the breadth
and value of our solutions over time has allowed us to develop
strong relationships with our customers’ executive and
senior management teams. We believe the addition of several new
solutions from Broadlane will allow us to expand existing
relationships while creating more enterprise sales opportunities
as a result of the broader solution set offered by the combined
company.
Leading market positions and increased opportunity to
benefit from favorable industry dynamics. We
believe we hold a top three market share position in the two
segments in which we operate based on revenue with respect to
our RCM segment and annual spend managed with respect to our
Spend Management segment, and the Broadlane Acquisition serves
to reinforce this leadership in spend management while enhancing
opportunities for our revenue cycle management business. This
relative market share advantage enables us to invest in areas of
our business to enhance our competitiveness through product
innovation and development, sales and customer support, as well
as employee training and development.
Superior proprietary data. Our solutions are
supported by proprietary databases compiled by leveraging the
breadth of our customer base and product and service offerings
over a period of years. We believe our databases are highly
competitive within the industry and will continue to improve
with the addition of Broadlane’s proprietary data. We
integrate customer revenue cycle and spend management data sets
to help ensure that all chargeable supplies are accurately
represented in the hospital’s chargemaster, resulting in
increased revenue capture and enhanced regulatory compliance.
This content also enables us to provide our customers with spend
management decision support and analytical services, including
the ability to effectively manage and control their contract
portfolios and monitor pricing, tiers and market share. The
breadth
6
and scale of our combined customer base and product and service
offerings enhance our ability to continually update our
proprietary databases, ensuring that our data remains current
and comprehensive.
Proven and experienced management team. We
have an industry leading management team with strong executive
leadership and experience in executing and integrating strategic
acquisitions. Xxxx Xxxxxx, Chairman, CEO and President of
MedAssets, has over 25 years of experience in the
healthcare industry, having held various senior management
positions. Xxxx Xxxxxxx, Chief Operating Officer and Chief
Customer Officer of MedAssets, has worked in the healthcare
industry since 1980. Xxxxxxxxx CEO Xxx Xxxx is expected to join
the MedAssets Board of Directors and will become President of
Spend Management operations reporting to Xx. Xxxxxx.
Xx. Xxxx has been in the healthcare field since 1980 with
specific experience in finance, operations,
direct-to-consumer
marketing, strategic development, service and sales. We believe
the addition of Xx. Xxxx will help ensure customer
continuity, improve integration and maximize synergy capture
across the combined business.
Our
strategy
Our mission is to partner with hospitals and health systems to
enhance their financial strength through improved operating
margins and cash flows. Key elements of our strategy include:
Capitalizing on strong industry
fundamentals. The revenue cycle management and
spend management industries have experienced strong growth over
the past several years due to increasing financial pressures
faced by hospitals and health systems. These include the
increasing complexity of healthcare reimbursement, rising levels
of bad debt and uncompensated care and significant increases in
supply utilization and operating costs. We believe there is
tremendous pressure on the United States healthcare system to
reduce costs and transform the delivery system. Our revenue
cycle management solutions and more powerful combined spend
management business will help our customers simultaneously
capture greater revenue and reduce costs.
Completing the successful integration of Broadlane and
maximizing the full range of revenue synergies and cost savings
from the combined operations. Our acquisition of
Broadlane continues our strategic focus on expanding our suite
of differentiated technology-enabled solutions for spend and
revenue cycle management to help hospitals control costs and
improve cash flows and margins. We expect to realize significant
cost savings and revenue synergies in the Broadlane Acquisition.
We believe we will be able to extract both revenue synergies and
cost savings by:
• Taking advantage of enhanced scale and larger
customer footprint to improve leverage with suppliers to
negotiate more favorable pricing for our expanded customer base;
• Using the size, scale and expertise of our existing
sales force, enhanced by the Broadlane Acquisition, to
cross-sell and up-sell the combined and more comprehensive suite
of supply chain management solutions alongside our existing
suite of RCM solutions to our expanded customer base;
• Eliminating redundant corporate overhead,
duplicative operating functions and back-office expenses, and
leveraging existing overhead across a wider range of
services; and
• Migrating to the
best-of-breed
contract pricing following the Broadlane Acquisition, which is
likely to increase savings for customers and generate higher
gross administrative
7
fees from vendors. We do not believe this will impact our
outstanding record of customer retention.
Continually improving and expanding our suite of
solutions. We intend to continue to deploy our
research and development team, proprietary databases and
industry knowledge to further integrate our products and
services and develop new financial improvement solutions for
hospitals and healthcare providers. We believe our internal
research and development department will be enhanced as a result
of the Broadlane Acquisition. In addition to our enhanced
internal research and development team, we also intend to expand
our portfolio of solutions through strategic partnerships and
acquisitions that will allow us to offer incremental financial
improvement to healthcare providers.
Further penetrating our existing customer base and
attracting new customers. We intend to leverage our
and Broadlane’s long-standing customer relationships and
enhanced sales team to increase the penetration rate for our
expanded suite of solutions with our and Broadlane’s
existing hospital and health system customers. Within our large
and diverse customer base, many of our hospital and health
system customers utilize solutions from only one of our
segments. The vast majority of our customers use less than the
full suite of our solutions. We intend to utilize our large and
experienced sales team and comprehensive suite of solutions to
aggressively seek new customers. We believe that our
comprehensive and flexible suite of solutions and ability to
demonstrate financial improvement opportunities through our
highly-consultative sales process will continue to allow us to
successfully differentiate our solutions from those of our
competitors.
Maintaining an internal environment that fosters a strong
and dynamic culture. Our management team strives to
maintain an organization of individuals who possess a strong
work ethic and high integrity, and who are recognized for their
dependability and commitment to excellence. We believe that this
results in attracting employees who are driven to achieve our
long-term mission of being the recognized leader in the markets
in which we compete. We believe that dynamic, customer-centric
thinking will be a catalyst for our continued growth and success.
8
Summary
historical and pro forma financial data
MedAssets
summary historical and pro forma financial data
The following tables set forth our summary historical
consolidated financial data as of December 31, 2009 and
2008, for the fiscal years ended December 31, 2009, 2008
and 2007, as of September 30, 2010 and for the nine months
ended September 30, 2010 and 2009, as well as our pro forma
combined financial data as of September 30, 2010, for the
fiscal year ended December 31, 2009, for the nine months
ended September 30, 2010 and the twelve months ended
September 30, 2010. The summary consolidated financial data
as of December 31, 2009 and 2008 and for the fiscal years
ended December 31, 2009, 2008 and 2007 should be read
together with our audited consolidated financial statements and
the related notes included elsewhere in this offering
memorandum. The summary consolidated financial data for the nine
months ended September 30, 2010 and September 30, 2009
and as of September 30, 2010 should be read together with
our unaudited condensed consolidated financial statements and
the related notes included elsewhere in this offering
memorandum. The unaudited condensed consolidated financial
statements have been prepared on the same basis as our audited
consolidated financial statements and, in the opinion of our
management, reflect all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the
financial information for the periods presented.
The unaudited pro forma condensed combined statement of
operations for the fiscal year ended December 31, 2009, the
nine months ended September 30, 2010 and the twelve months
ended September 30, 2010 give effect to the Transactions as
if they had occurred on January 1, 2009. The pro forma
information for the twelve months ended September 30, 2010
has been derived by adding the consolidated financial data for
the fiscal year ended December 31, 2009 and the nine months
ended September 30, 2010 and subtracting the consolidated
financial data for the nine months ended September 30,
2009. The unaudited pro forma condensed combined balance sheet
as of September 30, 2010 gives effect to the Transactions
as if they had occurred on September 30, 2010. The
unaudited pro forma condensed combined financial statements are
derived from MedAssets’ consolidated financial statements
for the periods and dates indicated, and Xxxxxxxxx’s
consolidated statement of operations for the year ended
December 31, 2009, unaudited consolidated statement of
operations for the nine months ended September 30, 2010 and
unaudited consolidated balance sheet as of September 30,
2010. The unaudited pro forma condensed combined financial
information has been derived from estimates and financial
information that are likely to change materially between the
date of this offering memorandum and the closing date of the
Broadlane Acquisition. Accordingly, the unaudited pro forma
condensed combined financial information should not be
considered illustrative of what our financial condition or
results of operations would have been had the Transactions been
completed on the dates indicated and does not purport to project
our future financial condition and results of operations
following the consummation of the Transactions.
The pro forma financial information does not include
management’s estimate of expected cost savings related to
the combination of the operations of the businesses (other than
Adjusted EBITDA with expected cost savings) or the related costs
to achieve those cost savings. In addition, the pro forma
information does not include transaction-related costs and
transaction fees expected to be incurred in connection with the
consummation of the Transactions.
We therefore caution you not to place undue reliance on the
unaudited pro forma condensed combined financial information.
9
The results presented below are not necessarily indicative of
the results to be expected for any future period, and the
results for any interim period are not necessarily indicative of
the results that may be expected for a full year. You should
read the following tables together with “Management’s
discussion and analysis of financial condition and results of
operations of MedAssets, ” “Management’s
discussion and analysis of financial condition and results of
operations of Broadlane,” “Unaudited pro forma
condensed combined financial information” and
MedAssets’ and Xxxxxxxxx’s respective historical
consolidated financial statements and the related notes included
elsewhere in this offering memorandum.
|
Pro forma |
Pro forma |
Pro forma |
||||||||||||||||||||||||||||||
|
for fiscal |
for nine |
for twelve |
||||||||||||||||||||||||||||||
|
Fiscal year ended |
Nine months ended |
year ended |
months ended |
months ended |
||||||||||||||||||||||||||||
|
(Unaudited and in |
December 31, |
September 30, |
September 30, |
December 31, |
September 30, |
September 30, |
||||||||||||||||||||||||||
| thousands) | 2007 | 2008 | 2009 | 2009 | 2010 | 2009 | 2010 | 2010 | ||||||||||||||||||||||||
|
Consolidated statement of operations data:
|
||||||||||||||||||||||||||||||||
|
Revenue:
|
||||||||||||||||||||||||||||||||
|
Administrative fees, net
|
$ | 94,792 | $ | 105,765 | $ | 108,223 | $ | 78,495 | $ | 84,437 | $ | 225,953 | $ | 172,558 | $ | 233,215 | ||||||||||||||||
|
Other service fees
|
93,726 | 173,891 | 233,058 | 167,091 | 199,948 | 282,852 | 242,473 | 322,344 | ||||||||||||||||||||||||
|
Total net revenue
|
188,518 | 279,656 | 341,281 | 245,586 | 284,385 | 508,805 | 415,031 | 555,559 | ||||||||||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||||||||||||||
|
Cost of revenue
|
27,983 | 51,548 | 74,651 | 55,830 | 67,176 | 143,978 | 125,953 | 163,332 | ||||||||||||||||||||||||
|
Product development expenses
|
7,785 | 16,393 | 18,994 | 15,424 | 14,859 | 32,269 | 24,393 | 31,699 | ||||||||||||||||||||||||
|
Selling and marketing expenses
|
35,748 | 43,205 | 45,282 | 36,529 | 35,348 | 52,219 | 41,257 | 52,113 | ||||||||||||||||||||||||
|
General and administrative expenses
|
64,817 | 91,481 | 110,661 | 77,971 | 91,425 | 141,483 | 114,223 | 157,118 | ||||||||||||||||||||||||
|
Acquisition related expenses
|
– | – | – | – | 4,351 | – | 2,805 | 2,805 | ||||||||||||||||||||||||
|
Depreciation
|
7,115 | 9,793 | 13,211 | 9,020 | 14,068 | 17,008 | 17,241 | 22,238 | ||||||||||||||||||||||||
|
Amortization of intangibles
|
15,778 | 23,442 | 28,012 | 21,029 | 17,706 | 90,829 | 63,044 | 85,731 | ||||||||||||||||||||||||
|
Impairment of property and equipment, intangibles and in process
research and development
|
1,204 | 2,272 | – | – | – | – | – | – | ||||||||||||||||||||||||
|
Total operating expense
|
160,430 | 238,134 | 290,811 | 215,803 | 244,933 | 477,786 | 388,916 | 515,036 | ||||||||||||||||||||||||
|
Operating income (loss)
|
28,088 | 41,522 | 50,470 | 29,783 | 39,452 | 31,019 | 26,115 | 40,523 | ||||||||||||||||||||||||
|
Other income (expense):
|
||||||||||||||||||||||||||||||||
|
Interest (expense)
|
(20,391 | ) | (21,271 | ) | (18,114 | ) | (14,015 | ) | (10,986 | ) | (87,687 | ) | (62,458 | ) | (84,333 | ) | ||||||||||||||||
|
Other income (expense)
|
3,115 | (1,921 | ) | 417 | 404 | 286 | 472 | 446 | 458 | |||||||||||||||||||||||
|
Income (loss) before income taxes
|
10,812 | 18,330 | 32,773 | 16,172 | 28,752 | (56,196 | ) | (35,897 | ) | (43,352 | ) | |||||||||||||||||||||
|
Income tax expense (benefit)
|
4,516 | 7,489 | 12,826 | 6,196 | 11,477 | (19,996 | ) | (12,296 | ) | (14,372 | ) | |||||||||||||||||||||
|
Net income (loss)
|
$ | 6,296 | $ | 10,841 | $ | 19,947 | $ | 9,976 | $ | 17,275 | $ | (36,200 | ) | $ | (23,601 | ) | $ | (28,980 | ) | |||||||||||||
10
| Nine months ended | ||||||||||||||||||||
| Fiscal year ended December 31, |
September 30, |
September 30, |
||||||||||||||||||
| (Unaudited and in thousands) | 2007 | 2008 | 2009 | 2009 | 2010 | |||||||||||||||
|
Consolidated cash flows and other financial data:
|
||||||||||||||||||||
|
Net cash provided by operating activities
|
$ | 41,624 | $ | 52,128 | $ | 60,303 | $ | 39,951 | $ | 47,105 | ||||||||||
|
Net cash used in investing activities
|
(107,654 | ) | (227,996 | ) | (46,462 | ) | (39,776 | ) | (24,634 | ) | ||||||||||
|
Net cash provided by (used in) financing activities
|
179,523 | 44,345 | (13,772 | ) | (929 | ) | (27,961 | ) | ||||||||||||
|
Pro forma |
||||||||||||||||
|
As of |
As of |
As of |
as of |
|||||||||||||
|
December |
December |
September 30, |
September |
|||||||||||||
| (Unaudited and in thousands) | 31, 2008 | 31, 2009 | 2010 | 30, 2010 | ||||||||||||
|
Consolidated balance sheet data:
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 5,429 | $ | 5,498 | $ | 8 | $ | 11,989 | ||||||||
|
Accounts receivable, net
|
55,048 | 67,617 | 75,692 | 122,573 | ||||||||||||
|
Property and equipment, net
|
42,417 | 54,960 | 61,318 | 68,630 | ||||||||||||
|
Total assets
|
773,860 | 778,544 | 782,334 | 1,896,306 | ||||||||||||
|
Existing line of credit
|
– | – | – | – | ||||||||||||
|
New Credit Facility
|
– | – | – | 600,000 | ||||||||||||
|
Notes offered hereby
|
– | – | – | 360,000 | ||||||||||||
|
Total liabilities
|
390,921 | 341,172 | 304,279 | 1,429,521 | ||||||||||||
|
Total stockholders’ equity
|
382,939 | 437,372 | 478,055 | 466,785 | ||||||||||||
11
|
Pro forma |
||||||||||||||||||||||||||||
|
Twelve |
for twelve |
|||||||||||||||||||||||||||
|
months |
months |
|||||||||||||||||||||||||||
| Nine months ended |
ended |
ended |
||||||||||||||||||||||||||
| Fiscal year ended December 31, |
September 30, |
September 30, |
September 30, |
September 30, |
||||||||||||||||||||||||
| (Unaudited and in thousands) | 2007 | 2008 | 2009 | 2009 | 2010 | 2010 | 2010 | |||||||||||||||||||||
|
Other financial data:
|
||||||||||||||||||||||||||||
|
EBITDA(1)
|
$ | 53,063 | $ | 72,969 | $ | 95,249 | $ | 62,606 | $ | 74,088 | $ | 106,731 | $ | 152,292 | ||||||||||||||
|
Adjusted EBITDA(1)
|
60,571 | 89,716 | 111,438 | 75,391 | 86,763 | 122,810 | 169,767 | |||||||||||||||||||||
|
Adjusted EBITDA with
expected cost savings(1) |
189,767 | |||||||||||||||||||||||||||
|
Total capital expenditures(2)
|
16,691 | 18,024 | 28,187 | 21,501 | 21,474 | 28,160 | 39,020 | |||||||||||||||||||||
|
Total cash interest
expense(3) |
73,924 | |||||||||||||||||||||||||||
|
Total debt(4)
|
960,000 | |||||||||||||||||||||||||||
|
Ratio of total debt to
twelve month Adjusted EBITDA with expected cost savings |
5.1 | |||||||||||||||||||||||||||
|
Ratio of Adjusted EBITDA
with expected cost savings to total cash interest expense |
2.6 | |||||||||||||||||||||||||||
(1) EBITDA represents net
income before interest, taxes, depreciation and amortization.
Adjusted EBITDA represents EBITDA adjusted to exclude the
effects of non-cash stock-based compensation expense, certain
acquisition-related expenses and other non-recurring, non-cash
or non-operating items. Adjusted EBITDA with expected cost
savings is Adjusted EBITDA adjusted to reflect management’s
estimates of expected cost savings related to the combination of
the operations of MedAssets and Broadlane. Adjusted EBITDA with
expected cost savings does not include any one-time charges to
be incurred in order to realize the expected cost savings. We
currently estimate such one-time charges to be between
approximately $15.0 million and $20.0 million. These
estimates reflect our current beliefs and expectations and are
based on information currently available to us. As such, no
assurance can be given that the expected cost savings can be
achieved in whole or at all or that our future growth, results
of operations and performance in light of such expected cost
savings will be achieved. We believe that the presentation of
EBITDA, Adjusted EBITDA and Adjusted EBITDA with expected cost
savings included in this offering memorandum provides useful
information to investors with which to analyze our operating
trends and performance and ability to service and incur debt.
Further, we believe EBITDA, Adjusted EBITDA and Adjusted EBITDA
with expected cost savings facilitate
company-to-company
operating performance comparisons by backing out potential
differences caused by variations in capital structures
(affecting net interest expense), taxation and the age and book
depreciation of property, plant and equipment (affecting
relative depreciation expense), which may vary for different
companies for reasons unrelated to operating performance. In
addition, we believe that EBITDA is frequently used by
securities analysts, investors and other interested parties in
their evaluation of companies, many of which present an EBITDA
measure when reporting their results. EBITDA, Adjusted EBITDA
and Adjusted EBITDA with expected cost savings are not
measurements of financial performance under GAAP and should not
be considered as an alternative to net income as a measure of
performance or to net cash flows provided by (used in)
operations as a measure of liquidity. In addition, other
companies may define EBITDA, Adjusted EBITDA and Adjusted EBITDA
with expected cost savings differently and, as a result, our
measures of EBITDA, Adjusted EBITDA and Adjusted EBITDA with
expected cost savings may not be directly comparable to EBITDA,
Adjusted EBITDA or Adjusted EBITDA with expected cost savings of
other companies. Furthermore, EBITDA, Adjusted EBITDA and
Adjusted EBITDA with expected cost savings each has limitations
as an analytical tool, and you should not consider them in
isolation, or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations are:
• EBITDA, Adjusted EBITDA and Adjusted EBITDA with
expected cost savings do not reflect our cash expenditures, or
future requirements, for capital expenditures or contractual
commitments,
• EBITDA, Adjusted EBITDA and Adjusted EBITDA with
expected cost savings do not reflect changes in, or cash
requirements for, our working capital needs,
• EBITDA, Adjusted EBITDA and Adjusted EBITDA with
expected cost savings do not reflect the significant interest
expense, or the cash requirements necessary to service interest
or principal payments, on our debt,
12
• EBITDA, Adjusted EBITDA and Adjusted EBITDA with
expected cost savings do not reflect our provision for income
taxes, which may vary significantly from period to period (see
“Management’s discussion and analysis of financial
condition and results of operations of MedAssets”), and
• Although depreciation and amortization are non-cash
charges, the assets being depreciated and amortized will often
have to be replaced in the future, and EBITDA, Adjusted EBITDA
and Adjusted EBITDA with expected cost savings do not reflect
any cash requirements for such replacements.
Because of these limitations, EBITDA, Adjusted EBITDA and
Adjusted EBITDA with expected cost savings should not be
considered as a measure of discretionary cash available to us to
invest in the growth of our business. We compensate for these
limitations by relying primarily on our GAAP results and using
EBITDA and Adjusted EBITDA only supplementally. You are
cautioned not to place undue reliance on EBITDA, Adjusted EBITDA
or Adjusted EBITDA with expected cost savings.
(2) Total capital expenditures
includes purchases of property, equipment and software and
capitalized software development costs.
(3) Amount represents the cash
paid on our indebtedness and excludes non-cash interest
associated with our finance obligation, deferred financing costs
and deferred payment amount.
(4) Excludes the
$125.0 million deferred payment. Also excludes the finance
obligation as this obligation is not included in the calculation
of outstanding indebtedness for purposes of satisfying the
covenants contained in the New Credit Facility. See Note 6
of the Notes to our Consolidated Financial Statements, under the
sub-heading “Finance Obligation” for additional
information regarding this transaction and the related
obligation.
The following table reconciles EBITDA and Adjusted EBITDA to net
income attributable to MedAssets, which we consider to be the
most directly comparable GAAP financial measure to EBITDA and
Adjusted EBITDA:
|
Pro forma |
||||||||||||||||||||||||||||
|
Twelve |
for twelve |
|||||||||||||||||||||||||||
|
months |
months |
|||||||||||||||||||||||||||
| Fiscal year ended December 31, | Nine months ended |
ended |
ended |
|||||||||||||||||||||||||
|
(Unaudited and in |
September |
September |
September |
September |
||||||||||||||||||||||||
| thousands) | 2007 | 2008 | 2009 | 30, 2009 | 30, 2010 | 30, 2010 | 30, 2010 | |||||||||||||||||||||
|
Net income
|
$ | 6,296 | $ | 10,841 | $ | 19,947 | $ | 9,976 | $ | 17,275 | $ | 27,246 | $ | (28,980 | ) | |||||||||||||
|
Depreciation
|
7,115 | 9,793 | 13,211 | 9,020 | 14,068 | 18,259 | 22,238 | |||||||||||||||||||||
|
Depreciation (included in cost or revenue)
|
353 | 709 | 2,426 | 1,836 | 2,167 | 2,757 | 2,757 | |||||||||||||||||||||
|
Amortization of intangibles
|
15,778 | 23,442 | 28,012 | 21,029 | 17,706 | 24,689 | 85,731 | |||||||||||||||||||||
|
Amortization of intangibles (included in cost of revenue)
|
792 | 872 | 740 | 555 | 509 | 694 | 694 | |||||||||||||||||||||
|
Interest expense, net of interest
amount(1)
|
18,213 | 19,823 | 18,087 | 13,994 | 10,886 | 14,979 | 84,224 | |||||||||||||||||||||
|
Income tax expense (benefit)
|
4,516 | 7,489 | 12,826 | 6,196 | 11,477 | 18,107 | (14,372 | ) | ||||||||||||||||||||
|
EBITDA
|
53,063 | 72,969 | 95,249 | 62,606 | 74,088 | 106,731 | 152,292 | |||||||||||||||||||||
|
Impairment of
intangibles(2)
|
1,204 | 2,272 | – | – | – | – | – | |||||||||||||||||||||
|
Share-based compensation
expense(3)
|
5,611 | 8,550 | 16,652 | 12,911 | 8,653 | 12,394 | 13,081 | |||||||||||||||||||||
|
Other (gains)
losses(4)
|
– | – | – | – | – | – | (156 | ) | ||||||||||||||||||||
|
Rental income from capitalizing building
lease(5)
|
(438 | ) | (438 | ) | (439 | ) | (329 | ) | (329 | ) | (439 | ) | (439 | ) | ||||||||||||||
|
Purchase accounting
adjustments(6)
|
1,131 | 2,449 | (24 | ) | 203 | – | (227 | ) | 2,184 | |||||||||||||||||||
|
Interest rate swap
cancellation(7)
|
– | 3,914 | – | – | – | – | – | |||||||||||||||||||||
|
Acquisition related
expenses(8)
|
– | – | – | – | 4,351 | 4,351 | 2,805 | |||||||||||||||||||||
|
Adjusted EBITDA
|
$ | 60,571 | $ | 89,716 | 111,438 | $ | 75,391 | $ | 86,763 | $ | 122,810 | $ | 169,767 | |||||||||||||||
|
Plus: Expected cost
savings(9)
|
20,000 | |||||||||||||||||||||||||||
|
Adjusted EBITDA with expected cost savings
|
$ | 189,767 | ||||||||||||||||||||||||||
(1) Interest income is
included in other income (expense) and is not netted against
interest expense in MedAssets’ Consolidated Statement of
Operations.
(2) Impairment of intangibles
during the fiscal year ended December 31, 2008 primarily
relates to acquired developed technology from prior
acquisitions, revenue cycle management tradename and internally
developed software products, mainly due to the integration of
Accuro’s operations and products. Impairment of intangibles
during fiscal year ended December 31, 2007 represents the
write-off of in-process research and development from the
XactiMed, Inc. (“XactiMed”) acquisition in May 2007.
(3) Represents non-cash
share-based compensation expense for both employees and
directors. The increase in 2009 is due to share-based grants
made under our 2008 Long-Term Performance Incentive Plan. The
increase in 2008 is due to share-based grants made subsequent to
our initial public offering. The significant increase in 2007 is
due to the adoption of SFAS No. 123(R). We believe
13
excluding this non-cash expense
allows us to compare our operating performance without regard to
the impact of share-based compensation expense, which varies
from period to period based on the amount and timing of grants.
(4) Other (gains) losses
consist primarily of (gains) losses from interest rate
derivative financial instruments.
(5) The imputed rental income
recognized with respect to a capitalized building lease is
deducted from net income (loss) due to its non-cash nature. We
believe this income is not a useful measure of continuing
operating performance. See Note 6 to MedAssets’
Consolidated Financial Statements for further discussion of this
rental income.
(6) The MedAssets adjustments
include the effect on revenue of adjusting acquired deferred
revenue balances, net of any reduction in associated deferred
costs, to fair value as of the respective acquisition dates for
Accuro and XactiMed. The reduction of the deferred revenue
balances materially affects
period-to-period
financial performance comparability and revenue and earnings
growth in future periods subsequent to the acquisition and is
not indicative of changes in underlying results of operations.
In 2010, these adjustments will no longer be reconciling items
related to acquired deferred revenue balances because the
amounts were fully amortized in 2009. In addition, the pro forma
amounts include certain purchase accounting adjustments related
to Broadlane’s historical acquisitions.
(7) During the fiscal year
ended December 31, 2008, we recorded an expense associated
with the cancellation of our interest rate swap arrangements. In
connection with the cancellation, we paid the counterparty
$3.9 million in termination fees. We believe such expense
is infrequent in nature and is not indicative of continuing
operating performance.
(8) These charges reflect the
due diligence and acquisition-related expenses pertaining to
merger and acquisition activities. We consider these charges to
be non-operating expenses and unrelated to our underlying
results of operations.
(9) Expected cost savings by
type are as follows (in thousands):
|
Salaries, bonus and
benefits(i)
|
$ | 16,200 | ||
|
Facilities(ii)
|
1,700 | |||
|
Professional fees and
other(iii)
|
2,100 | |||
|
Total expected cost savings
|
$ | 20,000 |
(i) Represents the elimination
of salaries, bonus and benefits of certain senior executives of
Broadlane and certain administrative, back office and
operational employees who are in redundant positions with
positions currently existing at MedAssets. These positions will
be eliminated following the consummation of the Broadlane
Acquisition.
(ii) Represents savings
expected from office space consolidation at certain of our
facilities.
(iii) Represents reductions in
outsourced professional services, reduction in employee travel
related expenses and reductions of other duplicative costs.
14
Capitalization
The following table sets forth our unaudited consolidated cash
and cash equivalents and capitalization as of September 30,
2010:
• on an actual basis, and
• on a pro forma basis to give effect to the
Transactions (after deducting estimated discounts, commissions
and offering expenses), the application of net proceeds from
this offering and the consummation of the Broadlane Acquisition
as if they had occurred on such date.
You should read this table together with “Use of
proceeds,” “The Broadlane Acquisition,”
“Selected historical consolidated financial data of
MedAssets,” “Unaudited pro forma condensed combined
financial information” and “Management’s
discussion and analysis of financial condition and results of
operations of MedAssets” and MedAssets’ consolidated
financial statements and the related notes included elsewhere in
this offering memorandum.
| As of September 30, 2010 | ||||||||
| (Unaudited and in thousands) | Actual | Pro forma(1) | ||||||
|
Cash and cash
equivalents(2)
|
$ | 8 | $ | 11,989 | ||||
|
Debt:
|
||||||||
|
Existing Credit Facility
|
173,515 | – | ||||||
|
Finance
obligation(3)
|
9,734 | 9,734 | ||||||
|
New Credit
Facility(4)
|
– | 600,000 | ||||||
|
Notes offered hereby
|
– | 360,000 | ||||||
|
Total
debt(5)
|
183,249 | 969,734 | ||||||
|
Total stockholders’ equity
|
478,055 | 466,785 | ||||||
|
Total capitalization
|
$ | 661,304 | $ | 1,436,519 | ||||
(1) Assumes that the
consideration of $725.0 million (excluding the
$125.0 million Deferred Payment Amount) for the Broadlane
Acquisition will be paid in cash at the closing of the Broadlane
Acquisition. See “The Broadlane Acquisition” and
“Unaudited pro forma condensed combined financial
information.” This offering is conditioned on the closing
of the Broadlane Acquisition.
(2) Assumes that we will
acquire $48.1 million in cash and cash equivalents relating
to the Broadlane business at the closing of the Broadlane
Acquisition, which is based on Broadlane’s consolidated
cash and cash equivalents of $48.1 million set forth on its
unaudited consolidated balance sheet as of September 30,
2010.
(3) Represents a capital lease
obligation incurred in a sale and subsequent leaseback
transaction of an office building in August 2003. The amount
represents the net present value of the obligation. See
Note 6 of the Notes to Consolidated Financial Statements,
under the
sub-heading
“Finance Obligation” for additional information
regarding this transaction and the related obligation.
(4) Assumes that we borrow
$600.0 million under the New Credit Facility to finance the
purchase price for the Broadlane Acquisition and the related
payment of indebtedness. As of September 30, 2010, after
giving pro forma effect to the Transactions, we would have had
$600.0 million of secured debt outstanding and
$149.0 million of available secured borrowings under the
revolving credit facility (netted for a $1.0 million letter
of credit).
(5) Total Debt does not
include the $125.0 million Deferred Payment Amount payable
in January 2012 in connection with the Broadlane
Acquisition.
15
Unaudited pro
forma condensed combined financial
information
information
Cautionary
note
The unaudited pro forma condensed combined financial
information set forth below contains preliminary adjustments
that are based on preliminary estimates, many of which are
inherently uncertain. We believe that some of these estimates
and the Broadlane financial information from which the unaudited
pro forma condensed combined financial information has been
derived are likely to change materially between the date of this
offering memorandum and the closing date of the Broadlane
Acquisition. The actual results reported in periods following
the Transactions may differ significantly from that reflected in
these pro forma condensed combined financial statements for a
number of reasons, including but not limited to: differences
between the assumptions used to prepare these unaudited pro
forma condensed combined financial statements and actual
amounts, cost savings from operating efficiencies, differences
resulting from potential synergies and cost savings, the impact
of the incremental costs incurred in integrating the Broadlane
business, or MedAssets’ or Broadlane’s results of
operations, financial condition or other transactions or
developments since September 30, 2010. In addition, no
adjustments have been made for certain non-recurring items
related to the Broadlane Acquisition. Accordingly, the following
unaudited pro forma condensed combined financial information
should not be considered illustrative of what our financial
condition or results of operations would have been had the
Transactions been completed on the dates indicated in the
unaudited pro forma condensed combined financial information and
does not purport to project our future financial condition and
results of operations after giving effect to these transactions.
We therefore caution you not to place undue reliance on the
following unaudited pro forma condensed combined financial
information.
The following unaudited pro forma condensed consolidated
financial information is based on historical audited and
unaudited consolidated financial statements of MedAssets and
Broadlane appearing elsewhere in this offering memorandum, as
adjusted to illustrate the estimated pro forma effects of the
Transactions, as described earlier in the offering memorandum.
The unaudited pro forma condensed combined financial information
should be read in conjunction with the consolidated financial
statements and related notes of MedAssets and Broadlane and
other financial information appearing elsewhere in this offering
memorandum, including “The proposed Broadlane Acquisition
and financing,” “Use of proceeds,” “Selected
historical consolidated financial information of
MedAssets,” “Management’s discussion and analysis
of financial condition and results of operations of
MedAssets,” “Selected historical consolidated
financial information of Broadlane,” and
“Management’s discussion and analysis of financial
condition and results of operations of Broadlane.”
The unaudited pro forma condensed combined balance sheet gives
effect to the Transactions as if they had occurred on
September 30, 2010. The unaudited pro forma condensed
combined statements of operations give effect to the
Transactions as if they had occurred on January 1, 2009.
We derived the unaudited pro forma condensed combined statement
of operations data for the twelve months ended
September 30, 2010 by adding the unaudited pro forma
condensed combined statement of operations data for the year
ended December 31, 2009 to the unaudited pro forma
condensed combined of operations data for the nine months ended
September 30, 2010 and subtracting the unaudited pro forma
condensed combined statement of operations data for the nine
months ended September 30, 2009.
16
The unaudited pro forma adjustments are based upon available
information and certain assumptions and estimates. For example,
our acquisition of Broadlane will be accounted for, and is
presented in the unaudited pro forma condensed consolidated
financial information, using the authoritative guidance for the
acquisition method of accounting. Under these standards, the
excess of the purchase price over the fair value of net assets
acquired and liabilities assumed is recorded as goodwill. The
pro forma adjustments reflect our preliminary estimates of the
purchase price allocation related to our acquisition of
Broadlane. We have made significant assumptions and estimates in
determining the preliminary purchase price and the preliminary
allocation of the estimated purchase price in the unaudited pro
forma financial statements contained herein. These preliminary
estimates and assumptions are likely to change materially during
the measurement period (up to one year from the acquisition
date) as we finalize the valuations of the net tangible assets
identified intangible assets, and resultant goodwill. As of the
date of this offering memorandum, we have not performed the
valuation studies necessary to determine with any certainty the
fair values of the assets that we will acquire and the
liabilities that we will assume and the related allocation of
purchase price. The preliminary estimated allocation is likely
to change based upon finalization of the appraisals and other
valuation studies that we will arrange to obtain, and the
amounts contained in the final purchase price allocation will
likely differ materially from our preliminary estimates. For
purposes of computing pro forma adjustments, we have assumed
that historical values of certain assets acquired and
liabilities assumed reflect fair value. The pro forma balance
sheet includes a preliminary estimate of fair value adjustments
for certain administrative fee receivables and related revenue
share obligations; identifiable intangible assets such as a
non-compete agreement, developed technology assets, tradenames
and customer relationship assets; additional long-term debt and
certain other adjustments. The pro forma condensed consolidated
statements of operations include preliminary estimates of
incremental amortization expenses associated with these
identifiable intangible assets, additional interest expense,
income tax adjustments and certain other adjustments. However,
these pro forma amounts will likely change materially as we have
not completed the appraisal process and necessary valuation
studies as of the date of this offering memorandum.
Pro forma adjustments do not include adjustments to deferred tax
assets or liabilities other than with respect to
Xxxxxxxxx’s historical goodwill and our preliminary
estimate of the purchase price to be allocated to identifiable
intangible assets and goodwill. The structure of the
Transactions (inclusive of tax matters described in
section 6.3 of the Purchase Agreement) and certain
elections that we may make in connection with our acquisition of
Broadlane and subsequent tax filings may impact the amount of
deferred tax liabilities that are due and the realization of
deferred tax assets.
The unaudited pro forma condensed combined financial information
contained in this offering memorandum is for informational
purposes only and is not intended to represent or be indicative
of the consolidated results of operations or financial position
that we would have reported had the Transactions been completed
as of the dates presented and should not be taken as
representative of our future consolidated results of operations
of financial position.
In connection with our plan to integrate the operations of
MedAssets and Broadlane, management anticipates that certain
material non-recurring charges, such as severance, relocation
expenses, facility consolidation expense, technology and other
infrastructure integration expenses will be incurred. Management
cannot yet determine the timing, nature and extent of such
charges and has not made any adjustment for them in the
accompanying unaudited pro forma condensed combined financial
statements.
17
Unaudited pro
forma condensed combined
balance sheet as of September 30, 2010
balance sheet as of September 30, 2010
|
Pro forma |
||||||||||||||||
| (In thousands, except share and per share amounts) | MedAssets | Broadlane | adjustments | Pro forma | ||||||||||||
|
Assets
|
||||||||||||||||
|
Current Assets
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 8 | $ | 48,145 | $ | (36,164 | )(a) | $ | 11,989 | |||||||
|
Accounts receivable, net
|
75,692 | 11,881 | 35,000 | (c) | 122,573 | |||||||||||
|
Deferred tax assets
|
19,846 | 7,212 | (4,542 | )(m) | 22,516 | |||||||||||
|
Prepaid expenses and other current assets
|
14,599 | 4,861 | – | 19,460 | ||||||||||||
|
Total current assets
|
110,145 | 72,099 | (5,706 | ) | 176,538 | |||||||||||
|
Property and equipment, net
|
61,318 | 26,068 | (18,756 | )(d) | 68,630 | |||||||||||
|
Other long term assets
|
||||||||||||||||
|
Goodwill
|
512,485 | 184,115 | 357,069 | (e) | 1,053,669 | |||||||||||
|
Intangible assets, net
|
79,529 | 177,840 | 277,660 | (f) | 535,029 | |||||||||||
|
Other
|
18,857 | 2,264 | 41,319 | (g) | 62,440 | |||||||||||
|
Other long term assets
|
610,871 | 364,219 | 676,048 | 1,651,138 | ||||||||||||
|
Total Assets
|
782,334 | 462,386 | 651,586 | 1,896,306 | ||||||||||||
|
Liabilities and Stockholders’ Equity
|
||||||||||||||||
|
Current Liabilities
|
||||||||||||||||
|
Accounts payable
|
7,325 | 12,070 | (10,057 | )(h) | 9,338 | |||||||||||
|
Accrued revenue share obligations and rebates
|
25,153 | 24,448 | 17,500 | (i) | 67,101 | |||||||||||
|
Accrued payroll and benefits
|
6,867 | 6,243 | 5,906 | (h) | 19,016 | |||||||||||
|
Other accrued expenses
|
11,409 | – | 1,542 | (j) | 12,951 | |||||||||||
|
Deferred revenue, current portion
|
30,514 | 915 | (915 | )(k) | 30,514 | |||||||||||
|
Current portion of notes payable
|
2,499 | 10,228 | (4,477 | )(l) | 8,250 | |||||||||||
|
Current portion of finance obligation
|
177 | – | – | 177 | ||||||||||||
|
Total current liabilities
|
83,944 | 53,904 | 9,499 | 147,347 | ||||||||||||
|
Notes payable, less current portion
|
171,016 | 166,532 | 614,202 | (l) | 951,750 | |||||||||||
|
Finance obligation, less current portion
|
9,557 | – | – | 9,557 | ||||||||||||
|
Deferred revenue, less current portion
|
9,057 | – | – | 9,057 | ||||||||||||
|
Deferred tax liability
|
28,037 | 59,057 | 101,228 | (m) | 188,322 | |||||||||||
|
Deferred payment liability
|
– | – | 121,250 | (n) | 121,250 | |||||||||||
|
Other long term liabilities
|
2,668 | 4,243 | (4,673 | )(o) | 2,238 | |||||||||||
|
Total liabilities
|
304,279 | 283,736 | 841,506 | 1,429,521 | ||||||||||||
|
Commitments and contingencies
|
||||||||||||||||
|
Stockholders’ equity
|
||||||||||||||||
|
Common stock, $0.01 par value, 150,000,000 shares
authorized; 57,964,000 issued and outstanding on an actual and
pro forma basis at September 30, 2010
|
580 | – | – | 580 | ||||||||||||
|
Additional paid in capital
|
662,133 | 203,391 | (203,391 | )(p) | 662,133 | |||||||||||
|
Accumulated other comprehensive loss
|
(1,028 | ) | – | 1,028 | (p) | – | ||||||||||
|
Accumulated deficit
|
(183,630 | ) | (24,741 | ) | 12,443 | (p) | (195,928 | ) | ||||||||
|
Total stockholders’ equity
|
478,055 | 178,650 | (189,920 | )(p) | 466,785 | |||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 782,334 | $ | 462,386 | $ | 651,586 | $ | 1,896,306 | ||||||||
See notes to unaudited pro forma
condensed combined balance sheet
18
Notes to
unaudited pro forma condensed combined balance sheet
(a) The following table sets forth the estimated sources
and uses of cash in the Transactions, assuming they had occurred
on September 30, 2010 excluding the $125 million
Deferred Payment Amount (in thousands):
| Sources | ||||
|
New revolving credit
facility(1)
|
$ | – | ||
|
New senior secured term loan
facility(2)
|
$ | 600,000 | ||
|
Xxxxx proceeds from the notes offered xxxxxx, assuming sold at
par
|
$ | 360,000 | ||
|
Cash and cash equivalents of MedAssets and Broadlane
|
$ | 36,164 | ||
| $ | 996,164 | |||
|
Uses:
|
||||
|
Seller cash consideration
|
$ | 580,379 | ||
|
Repayment of MedAssets existing senior credit
facility(3)
|
$ | 175,171 | ||
|
Repayment of Xxxxxxxxx’s existing
indebtedness(4)
|
$ | 184,140 | ||
|
Estimated transaction fees and
expenses(5)
|
$ | 56,474 | ||
| $ | 996,164 | |||
(1) In connection with the
Broadlane Acquisition, we will enter into a $150.0 million
revolving credit facility with a five-year maturity. We do not
expect to borrow any amount under the new revolving credit
facility at the closing of the Broadlane Acquisition and we
expect to issue a $1.0 million letter of credit to replace
an existing letter of credit. See “Description of other
indebtedness.”
(2) In connection with the
Broadlane Acquisition, we will enter into a $600.0 million
senior secured term loan facility with a six-year maturity. The
entire amount of the new senior term loan facility Term B
facility will be drawn at the closing of the Broadlane
Acquisition. See “Description of other indebtedness.”
(3) Reflects the outstanding
principal amount of MedAssets’ existing senior credit
facility of $173.5 million, which will be repaid in full at
the closing of the Broadlane Acquisition, together with an
approximate $1.7 million estimated amount payable to
terminate a related interest rate swap.
(4) Reflects the face amount
(gross of original issue discount of $2.3 million) of
Broadlane’s existing indebtedness of $179.1 million
plus accrued interest of approximately $2.0 million,
together with an approximate net $3.0 million estimated
amount payable to terminate a related interest rate swap and
interest rate cap.
(5) Reflects the estimated
fees and expenses associated with the Transactions, as described
in the table below (in thousands):
|
Deferred financing costs:
|
||||
|
Financing
fees(i)
|
$ | 45,088 | ||
|
Other financing
costs(ii)
|
2,945 | |||
|
Total deferred financing costs
|
$ | 48,033 | ||
|
Costs to be expensed by MedAssets:
|
||||
|
Other financing and transaction
costs(ii)
|
8,441 | |||
|
Total estimated transaction costs
|
$ | 56,474 | ||
(i) Reflects estimated
financing fees we will incur in connection with the new senior
secured credit facility and the notes offered hereby, which will
be capitalized and amortized over the terms of the applicable
indebtedness.
(ii) Represents estimated
remaining transaction costs, other than those costs included in
(i) above, including fees attributable to professional
advisors and other fees associated with the completion of the
Transactions, which will be allocated between deferred financing
costs and expenses associated with the Transactions, based on a
study which is not yet complete. Accordingly, the actual amounts
incurred and allocated to deferred financing costs and
transaction expenses, and the corresponding amount of
amortization and current expense, respectively, may be different
from the amounts presented herein. The tax deductibility of
these costs will be determined based upon a study which is not
yet complete. Therefore no estimated tax effect related to these
costs has been reflected in the pro forma financial information
presented herein.
19
(b) Reflects our preliminary estimates of the preliminary
purchase price and the preliminary estimated purchase price
allocation related to the Broadlane acquisition. We have made
significant assumptions and estimates in determining the
preliminary purchase price and the preliminary allocation of the
estimated purchase price in the unaudited pro forma financial
statements contained herein. These preliminary estimates and
assumptions will likely change materially during the measurement
period (up to one year from the acquisition date) as we finalize
the estimates of the net tangible assets, identified intangible
assets, and resultant goodwill. As of the date of this offering
memorandum, we have not performed the valuation studies
necessary to determine with any certainty the fair values of the
assets that we will acquire and the liabilities that we will
assume and the related allocation of purchase price. The
allocation is subject to change based upon finalization of
appraisals and valuation studies that we will arrange to obtain
and the final purchase price allocation will likely differ
materially from the preliminary estimates included in the pro
forma statements included herein. The following reflects the
preliminary estimated purchase price and preliminary estimated
purchase price allocation to the fair value of assets acquired
and liabilities assumed (in thousands)(1):
|
Consideration:(2)
|
||||||||
|
Cash payments:
|
||||||||
|
Cash to sellers
|
$ | 580,379 | ||||||
|
Less: cash acquired
|
(48,145 | ) | ||||||
|
Net cash to sellers
|
532,234 | |||||||
|
Repayment of Broadlane indebtedness
|
184,140 | |||||||
|
Present value of deferred payment @ 2.6% (Item (n))
|
121,250 | |||||||
|
Net consideration
|
$ | 837,624 | ||||||
|
Allocated to:
|
||||||||
|
Administrative fees receivable (Item (c))
|
$ | 35,000 | ||||||
|
Accounts receivable
|
11,881 | |||||||
|
Deferred tax asset (Item (m))
|
941 | |||||||
|
Prepaid and other assets
|
4,861 | |||||||
|
Fixed assets
|
7,312 | |||||||
|
Other long-term assets
|
110 | |||||||
|
Accounts payable
|
(2,015 | ) | ||||||
|
Accrued revenue share obligations on administrative fees
receivable (Item (i))
|
(17,500 | ) | ||||||
|
Accrued revenue share obligations and rebates
|
(24,448 | ) | ||||||
|
Accrued payroll and benefits
|
(12,149 | ) | ||||||
|
Other accrued expenses
|
(1,542 | ) | ||||||
|
Other long-term liabilities
|
(1,226 | ) | ||||||
|
Deferred tax liabilities (Item (m))
|
$ | (160,285 | ) | |||||
|
Net liabilities assumed
|
(159,060 | ) | ||||||
|
Intangible assets (Item (f))
|
455,500 | |||||||
|
Unallocated excess purchase price (Item (e))
|
$ | 541,184 | ||||||
20
(1) For purposes of computing
pro forma adjustments, we have assumed that the historical
values of tangible assets acquired and liabilities assumed
reflect fair value. We have estimated a fair value adjustment
for certain accounts receivables as described in Item
(c) and related accrued revenue share obligations as
described in Item (i) and identifiable intangible assets
such as a non-compete agreement, developed technology assets,
tradenames, and customer relationship assets as described in
Item (f) using a preliminary valuation study estimate. The
remaining excess of the preliminary estimated purchase price
over the fair value of tangible and identifiable intangible
assets acquired and liabilities assumed is recorded as goodwill
as noted in Item (e).
(2) We may be required to make
certain payments to the seller related to tax benefits
associated with costs incurred prior to the Transaction date.
See section 6.2(f) Transaction Tax Deductions of the Purchase
Agreement. We have not included an estimate of these amounts, if
any, in computing our preliminary estimated purchase price.
(c) Reflects the preliminary fair value of administrative
fees related to customer purchases that occurred prior to the
Transaction date but were reported to us subsequent to the
Transaction date. Under our accounting policies, these
administrative fees would be recorded as revenue when reported
to us; however, acquisition accounting requires us to estimate
the amount of purchases occurring prior to the Transaction date
and to record the fair value of the administrative fees to be
received from those purchases as an account receivable (as
opposed to recognizing revenue when these transactions are
reported to us) and record any corresponding revenue share
obligation as described in Item (i) as a liability.
(d) Reflects the elimination of Xxxxxxxxx’s historical
cost basis of capitalized software. A preliminary fair value
estimate of developed technology assets has been included in the
estimated intangibles in Item (f) below.
(e) Reflects the preliminary estimated excess of purchase
price over the fair values of assets acquired and liabilities
assumed as a result of the assumed purchase price allocation (in
thousands):
|
Unallocated excess purchase price (Item (b))
|
$ | 541,184 | ||
|
Less: Xxxxxxxxx’s historical goodwill
|
(184,115 | ) | ||
|
Net adjustment to goodwill
|
$ | 357,069 | ||
(f) Reflects the preliminary estimated fair value of
intangible assets acquired (in thousands):
|
Non-compete agreement
|
1.5 yr life | $ | 2,900 | |||||
|
Tradename
|
3 yr life | 4,500 | ||||||
|
Developed technology
|
5 yr life | 24,000 | ||||||
|
Customer relationship
|
10 yr life | 424,100 | ||||||
|
Total identified intangible assets acquired
|
$ | 455,500 | ||||||
|
Less Elimination of Broadlane’s existing intangible assets,
net
|
(177,840 | ) | ||||||
|
Net adjustment to intangible assets
|
$ | 277,660 | ||||||
The non-compete agreement, tradename, and developed technology
assets are being amortized using the straight-line method over
assumed estimated useful lives of one and one-half, three, and
five years, respectively. The customer relationship identified
intangible asset is being amortized over an estimated useful
life of ten years based on the estimated pattern of economic
benefit that is expected to be realized from the acquired
customer relationships.
As noted above in Item (b), the amounts allocated to identified
intangible assets and the assumed useful lives are based on
estimates and the estimated amounts and useful lives will
21
likely change materially based upon the finalization of
appraisals and valuation studies and will likely differ
materially from the pro forma amounts presented herein.
(g) Reflects the capitalization of estimated financing
costs in connection with the indebtedness we will incur in the
Transactions consisting of the new senior secured credit
facilities and notes offered hereby, which will be amortized
over the terms of the applicable indebtedness, less the
elimination of MedAssets and Xxxxxxxxx’s historical
unamortized debt issuance costs and original issue discount, as
follows (in thousands):
|
Estimated deferred financing costs related to the Transactions
|
$ | 48,033 | ||
|
Write-off of MedAssets debt issuance costs (Item (p))
|
(4,558 | ) | ||
|
Write-off of Broadlane debt issuance costs
|
(2,131 | ) | ||
|
Termination of Broadlane interest rate cap (Item (a)(4))
|
(25 | ) | ||
|
Net adjustment to other assets
|
$ | 41,319 | ||
(h) Reflects the net adjustment to accounts payable as a
result of reclassification of accrued payroll and benefits and
other accrued expenses to conform to MedAssets’
presentation format (in thousands):
|
Accrued bonuses and employee benefits
|
$ | (5,906 | ) | |
|
Other accrued expenses (Item (j))
|
(4,151 | ) | ||
|
Net adjustment to accounts payable
|
$ | (10,057 | ) | |
(i) Reflects the estimated preliminary fair value of
accrued revenue share obligations related to the administrative
fees receivable described in Item (c) above.
(j) Reflects net adjustment to other accrued expenses as a
result of the reclassification of certain current liabilities
and adjustments as a result of the Transactions as follows (in
thousands):
|
Other accrued expenses (Item (h))
|
$ | 4,151 | ||
|
Accrued interest payments (Item (a)(4))
|
(2,048 | ) | ||
|
Adjustment to record preliminary fair value of accrued rent
|
(561 | ) | ||
|
Net adjustment to other accrued expenses
|
$ | 1,542 | ||
(k) Reflects adjustment to record the estimated preliminary
fair value of deferred revenue.
(l) Reflects the estimated net adjustments to long-term
debt assuming the completion of the currently structured
Transactions as follows (in thousands):
22
|
Current |
Long-term |
|||||||||||
| portion | portion | Total debt | ||||||||||
|
New senior secured term loan facility
|
$ | 8,250 | $ | 591,750 | $ | 600,000 | ||||||
|
Notes offered hereby
|
– | 360,000 | 360,000 | |||||||||
|
New revolving credit facility borrowings
|
– | – | – | |||||||||
|
Write-off of Broadlane term loan original issue discount
|
– | 2,340 | 2,340 | |||||||||
|
Repayment of Broadlane existing credit facility
|
(10,228 | ) | (168,872 | ) | (179,100 | ) | ||||||
|
Repayment of MedAssets existing indebtedness
|
(2,499 | ) | (171,016 | ) | (173,515 | ) | ||||||
|
Net adjustments to long-term debt
|
$ | (4,477 | ) | $ | 614,202 | $ | 609,725 | |||||
(m) Reflects the preliminary estimated adjustments to net
current deferred tax assets and net non-current deferred tax
liabilities as follows (in thousands):
|
Reduction of Broadlane historical current deferred tax assets
|
$ | (7,212 | ) | |
|
Estimated increase in current deferred tax assets as a result of
the Transactions
|
941 | |||
|
Estimated increase in current deferred tax assets as a result
the write-off MedAssets debt issuance costs (Item(p))
|
1,729 | |||
|
Net adjustments to current deferred tax assets
|
$ | (4,542 | ) | |
|
Reduction of Broadlane historical non-current deferred tax
liabilities
|
$ | (59,057 | ) | |
|
Estimated increase in non-current deferred tax liabilities as a
result of the Transactions
|
160,285 | |||
|
Net adjustments to non-current deferred tax liabilities
|
$ | 101,228 | ||
(n) Reflects the preliminary estimated present value of the
$125.0 million Deferred Payment Amount, discounted at 2.6%.
The Deferred Payment Amount is payable on January 4, 2012.
The seller is entitled to certain remedies as described by
section 2.5 and 2.6 of the Purchase Agreement in the event
we are unable to pay the Deferred Payment Amount on the due
date. For purposes of the pro forma adjustments presented
herein, we have assumed that the Deferred Payment Amount will be
paid in the form of a cash payment on January 4, 2012.
(o) Reflects the net adjustments to other long term
liabilities as a result of the Transactions as follows (in
thousands):
|
Termination of Xxxxxxxxx’s interest rate swap agreement
(Item(a)(4))
|
$ | (3,017 | ) | |
|
Termination of MedAssets’ interest rate swap agreement
(Item(a)(3))
|
(1,656 | ) | ||
|
Net adjustments to other long term liabilities
|
$ | (4,673 | ) | |
23
(p) Reflects the net adjustment to shareholders’
equity, as follows (in thousands):
|
Elimination of Xxxxxxxxx’s historical additional paid in
capital
|
$ | (203,391 | ) | |||||
|
Reclassification into earnings of MedAssets interest rate swap,
net of
tax(1)
|
1,028 | |||||||
|
Elimination of Xxxxxxxxx’s historical accumulated deficit
|
$ | 24,741 | ||||||
|
Reclassification into earnings of MedAssets interest rate swap,
net of
tax(1)
|
(1,028 | ) | ||||||
|
Write-off of MedAssets debt issuance costs, net of tax
(Item (g))(2)
|
(2,829 | ) | ||||||
|
Other financing and transactions costs
(Item (a)(5))(3)
|
$ | (8,441 | ) | |||||
|
Net adjustments to accumulated deficit
|
12,443 | |||||||
|
Net adjustments to shareholders’ equity
|
$ | (189,920 | ) | |||||
(1) MedAssets’ interest
rate swap is designated as a highly effective cash flow hedge
and is recorded at fair value net of tax in accumulated
comprehensive loss. As a result of the estimated termination in
connection with the Transaction, the fair value of the interest
rate swap, net of tax has been reclassified into earnings.
(2) The estimated
$4.6 million write-off of MedAssets’ historical debt
issuance costs has been tax effected using the blended statutory
rate of approximately 38% resulting in an estimated
$2.8 million net of tax charge to earnings.
(3) The other financing and
transaction costs have not been tax effected as the tax
deductibility of these costs will be determined based upon a
study which is not yet complete. Therefore no estimated tax
effect related to these costs has been reflected in the pro
forma financial information presented herein.
24
Unaudited pro
forma condensed combined
statement of operations for the year ended
December 31, 2009
statement of operations for the year ended
December 31, 2009
|
Pro forma |
||||||||||||||||
| (In thousands, except per share amounts) | MedAssets | Broadlane | adjustments(a) | Pro forma | ||||||||||||
|
Revenue
|
||||||||||||||||
|
Administrative fees, net
|
$ | 108,223 | $ | 117,730 | $ | – | $ | 225,953 | ||||||||
|
Service fees
|
233,058 | 49,794 | – | 282,852 | ||||||||||||
|
Total net revenue
|
341,281 | 167,524 | – | 508,805 | ||||||||||||
|
Operating expenses
|
||||||||||||||||
|
Cost of revenue
|
74,651 | 69,327 | – | 143,978 | ||||||||||||
|
Product development expenses
|
18,994 | 13,275 | – | 32,269 | ||||||||||||
|
Selling and marketing expenses
|
45,282 | 6,937 | – | 52,219 | ||||||||||||
|
General and administrative expenses
|
110,661 | 30,822 | – | 141,483 | ||||||||||||
|
Depreciation
|
13,211 | 9,169 | (5,372 | )(b) | 17,008 | |||||||||||
|
Amortization of intangibles
|
28,012 | 15,950 | 46,867 | (c) | 90,829 | |||||||||||
|
Total operating expense
|
290,811 | 145,480 | 41,495 | 477,786 | ||||||||||||
|
Operating income (loss)
|
50,470 | 22,044 | (41,495 | ) | 31,019 | |||||||||||
|
Other income (expense)
|
||||||||||||||||
|
Interest (expense)
|
(18,114 | ) | (24,721 | ) | (44,852 | )(d) | (87,687 | ) | ||||||||
|
Loss on extinguishment of debt
|
– | (3,074 | ) | 3,074 | (e) | – | ||||||||||
|
Other income (expense)
|
417 | 811 | (756 | )(f) | 472 | |||||||||||
|
Income (loss) before income taxes
|
32,773 | (4,940 | ) | (84,029 | ) | (56,196 | ) | |||||||||
|
Income tax expense (benefit)
|
12,826 | (1,017 | ) | (31,805 | )(g) | (19,996 | ) | |||||||||
|
Net income (loss)
|
19,947 | (3,923 | ) | (52,224 | ) | (36,200 | ) | |||||||||
|
Income (loss) per share—basic
|
$ | 0.36 | – | – | $ | (0.66 | ) | |||||||||
|
Income (loss) per share—diluted
|
$ | 0.34 | – | – | $ | (0.66 | ) | |||||||||
|
Shares used in per share calculation—basic
|
54,841 | – | – | 54,841 | ||||||||||||
|
Shares used in per share calculation—diluted
|
57,865 | – | – | 54,841 | ||||||||||||
See notes to unaudited pro forma
condensed combined statements of operations
25
Unaudited pro
forma condensed combined
statement of operations for the nine months
ended September 30, 2009
statement of operations for the nine months
ended September 30, 2009
|
Pro forma |
||||||||||||||||
| (In thousands, except per share amounts) | MedAssets | Broadlane | adjustments(a) | Pro forma | ||||||||||||
|
Revenue
|
||||||||||||||||
|
Administrative fees, net
|
$ | 78,495 | $ | 86,801 | $ | – | $ | 165,296 | ||||||||
|
Service fees
|
167,091 | 35,890 | – | 202,981 | ||||||||||||
|
Total net revenue
|
245,586 | 122,691 | – | 368,277 | ||||||||||||
|
Operating expenses
|
||||||||||||||||
|
Cost of revenue
|
55,830 | 50,769 | – | 106,599 | ||||||||||||
|
Product development expenses
|
15,424 | 9,539 | – | 24,963 | ||||||||||||
|
Selling and marketing expenses
|
36,529 | 4,834 | – | 41,363 | ||||||||||||
|
General and administrative expenses
|
77,971 | 20,617 | – | 98,588 | ||||||||||||
|
Depreciation
|
9,020 | 6,721 | (3,730 | )(b) | 12,011 | |||||||||||
|
Amortization of intangibles
|
21,029 | 11,962 | 35,151 | (c) | 68,142 | |||||||||||
|
Total operating expense
|
215,803 | 104,442 | 31,421 | 351,666 | ||||||||||||
|
Operating income (loss)
|
29,783 | 18,249 | (31,421 | ) | 16,611 | |||||||||||
|
Other income (expense)
|
||||||||||||||||
|
Interest (expense)
|
(14,015 | ) | (18,936 | ) | (32,861 | )(d) | (65,812 | ) | ||||||||
|
Other income (expense)
|
404 | 506 | (450 | )(f) | 460 | |||||||||||
|
Income (loss) before income taxes
|
16,172 | (181 | ) | (64,732 | ) | (48,741 | ) | |||||||||
|
Income tax expense (benefit)
|
6,196 | 368 | (24,488 | )(g) | (17,924 | ) | ||||||||||
|
Net income (loss)
|
9,976 | (549 | ) | (40,244 | ) | (30,817 | ) | |||||||||
|
Income (loss) per share—basic
|
$ | 0.18 | – | – | $ | (0.56 | ) | |||||||||
|
Income (loss) per share—diluted
|
$ | 0.17 | – | – | $ | (0.56 | ) | |||||||||
|
Shares used in per share calculation—basic
|
54,589 | – | – | 54,589 | ||||||||||||
|
Shares used in per share calculation—diluted
|
57,223 | – | – | 54,589 | ||||||||||||
See notes to unaudited pro forma
condensed combined statements of operations
26
Unaudited pro
forma condensed combined
statement of operations for the nine months
ended September 30, 2010
statement of operations for the nine months
ended September 30, 2010
|
Pro forma |
||||||||||||||||
| (In thousands, except per share amounts) | MedAssets | Broadlane | adjustments(a) | Pro forma | ||||||||||||
|
Revenue
|
||||||||||||||||
|
Administrative fees, net
|
$ | 84,437 | $ | 88,121 | $ | – | $ | 172,558 | ||||||||
|
Service fees
|
199,948 | 42,525 | – | 242,473 | ||||||||||||
|
Total net revenue
|
284,385 | 130,646 | – | 415,031 | ||||||||||||
|
Operating expenses
|
||||||||||||||||
|
Cost of revenue
|
67,176 | 58,777 | – | 125,953 | ||||||||||||
|
Product development expenses
|
14,859 | 9,534 | – | 24,393 | ||||||||||||
|
Selling and marketing expenses
|
35,348 | 5,909 | – | 41,257 | ||||||||||||
|
General and administrative expenses
|
91,425 | 22,798 | – | 114,223 | ||||||||||||
|
Acquisition related expenses
|
4,351 | – | (1,546 | )(h) | 2,805 | |||||||||||
|
Depreciation
|
14,068 | 7,938 | (4,765 | )(b) | 17,241 | |||||||||||
|
Amortization of intangibles
|
17,706 | 11,962 | 33,376 | (c) | 63,044 | |||||||||||
|
Total operating expense
|
244,933 | 116,918 | 27,065 | 388,916 | ||||||||||||
|
Operating income (loss)
|
39,452 | 13,728 | (27,065 | ) | 26,115 | |||||||||||
|
Other income (expense)
|
||||||||||||||||
|
Interest (expense)
|
(10,986 | ) | (11,922 | ) | (39,550 | )(d) | (62,458 | ) | ||||||||
|
Loss on extinguishment of debt
|
– | (11,754 | ) | 11,754 | (e) | – | ||||||||||
|
Other income
|
286 | 87 | 73 | (f) | 446 | |||||||||||
|
Income (loss) before income taxes
|
28,752 | (9,861 | ) | (54,788 | ) | (35,897 | ) | |||||||||
|
Income tax expense (benefit)
|
11,477 | (2,986 | ) | (20,787 | )(g) | (12,296 | ) | |||||||||
|
Net income (loss)
|
17,275 | (6,875 | ) | (34,001 | ) | (23,601 | ) | |||||||||
|
Income (loss) per share—basic
|
$ | 0.31 | – | – | $ | (0.42 | ) | |||||||||
|
Income (loss) per share—diluted
|
$ | 0.29 | – | – | $ | (0.42 | ) | |||||||||
|
Shares used in per share calculation—basic
|
56,238 | – | – | 56,238 | ||||||||||||
|
Shares used in per share calculation—diluted
|
59,340 | – | – | 56,238 | ||||||||||||
See notes to unaudited pro forma
condensed combined statements of operations
27
Unaudited pro
forma condensed combined
statement of operations for the twelve months
ended September 30, 2010
statement of operations for the twelve months
ended September 30, 2010
|
Pro forma |
||||||||||||||||
| (In thousands, except per share amounts) | MedAssets | Broadlane | adjustments(a) | Pro forma | ||||||||||||
|
Revenue
|
||||||||||||||||
|
Administrative fees, net
|
$ | 114,165 | $ | 119,050 | $ | – | $ | 233,215 | ||||||||
|
Service fees
|
265,915 | 56,429 | – | 322,344 | ||||||||||||
|
Total net revenue
|
380,080 | 175,479 | – | 555,559 | ||||||||||||
|
Operating expenses
|
||||||||||||||||
|
Cost of revenue
|
85,997 | 77,335 | – | 163,332 | ||||||||||||
|
Product development expenses
|
18,429 | 13,270 | – | 31,699 | ||||||||||||
|
Selling and marketing expenses
|
44,101 | 8,012 | – | 52,113 | ||||||||||||
|
General and administrative expenses
|
124,115 | 33,003 | – | 157,118 | ||||||||||||
|
Acquisition related expenses
|
4,351 | – | (1,546 | )(h) | 2,805 | |||||||||||
|
Depreciation
|
18,259 | 10,386 | (6,407 | )(b) | 22,238 | |||||||||||
|
Amortization of intangibles
|
24,689 | 15,950 | 45,092 | (c) | 85,731 | |||||||||||
|
Total operating expense
|
319,941 | 157,956 | 37,139 | 515,036 | ||||||||||||
|
Operating income (loss)
|
60,139 | 17,523 | (37,139 | ) | 40,523 | |||||||||||
|
Other income (expense)
|
||||||||||||||||
|
Interest (expense)
|
(15,085 | ) | (17,707 | ) | (51,541 | )(d) | (84,333 | ) | ||||||||
|
Loss on extinguishment of debt
|
– | (14,828 | ) | 14,828 | (e) | – | ||||||||||
|
Other income
|
299 | 392 | (233 | )(f) | 458 | |||||||||||
|
Income (loss) before income taxes
|
45,353 | (14,620 | ) | (74,085 | ) | (43,352 | ) | |||||||||
|
Income tax expense (benefit)
|
18,107 | (4,371 | ) | (28,108 | )(g) | (14,372 | ) | |||||||||
|
Net income (loss)
|
27,246 | (10,249 | ) | (45,977 | ) | (28,980 | ) | |||||||||
|
Income (loss) per share—basic
|
$ | 0.49 | – | – | $ | (0.52 | ) | |||||||||
|
Income (loss) per share—diluted
|
$ | 0.46 | – | – | $ | (0.52 | ) | |||||||||
|
Shares used in per share calculation—basic
|
56,074 | – | – | 56,074 | ||||||||||||
|
Shares used in per share calculation—diluted
|
59,176 | – | – | 56,074 | ||||||||||||
See notes to unaudited pro forma
condensed combined statements of operations
28
Notes to
unaudited pro forma condensed combined
statements of operations
statements of operations
(a) Certain of the pro forma adjustments reflect our
preliminary estimates of the purchase price allocation related
to the Broadlane Acquisition. We have made significant
assumptions and estimates in determining the preliminary
purchase price and the preliminary allocation of the estimated
purchase price in the unaudited pro forma financial statements
contained herein. These preliminary estimates and assumptions
will likely change materially during the measurement period (up
to one year from the acquisition date) as we finalize the
valuations of the net tangible assets, identified intangible
assets, and resultant goodwill. As of the date of this offering
memorandum, we have not performed the valuation studies
necessary to determine with any certainty the fair values of the
assets that we will acquire and the liabilities that we will
assume and the related allocation of purchase price. The
allocation is subject to change based upon finalization of
appraisals and valuation studies that we will arrange to obtain
and the final purchase price allocation will likely differ
materially from the preliminary estimates included in the pro
forma statements included herein. The pro forma adjustments do
not reflect the following material items that are expected to
result directly from the Transactions and which are expected to
impact our statement of operations within twelve months
following the Transactions:
i) An estimated reduction of approximately
$17.5 million of net administrative fee revenue (net of
accrued revenue share obligations) related to administrative
fees generated from customer purchases that occurred prior to
the Transaction date but were reported to us subsequent to the
Transaction date. Under our revenue recognition accounting
policies, these administrative fees would be recorded as revenue
when reported to us; however, acquisition accounting requires us
to estimate the amount of purchases occurring prior to the
Transaction date and to record the fair value of the
administrative fees to be received from those purchases as an
account receivable and any corresponding revenue share
obligation as a liability;
ii) Remaining transaction costs currently estimated at
approximately $8.4 million relating to fees to investment
bankers, attorneys, accountants and other professional advisors
and other Transaction-related costs that will likely not be
capitalized as deferred financing costs; and
iii) The effect of anticipated cost savings or operating
efficiencies expected to be realized and related restructuring
charges which will be material such as severance, relocation
expenses, facility consolidation expense, technology and
infrastructure integration expenses, impairment of duplicative
assets and other costs related to the integration of Broadlane
into MedAssets.
(b) For purposes of computing pro forma adjustments, we
have assumed that the historical values of tangible fixed assets
acquired reflect fair value and have recorded those amounts as
part of the preliminary estimated purchase price allocation.
These tangible fixed assets are being amortized using the
straight-line method over their historical estimated remaining
useful lives of between three and fifteen years. As a result, we
have not included a pro forma depreciation adjustment for
tangible fixed assets in the Pro Forma Condensed Combined
Statements of Operations. However, Xxxxxxxxx’s historical
depreciation expense includes depreciation of capitalized
software. We have estimated the value of the acquired developed
technology assets (software) and included depreciation expense
for the fair value of the software in footnote (c). As a
result, we have recorded a pro forma adjustment to remove the
effect of Xxxxxxxxx’s
29
historical software amortization included in depreciation
expense. The Pro Forma Condensed Combined Statements of
Operations include the following adjustments to reduce
depreciation expense (in thousands):
|
Nine months |
Nine months |
Twelve months |
||||||||||||||
|
Year ended |
ended |
ended |
ended |
|||||||||||||
|
December 31, |
September 30, |
September 30, |
September 30, |
|||||||||||||
| 2009 | 2009 | 2010 | 2010 | |||||||||||||
|
Depreciation expense
|
$ | (5,372 | ) | $ | (3,730 | ) | $ | (4,765 | ) | $ | (6,407 | ) | ||||
(c) For purposes of computing pro forma adjustments, we
have estimated a fair value adjustment for identifiable assets
such as a non-compete agreement; developed technology assets,
tradenames and customer relationship assets of
$455.5 million based on a preliminary valuation study. The
non-compete agreement, tradenames and developed technology
assets are being amortized using the straight-line method over
assumed estimated useful lives of one and one-half, three, and
five years, respectively. Cost related to the customer
relationship identified intangible asset is being amortized over
an estimated useful life of ten years based on the estimated
pattern of economic benefit that is expected to be realized from
the customer relationships. As a result, the pro forma condensed
consolidated statements of operations includes the following
incremental adjustments to amortization expense (in thousands):
|
Nine months |
Nine months |
Twelve months |
||||||||||||||
|
Year ended |
ended |
ended |
ended |
|||||||||||||
|
December 31, |
September 30, |
September 30, |
September 30, |
|||||||||||||
| 2009 | 2009 | 2010 | 2010 | |||||||||||||
|
Amortization expense
|
$ | 46,867 | $ | 35,151 | $ | 33,376 | $ | 45,092 | ||||||||
The estimated five year impact on operating results using the
expected pattern of economic benefit of the customer
relationship identified intangible asset is as follows (in
thousands):
|
Expected five year customer |
||||
| relationship amortization | ||||
|
Year 1
|
$ | 54,584 | ||
|
Year 2
|
52,862 | |||
|
Year 3
|
50,623 | |||
|
Year 4
|
48,213 | |||
|
Year 5
|
$ | 45,802 | ||
The remaining excess of the estimated preliminary purchase price
over the fair value of tangible and identifiable intangible
assets acquired and liabilities assumed is recorded as goodwill.
Goodwill is not amortized but will be subject to annual
impairment tests in accordance with generally accepted
accounting principles. As noted, the estimated amounts allocated
to identified intangible assets and the assumed useful lives are
based on preliminary valuation studies and the amounts and
useful lives are subject to change based upon the finalization
of appraisals and valuation study estimates and will likely
differ materially from the pro forma amounts presented herein.
(d) For purposes of computing pro forma adjustments for
interest expense, we have made certain assumptions regarding our
debt structure at the closing of the Transactions (including
30
assuming that the notes are issued at par), interest rates on
our outstanding debt and the yield and expected maturity dates
on the notes offered herein. We have preliminarily assumed there
are no specific embedded features in the debt instruments,
including embedded derivatives. These estimates are preliminary
and actual results could differ materially from the pro forma
amounts presented herein. The following reflects pro forma
adjustments to estimated interest expense (in thousands):
|
Nine months |
Nine months |
Twelve months |
||||||||||||||
|
Year ended |
ended |
ended |
ended |
|||||||||||||
|
December 31, |
September 30, |
September 30, |
September 30, |
|||||||||||||
| 2009 | 2009 | 2010 | 2010 | |||||||||||||
|
New senior secured term loan
facility(1)
|
$ | 38,854 | $ | 29,177 | $ | 28,884 | $ | 38,561 | ||||||||
|
Notes offered
hereby(2)
|
34,200 | 25,650 | 25,650 | 34,200 | ||||||||||||
|
New revolving credit facility
borrowings(3)
|
– | – | – | – | ||||||||||||
|
Fees on outstanding letters of
credit(4)
|
45 | 34 | 34 | 45 | ||||||||||||
|
Commitment
fees(5)
|
1,118 | 838 | 838 | 1,118 | ||||||||||||
|
Total pro forma cash interest expense related to new borrowings
|
74,217 | 55,699 | 55,406 | 73,924 | ||||||||||||
|
Amortization of capitalized debt issuance
costs(6)
|
8,490 | 6,374 | 6,325 | 8,441 | ||||||||||||
|
Interest accretion on Deferred Payment
Amount(7)
|
4,000 | 3,000 | – | 1,000 | ||||||||||||
|
Total pro forma interest expense related to new borrowings
|
86,707 | 65,073 | 61,731 | 83,365 | ||||||||||||
|
Less: Reduction of MedAssets’ existing interest expense and
fees(8)
|
(17,134 | ) | (13,276 | ) | (10,259 | ) | (14,117 | ) | ||||||||
|
Less: Xxxxxxxxx’s historical interest expense and
fees(9)
|
(24,721 | ) | (18,936 | ) | (11,922 | ) | (17,707 | ) | ||||||||
|
Total pro forma adjustment to interest expense
|
$ | 44,852 | $ | 32,861 | $ | 39,550 | $ | 51,541 | ||||||||
(1) Reflects estimated pro
forma interest expense on the new $600.0 million senior
secured term loan facility at an assumed minimum LIBOR rate of
1.75% plus an applicable margin of 4.75%. The calculation of the
estimated pro forma interest expense is inclusive of estimated
required quarterly principal repayments as per the terms of the
senior secured credit facility. A 0.125% increase in the
interest rate on the floating rate debt would result in an
increase in total annual pro forma interest expense of
approximately $0.8 million.
(2) Reflects pro forma
interest expense on the $360.0 million of notes offered
xxxxxx estimated at 9.5% per annum.
(3) Reflects no assumed
borrowings under the new revolving credit facility. Interest on
any borrowings under the new revolving credit facility would be
based on our minimum LIBOR floor of 1.75% for each period plus
an applicable margin of 4.75%.
(4) Reflects pro forma annual
fees of 4.75% on average assumed outstanding letters of credit
of $1.0 million.
(5) Reflects pro forma
commitment fees of 0.75% on the unused portion of the new
revolving credit facility.
(6) Reflects non-cash
amortization of estimated capitalized deferred financing costs
related to the Transactions over the term of the related
facilities.
31
(7) Reflects non-cash interest
to accrete Deferred Payment Amount to face value.
(8) Reflects MedAssets’
historical interest expense on its existing term loan, letter of
credit fees and commitment fees on its unused revolving credit
facility. Excludes interest expense on our finance obligation.
(9) Reflects Xxxxxxxxx’s
historical interest expense on its existing senior term loan and
commitment fees on its unused revolving credit facility.
(e) Reflects the pro forma adjustment to eliminate the loss
on extinguishment of debt from Xxxxxxxxx’s historical
statements of operations relating to Xxxxxxxxx’s
refinancing of their senior term loan, as discussed elsewhere in
this offering memorandum. Xxxxxxxxx’s refinancing would not
have occurred had the Transactions been completed as of the
beginning of the period as the recorded loss was directly
impacted by the Transactions; therefore, the loss was eliminated
in the pro forma condensed consolidated statements of operations.
(f) Reflects the pro forma adjustment to eliminate the
effect of Xxxxxxxxx’s interest rate swap and interest rate
cap from Xxxxxxxxx’s historical statements of operations.
These transactions would not have occurred had the Transactions
been completed as of the beginning of the period as the recorded
amounts were directly impacted by the Transactions; therefore,
they were eliminated in the pro forma condensed consolidated
statements of operations.
(g) Represents the estimated pro forma tax adjustment
resulting from the combination of the consolidated tax groups of
MedAssets and Broadlane, consideration of their resulting tax
attributes and the impact of the pro forma adjustments. The
amount was calculated using the MedAssets blended statutory tax
rate for each applicable period. The adjustment is preliminary
and may change materially based upon a study that is not yet
complete.
(h) Represents the elimination of approximately
$1.5 million of transaction costs attributable to
professional advisors and other fees directly associated with
the completion of the Acquisition which were recorded in
MedAssets’ historical statement of operations for the nine
months ended September 30, 2010.
32
Management’s
discussion and analysis of financial
condition and results of operations of Broadlane
condition and results of operations of Broadlane
Cautionary
statement
The following discussion and analysis of Xxxxxxxxx’s
financial condition and results of operations has been produced
based on information provided to us by Broadlane and its
management team. This discussion reflects the views and plans of
Xxxxxxxxx’s management for that company operating as an
independent company and should not be viewed as indicative of
the manner in which Broadlane will be operated following its
acquisition by us. Further, Xxxxxxxxx is not required to prepare
this discussion in accordance with the requirements of
Regulation S-K
which apply to us, and accordingly, the following discussion
does not contain all of the information required for issuers
subject to the SEC’s rules. In addition, although
Xxxxxxxxx’s historical financial statements, financial data
and the related notes included elsewhere in this offering
memorandum cover Xxxxxxxxx’s results of operations for
Xxxxxxxxx’s last three fiscal years and the nine months
ended September 30, 2010 and 2009, the following discussion
and analysis of Xxxxxxxxx’s financial condition and results
of operations is limited to Xxxxxxxxx’s last two fiscal
years and the nine months ended September 30, 2010 and
2009, which periods we believe are the most relevant.
The following discussion and analysis of Xxxxxxxxx’s
financial condition and results of operations should be read
together with Xxxxxxxxx’s financial statements and related
notes and the other financial information appearing elsewhere in
this offering memorandum. This discussion and analysis contains
forward-looking statements that involve risk, uncertainties and
assumptions. Xxxxxxxxx’s actual results could differ
materially from those anticipated in the forward-looking
statements as a result of many factors, including those
discussed in “Risk factors” and elsewhere in this
offering memorandum and other risks that may not be presently
known to us.
The 2008 financial information presented herein combine the
“Predecessor” and “Successor” periods of
Broadlane as presented on Xxxxxxxxx’s consolidated
financial position, results of operations and cash flows.
Overview
Broadlane is a leading healthcare group purchasing organization
and management services company, providing comprehensive supply
chain management, technology and other value added services to
hospitals, physicians’ offices and surgery centers. Through
its service offerings, Broadlane enables its healthcare provider
clients to reduce costs and improve operational performance.
Broadlane offers the following portfolio of cost reducing
services that are designed to lower cost and inefficiency,
allowing providers to better focus on the primary mission of
patient care:
• Supply chain solutions
• Strategic sourcing solutions
• Capital equipment solutions
• Physician preference item consulting
33
• Workforce management, and
• Lean operations consulting
The largest service currently is strategic sourcing solutions
through its GPO, wherein Broadlane negotiates contracts with
suppliers to obtain cost-effective prices for Broadlane’s
clients. While Broadlane has a comprehensive, competitive
portfolio of group purchasing contracts, the breadth of its
additional service line offerings separate Broadlane from
traditional GPOs. Broadlane operates one reportable segment.
Xxxxxxxxx’s management’s primary metrics to measure
the consolidated financial performance of the business are
revenue, non-GAAP EBITDA, non-GAAP Adjusted EBITDA and non-GAAP
Adjusted EBITDA margin.
The following table sets forth Xxxxxxxxx’s results of
operations for the periods indicated (dollars in thousands):
| Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | Change | |||||||||||||
| Amount | Amount | Amount | % | ||||||||||||
|
Revenue:
|
|||||||||||||||
|
Administrative fees, net
|
$ | 88,121 | $ | 86,801 | $ | 1,320 | 1.5% | ||||||||
|
Other service fees
|
42,525 | 35,890 | 6,635 | 18.5% | |||||||||||
|
Total revenue, net
|
130,646 | 122,691 | 7,955 | 6.5% | |||||||||||
|
Operating expenses
|
116,918 | 104,442 | 12,476 | 11.9% | |||||||||||
|
Operating income/(loss)
|
13,728 | 18,249 | (4,521 | ) | (24.8)% | ||||||||||
|
Net income/(loss)
|
$ | (6,875 | ) | $ | (549 | ) | $ | (6,326 | ) | 1152.3% | |||||
|
Adjusted
EBITDA(1)
|
$ | 34,414 | $ | 38,281 | $ | (3,868 | ) | (10.1)% | |||||||
|
Adjusted EBITDA
margin(1)
|
26.3% | 31.2% | |||||||||||||
(1) These are non-GAAP
measures. See “Use of non-GAAP financial measures” in
this section for additional information.
The increases in revenue of $8.0 million for the nine
months ended September 30, 2010, when compared to the nine
months ended September 30, 2009 were primarily attributable
to:
• growth provided by acquisitions;
• the purchase accounting adjustment in the prior
year; and
• organic growth in Broadlane’s service lines
provided by increased customer contract utilization.
For the nine months ended September 30, 2010
Xxxxxxxxx’s operating income decreased by
$4.5 million, compared to the nine months ended
September 30, 2009. The decreases in operating income
compared to the nine months ended September 30, 2009 were
primarily attributable to:
• an increase in the overall employee base to support
Xxxxxxxxx’s service offerings and as a result of the
acquisitions;
34
• increases in incentive compensation due to the
anticipation of the Broadlane Management Incentive Plan funding
in the current year.
For the nine months ended September 30, 2010,
Xxxxxxxxx’s non-GAAP Adjusted EBITDA decreased by
$3.9 million compared to the nine months ended
September 30, 2009 as a result of the overall increases in
operating expenses, offset in part by revenue growth as
discussed above.
Revenue
Broadlane groups revenue from its service lines into two
streams, Administrative fees and Other service fees.
Broadlane’s revenue streams are described below:
Administrative
fees
Revenue from Administrative fees includes revenue from
Broadlane’s strategic sourcing solutions, capital equipment
solutions and workforce management service lines.
Broadlane’s Administrative fee revenue stream consists of
the following components:
• GPO. Broadlane earns administrative fees
from manufacturers, distributors, and other vendors of products
and services with whom Broadlane has contracts under which its
group purchasing organization customers may purchase products
and services. Administrative fees represent a percentage
typically ranging from 0.25% to 3.00% of the purchases made by
Broadlane’s group purchasing organization customers through
contracts with its vendors.
Broadlane’s group purchasing organization customers make
purchases, and receive shipments, directly from the vendors.
Generally on a monthly or quarterly basis, vendors provide
Broadlane with a sales report describing the purchases made by
Broadlane’s customers through its group purchasing
organization vendor contracts, including associated
administrative fees. Broadlane recognizes revenue upon the
receipt of these reports from vendors.
In many cases, Broadlane is contractually obligated to pay a
portion of the administrative fees to its hospital and health
system customers. Typically, this amount, which Broadlane refers
to as its offeror rebates, is calculated as a percentage of
administrative fees earned on a particular customer’s
purchases from its vendors. Broadlane’s total revenue on
its Consolidated Statements of Operations is shown net of the
offeror rebates.
• Workforce management. Broadlane earns
administrative fees from its contracted labor agencies of
approximately 3% of Broadlane’s customers’ total labor
spend under its agency contracts.
Other service
fees
Revenue from Other service fees includes revenue from
Broadlane’s supply chain solutions, physician preference
consulting and lean operations consulting. Broadlane’s
Other service fee revenue stream consists of the following
components:
• Consulting. Broadlane earns fees from
custom consulting services primarily aimed at reducing the cost
and utilization/consumption of high cost physician preference
items and clinical and administrative solutions through lean
healthcare and six sigma consulting
35
services. Broadlane enters into fixed-price and
time-and-expenses
contracts to provide consulting services. Revenue under
time-and-expenses
contracts is based on fixed billable rates for hours delivered
plus reimbursable costs. Certain of the consulting agreements
are based on contingent cost savings to be realized by the
customer.
• Procurement/Supply chain
management. Broadlane earns fees from offering
solutions ranging from
end-to-end
management of the supply chain for its client hospitals, to
management of its client’s purchasing systems, to
electronic ordering management.
Operating
expenses
Broadlane classifies its operating expenses as follows:
Cost of revenue. Cost of revenue primarily consists
of the direct labor costs incurred to generate Broadlane’s
revenue. Direct labor costs consist primarily of salaries,
benefits, and other direct costs and expenses related to
personnel who provide services to implement Broadlane’s
services for its customers. As the majority of Broadlane’s
services are generated internally, Broadlane’s costs to
provide these services are primarily labor-driven. Cost of
revenue does not include allocated amounts for rent,
depreciation or amortization because Broadlane does not consider
the inclusion of these items in direct cost of revenue for its
services.
Product development expenses. Product development
expenses primarily consist of the salaries, benefits, travel and
technology-related operating expenses of the technology
professionals who develop, support and maintain Broadlane’s
software-related products and services. Product development
expenses are net of capitalized software development costs.
Selling and marketing expenses. Selling and
marketing expenses consist primarily of costs related to
marketing programs (including trade shows and brand messaging),
personnel-related expenses for sales and marketing employees
(including salaries, benefits and incentive compensation
expense), certain meeting costs and travel-related expenses.
General and administrative expenses. General and
administrative expenses consist primarily of personnel-related
expenses for administrative employees (including salaries,
benefits and incentive compensation expense) and travel-related
expenses, occupancy and other indirect costs, insurance costs,
professional fees, and other general overhead expenses.
Depreciation and amortization. Depreciation and
amortization expense consists primarily of depreciation of fixed
assets and the amortization of software, including capitalized
costs of software developed for internal use.
Amortization of intangibles. Amortization of
intangibles includes the amortization of all identified
intangible assets (with the exception of goodwill), primarily
resulting from acquisitions.
Key
Considerations
Certain significant items or events must be considered to better
understand differences in Broadlane’s results of operations
from period to period. Xxxxxxxxx believes that the following
36
items or events have had a material impact on its results of
operations for the periods discussed below or may have a
material impact on its results of operations in future periods:
Acquisitions
On November 3, 2009, Broadlane acquired Healthcare
Performance Partners (“HPP”), a leading boutique
consulting firm based in Nashville, Tennessee, offering clinical
and administrative solutions through lean healthcare and six
sigma consulting services.
On April 30, 2010, Broadlane acquired Health Equipment
Logistics and Planning, Inc. (“HELP”), a company
specializing in equipment planning, procurement and equipment
services for healthcare organizations.
Acquisition by
TowerBrook
• Purchase accounting adjustment. On
August 15, 2008, Xxxxxxxxx was substantially acquired by
TowerBrook. At the close of the TowerBrook Transaction,
Broadlane’s customers had purchased items on its contracts,
but the fees earned did not qualify for revenue recognition as
the purchase information was not received and the fees were not
collected as of the acquisition date. Consequently, in applying
purchase accounting required by GAAP, an accounts receivable
asset for the fees earned but not collected as of
August 15, 2008 was established. Under GAAP, the revenue
associated with these fees is not deemed revenue of the
acquiring entity as no legal performance obligation is assumed
by the acquiring entity similar to acquired deferred revenue
that is discounted during purchase accounting. As a result,
Xxxxxxxxx has taken a purchase accounting reduction to
administrative fee revenue of $0.9 million for the year
ended December 31, 2009 and the nine months ended
September 30, 2009 and $15.6 million for the year
ended December 31, 2008.
• Transaction fees and expenses. In
connection with the TowerBrook Transaction, Broadlane incurred
legal fees, professional consulting and salary continuation
expenses totaling $15.8 million in the year ended
December 31, 2008.
• Amortization of intangibles. In
connection with the TowerBrook Transaction, Xxxxxxxxx recognized
certain definite-lived intangible assets on its Consolidated
Balance Sheets. As a result, Xxxxxxxxx experienced a significant
increase in its amortization expense in the years ended
December 31, 2009 and 2008.
Debt
refinancing
On February 5, 2010 Broadlane refinanced all the
outstanding debt under its senior term loan, which among other
things, provided $51.4 million in new proceeds for total
borrowings of $180.0 million. The changes to the credit
agreement under Xxxxxxxxx’s senior term loan resulted in a
substantial modification as defined by GAAP, and as a result
Broadlane accounted for the transaction as an extinguishment of
debt. The new proceeds provided by the refinancing were used to
extinguish Xxxxxxxxx’s senior subordinated notes and pay
fees and expenses associated with the refinancing. As a result
of the refinancing of its senior term loan and the
extinguishment of its senior subordinated notes, Xxxxxxxxx
recognized a total loss of $11.8 million related to the
write-off of unamortized debt discount and issuance costs, fees
and expenses and a 4% prepayment premium was charge on the
senior subordinated notes. Refer to Note 5, Debt, of
37
the Notes to Xxxxxxxxx’s Condensed Consolidated Financial
Statements elsewhere in this offering memorandum for a
discussion of the refinancing.
Early payments on
debt
• Senior term loan. In November 2009,
Xxxxxxxxx made a $10.0 million prepayment on its term loan,
and as a result Broadlane recognized a loss of $0.4 million
related to the write-off of related deferred financing costs.
• Senior subordinated notes. In October
2009, Xxxxxxxxx made a $21.6 million prepayment on its
senior subordinated notes and as a result Broadlane recognized a
loss on extinguishment of debt of $2.7 million as a result
of a 4% prepayment premium and write-off of related debt
discount and deferred financing costs.
Results of
operations
Comparison of the
nine months ended September 30, 2010 and September 30,
2009
Revenue
The following table sets forth Broadlane’s revenue by
revenue stream for the periods indicated (dollars in thousands):
| Nine months ended September 30, | ||||||||||||||||||||||||
| 2010 | 2009 | Change | ||||||||||||||||||||||
|
% of |
% of |
|||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | % | |||||||||||||||||||
|
Revenue:
|
||||||||||||||||||||||||
|
Administrative fees, net
|
$ | 88,121 | 67.5% | $ | 86,801 | 70.7% | $ | 1,320 | 1.5% | |||||||||||||||
|
Other service fees
|
42,525 | 32.5% | 35,890 | 29.3% | 6,635 | 18.5% | ||||||||||||||||||
|
Total revenue, net
|
$ | 130,646 | 100.0% | $ | 122,691 | 100.0% | $ | 7,955 | 6.5% | |||||||||||||||
Total revenue. Total revenue for the nine months
ended September 30, 2010 was $130.6 million, an
increase of $7.9 million, or 6.5%, from $122.7 million
in revenue for the nine months ended September 30, 2009.
The increase in total revenue was comprised of a
$1.3 million increase in Administrative fee revenue and a
$6.6 million increase in Other service fee revenue.
Administrative fee revenue. Revenue from
Administrative fees was $88.1 million for the nine months
ended September 30, 2010, an increase of $1.3 million,
or 1.5%, from $86.8 million in revenue from Administrative
fees for the nine months ended September 30, 2009. The
increase in Administrative fee revenue is a result of the
purchase accounting adjustment in the prior year (described in
Key Considerations) and revenue provided by purchased services,
a new product offering in 2010, offset in part by overall lower
customer spending.
Other service fees. Revenue from Other service fees
was $42.5 million for the nine months ended
September 30, 2010, an increase of $6.6 million, or
18.5%, from $35.9 million in revenue from Other service
fees for the nine months ended September 30, 2009. The
increase in Other
38
service fee revenue is primarily a result of increased contract
utilization by Broadlane’s customers and the HPP
acquisition in November 2009.
Total operating
expenses
The following table sets forth Xxxxxxxxx’s operating
expenses for the periods indicated (dollars in thousands):
| Nine months ended September 30, | |||||||||||||||||||||||
| 2010 | 2009 | Change | |||||||||||||||||||||
|
% of |
% of |
||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | % | ||||||||||||||||||
|
Operating expenses:
|
|||||||||||||||||||||||
|
Cost of revenue
|
$ | 58,777 | 45.0% | $ | 50,769 | 41.4% | $ | 8,008 | 15.8% | ||||||||||||||
|
Product development expenses
|
9,534 | 7.3% | 9,539 | 7.8% | (5 | ) | (0.1)% | ||||||||||||||||
|
Selling and marketing expenses
|
5,909 | 4.5% | 4,834 | 3.9% | 1,075 | 22.2% | |||||||||||||||||
|
General and administrative expenses
|
22,798 | 17.5% | 20,617 | 16.8% | 2,181 | 10.6% | |||||||||||||||||
|
Depreciation and amortization
|
7,938 | 6.1% | 6,721 | 5.5% | 1,217 | 18.1% | |||||||||||||||||
|
Amortization of intangibles
|
11,962 | 9.1% | 11,962 | 9.7% | – | 0.0% | |||||||||||||||||
|
Total operating expenses
|
$ | 116,918 | 89.5% | $ | 104,442 | 85.1% | $ | 12,476 | 11.9% | ||||||||||||||
Cost of revenue. Cost of revenue for the nine months
ended September 30, 2010 was $58.8 million, or 45.0%
of total net revenue, an increase of $8.0 million, or
15.8%, from cost of revenue of $50.8 million, or 41.4% of
total net revenue, for the nine months ended September 30,
2009.
Of the increase, $7.2 million is a result of an increase in
the employee base due primarily to a large customer that
expanded its relationship to include outsourcing of its
materials management and procurement functions to Broadlane and
the HPP and HELP acquisitions. The outsourcing agreement
resulted in a $2.4 million increase in employee-related
expenses and the acquisitions combined for $3.3 million in
employee-related expenses for the nine months ended
September 30, 2010.
Product development expenses. Product development
expenses for the nine months ended September 30, 2010 were
$9.5 million, or 7.3% of total net revenue, which was about
even with product development expenses of $9.5 million, or
7.8% of total net revenue, for the nine months ended
September 30, 2009. The slight decrease in product
development expenses was attributable to the consistent number
of development projects during the nine months ended
September 30, 2010 as compared to the prior period.
Selling and marketing expenses. Selling and
marketing expenses for the nine months ended September 30,
2010 were $5.9 million, or 4.5% of total net revenue, an
increase of $1.1 million, or 22.2%, from selling and
marketing expenses of $4.8 million, or 3.9% of total net
revenue, for the nine months ended September 30, 2009.
The $1.1 million increase in selling and marketing expenses
is due largely to an effort to enhance customer brand awareness
and additional sales personnel.
39
General and administrative expenses. General and
administrative expenses for the nine months ended
September 30, 2010 were $22.8 million, or 17.5% of
total net revenue, an increase of $2.2 million, or 10.6%,
from general and administrative expenses of $20.6 million,
or 16.8% of total net revenue, for the nine months ended
September 30, 2009.
Of the increase, $2.8 million was attributable to an
increase in incentive compensation as a result of a change in
the funding of the Management Incentive Plan, which did not fund
in the prior year. Helping to offset this increase in expenses,
was $0.8 million in savings on employee benefits as a
result of changing to a self-insured plan in the current year.
Depreciation and amortization. Depreciation and
amortization expense for the nine months ended
September 30, 2010 was $7.9 million, or 6.1% of total
net revenue, an increase of $1.2 million, or 18.1%, from
depreciation expense of $6.7 million, or 5.5% of total net
revenue, for the nine months ended September 30, 2009.
The increase was primarily attributable to depreciation
resulting from fixed asset and software additions.
Amortization of intangibles. Amortization of
intangibles for the nine months ended September 30, 2010
and September 30, 2009 was $12.0 million, or 9.1% of
total net revenue and $12.0 million, or 9.7% of total net
revenue, respectively.
Non-operating
expenses
Interest expense. Interest expense for the nine
months ended September 30, 2010 was $11.9 million, a
decrease of $7.0 million from interest expense of
$18.9 million for the nine months ended September 30,
2009. The decrease in interest expense is largely a result of
the refinancing of Xxxxxxxxx’s debt on February 5,
2010. The refinancing lowered the interest rate on
Xxxxxxxxx’s senior term loan from the higher of LIBOR or
3.25% plus an applicable margin of 5.25% to the higher of LIBOR
or 2% plus an applicable margin of 4%.
Income tax expense/benefit. Income tax benefit for
the nine months ended September 30, 2010 was
$3.0 million, a decrease of $3.4 million from income
tax expense of $0.4 million for the nine months ended
September 30, 2009, which was primarily attributable to
decreased income before taxes as a result of the debt
refinancing.
40
Comparison of
years ended December 31, 2009 and December 31,
2008
Revenue
The following table sets forth Broadlane’s revenue by
revenue stream for the periods indicated (dollars in thousands):
| Year ended December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | Change | ||||||||||||||||||||||
|
% of |
% of |
|||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | % | |||||||||||||||||||
|
Revenue:
|
||||||||||||||||||||||||
|
Administrative fees, net
|
$ | 117,730 | 70.3% | $ | 98,805 | 72.7% | $ | 18,925 | 19.2% | |||||||||||||||
|
Other service fees
|
49,794 | 29.7% | 37,061 | 27.3% | 12,733 | 34.4% | ||||||||||||||||||
|
Total revenue, net
|
$ | 167,524 | 100.0% | $ | 135,866 | 100.0% | $ | 31,658 | 23.3% | |||||||||||||||
Total revenue. Total revenue for the year ended
December 31, 2009 was $167.5 million, an increase of
$31.7 million, or 23.3%, from the year ended
December 31, 2008. The increase in total revenue was
comprised of a $18.9 million increase in Administrative fee
revenue and a $12.7 million increase in Other service fee
revenue.
Administrative fee revenue. Revenue from
Administrative fees were $117.7 million for the year ended
December 31, 2009, an increase of $18.9 million, or
19.2%, from $98.8 million in revenue from Administrative
fees for the year ended December 31, 2008. The increase in
revenue was largely a result of the following:
• Purchase accounting adjustment. On
August 15, 2008, Xxxxxxxxx was substantially acquired by
TowerBrook. At the close of the TowerBrook Transaction,
Broadlane’s customers had purchased items on its contracts,
but the fees earned did not qualify for revenue recognition as
the purchase information was not received and the fees were not
collected as of the acquisition date. Consequently, in applying
purchase accounting required by GAAP, an accounts receivable
asset for the fees earned but not collected as of
August 15, 2008 was established. Under GAAP, the revenue
associated with these fees is not deemed revenue of the
acquiring entity as no legal performance obligation is assumed
by the acquiring entity similar to acquired deferred revenue
that is discounted during purchase accounting. As a result,
Xxxxxxxxx has taken a purchase accounting reduction to
Administrative fee revenue of $0.9 million for the year
ended December 31, 2009 and $15.6 million for the year
ended December 31, 2008.
Given the significant impact of the TowerBrook Transaction on
total Administrative fee revenue, Broadlane believes
acquisition-affected measures are useful for the comparison of
its year over year revenue. Administrative fee non-GAAP total
acquisition-affected revenue for the year ended
December 31, 2009 was $118.6 million, an increase of
$4.3 million, or 3.7%, from Administrative fee non-GAAP
acquisition-affected revenue of $114.4 million for the year
ended
41
December 31, 2008. The following table sets forth the
reconciliation of Administrative fee non-GAAP
acquisition-affected revenue to GAAP revenue:
| Year ended December 31, | |||||||||||||||
| 2009 | 2008 | Change | |||||||||||||
| Amount | Amount | Amount | % | ||||||||||||
|
Administrative fee revenue
|
$ | 117,730 | $ | 98,805 | $ | 18,925 | 19.2% | ||||||||
|
Acquisition related purchase accounting
adjustment(1)
|
889 | 15,558 | (14,669 | ) | (94.3)% | ||||||||||
|
Total Administrative fee acquisition-affected
revenue(1)
|
118,619 | 114,363 | 4,256 | 3.7% | |||||||||||
|
Other service fee revenue
|
49,794 | 37,061 | 12,733 | 34.4% | |||||||||||
|
Total acquisition-affected
revenue(1)
|
$ | 168,413 | $ | 151,424 | 16,989 | 11.2% | |||||||||
(1) These are non-GAAP
measures. See “Use of non-GAAP financial measures”
in this section for additional information.
• Organic revenue growth. The increase in
Administrative fee revenue, after excluding the impact of the
purchase accounting adjustment, was $4.3 million, or 3.7%.
The increase is a result of increased customer utilization of
Broadlane’s GPO contracts and the recruitment of new
customers.
• Other service fee revenue. The increase
in the other service fee revenue of $12.7 million, or
34.4%, is a result of existing customers expanding their
relationship with Broadlane to include additional services.
Total operating
expenses
The following table sets forth Xxxxxxxxx’s operating
expenses for the periods indicated (dollars in thousands):
| Year ended December 31, | |||||||||||||||||||||||
| 2009 | 2008 | Change | |||||||||||||||||||||
|
% of |
% of |
||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | % | ||||||||||||||||||
|
Operating expenses:
|
|||||||||||||||||||||||
|
Cost of revenue
|
$ | 69,327 | 41.4% | $ | 59,175 | 43.6% | $ | 10,152 | 17.2% | ||||||||||||||
|
Product development expenses
|
13,275 | 7.9% | 12,560 | 9.2% | 715 | 5.7% | |||||||||||||||||
|
Selling and marketing expenses
|
6,937 | 4.1% | 5,564 | 4.1% | 1,373 | 24.7% | |||||||||||||||||
|
General and administrative expenses
|
30,822 | 18.4% | 49,942 | 36.8% | (19,120 | ) | (38.3)% | ||||||||||||||||
|
Depreciation and amortization
|
9,169 | 5.5% | 10,568 | 7.8% | (1,399 | ) | (13.2)% | ||||||||||||||||
|
Amortization of intangibles
|
15,950 | 9.5% | 7,096 | 5.2% | 8,854 | 124.8% | |||||||||||||||||
|
Total operating expenses
|
$ | 145,480 | 86.8% | $ | 144,905 | 106.7% | $ | 575 | 0.4% | ||||||||||||||
42
Cost of revenue. Cost of revenue for the year ended
December 31, 2009 was $69.3 million, or 41.4% of total
net revenue, an increase of $10.1 million, or 17.2%, from
cost of revenue of $59.2 million, or 43.6% of total net
revenue, for the year ended December 31, 2008.
Of the increase, $9.2 million is a result of an increase in
the employee base due primarily to a large customer that
expanded its relationship to include outsourcing of its
materials management and procurement functions to Broadlane.
Xxxxxxxxx’s overall employee base increased from 668 at
December 31, 2008 to 857 at December 31, 2009. The
outsourcing agreement contributed 188 new employees.
Product development expenses. Product development
expenses for the year ended December 31, 2009 were
$13.3 million, or 7.9% of total net revenue, an increase of
$0.7 million, or 5.7%, from product development expenses of
$12.6 million, or 9.2% of total net revenue, for the year
ended December 31, 2008.
The $0.7 million increase in product development expenses
is largely a result of higher salaries and benefits due an
increase in the employee base to provide support for
Broadlane’s service offerings.
Selling and marketing expenses. Selling and
marketing expenses for the year ended December 31, 2009
were $6.9 million, or 4.1% of total net revenue, an
increase of $1.4 million, or 24.7%, from selling and
marketing expenses of $5.6 million, or 4.1% of total net
revenue, for the year ended December 31, 2008.
The $1.4 million increase in selling and marketing expenses
is due largely to an effort to enhance customer brand awareness
and additional sales personnel.
General and administrative expenses. General and
administrative expenses for the year ended December 31,
2009 were $30.8 million, or 18.4% of total net revenue, a
decrease of $19.2 million, or 38.3%, from general and
administrative expenses of $49.9 million, or 36.8% of total
net revenue, for the year ended December 31, 2008.
Of the decrease, $15.8 million was attributable to
acquisition related expenses from the TowerBrook Transaction on
August 15, 2008 and included in expenses for the year ended
December 31, 2008. Also contributing to the decrease was a
change in the funding of the management incentive compensation
plan in 2009, which contributed savings of $7.0 million.
Offsetting these decreases was a $3.3 million increase
attributable to increased health benefits and professional
services expenses for the year.
Depreciation and amortization. Depreciation and
amortization expense for the year ended December 31, 2009
was $9.2 million, or 5.5% of total net revenue, a decrease
of $1.4 million, or 13.2%, from depreciation expense of
$10.6 million, or 7.8% of total net revenue, for the year
ended December 31, 2008.
The decrease was primarily attributable to depreciation
resulting from the valuation of certain assets recorded at net
book value at the TowerBrook Transaction date and depreciating
the assets over the estimated life pursuant to the valuation of
Broadlane’s assets acquired as of August 15, 2008.
Amortization of intangibles. Amortization of
intangibles for the year ended December 31, 2009 was
$16.0 million, or 9.5% of total net revenue, an increase of
$8.9 million, or 124.8%, from amortization of intangibles
expense of $7.1 million, or 5.2% of total net revenue, for
the year ended December 31, 2008.
43
The increase was a result of amortization of intangible assets
recorded in connection with the TowerBrook Transaction on
August 15, 2008.
Non-operating
expenses
Interest expense. Interest expense for the year
ended December 31, 2009 was $24.7 million, an increase
of $15.6 million, or 171.4%, from interest expense of
$9.1 million for the year ended December 31, 2008. As
of December 31, 2009, Xxxxxxxxx had total indebtedness of
$168.6 million compared to $197.9 million as of
December 31, 2008. The increase in interest expense in 2009
is attributable to a full year of interest on the indebtedness
incurred in connection with the TowerBrook Transaction on
August 15, 2008.
Income tax expense/benefit. Income tax benefit for
the year ended December 31, 2009 was $1.0 million, a
decrease of $5.4 million from an income tax benefit of
$6.4 million for the year ended December 31, 2008,
which was primarily attributable to increased income before
taxes as a result of fees and expenses associated with the
TowerBrook Transaction in the prior year.
Comparison of
years ended December 31, 2008 and December 31,
2007
Revenue
The following table sets forth Broadlane’s revenue by
revenue stream for the periods indicated (dollars in thousands):
| Year ended December 31, | |||||||||||||||||||||||
| 2008 | 2007 | Change | |||||||||||||||||||||
|
% of |
% of |
||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | % | ||||||||||||||||||
|
Revenue:
|
|||||||||||||||||||||||
|
Administrative fees, net
|
$ | 98,805 | 72.7% | $ | 109,267 | 77.0% | $ | (10,462 | ) | (9.6)% | |||||||||||||
|
Other service fees
|
37,061 | 27.3% | 32,687 | 23.0% | 4,374 | 13.4% | |||||||||||||||||
|
Total revenue, net
|
$ | 135,866 | 100.0% | $ | 141,954 | 100.0% | $ | (6,088 | ) | (4.3)% | |||||||||||||
Total revenue. Total revenue for the year ended
December 31, 2008 was $135.9 million, a decrease of
$6.1 million, or 4.3%, from $142.0 million in revenue
for the year ended December 31, 2007. The decrease in total
revenue was comprised of a $10.5 million decrease in
Administrative fee revenue, offset in part by a
$4.4 million increase in Other service fee revenue.
Administrative fee revenue. Revenue from
Administrative fees was $98.8 million for the year ended
December 31, 2008, a decrease of $10.5 million, or
9.6%, from $109.3 million in revenue from Administrative
fees for the year ended December 31, 2007. The decrease in
revenue was largely a result of the following:
• Purchase accounting adjustment. On
August 15, 2008 Broadlane was substantially acquired by
TowerBrook. At the close of the TowerBrook Transaction,
Broadlane’s customers had purchased items on its contracts,
but the fees earned did not qualify for revenue recognition as
the purchase information was not received and the fees were not
collected as of the acquisition date. Consequently, in applying
purchase accounting required by GAAP, an accounts receivable
asset for the fees earned but not collected as
44
of August 15, 2008 was established. Under GAAP, the revenue
associated with these fees is not deemed revenue of the
acquiring entity as no legal performance obligation is assumed
by the acquiring entity similar to acquired deferred revenue
that is discounted during purchase accounting. As a result,
Xxxxxxxxx has taken a purchase accounting reduction to revenue
of $15.6 million in Administrative fee revenue for the year
ended December 31, 2008.
Given the significant impact of the TowerBrook Transaction on
total Administrative fee revenue, Broadlane believes
acquisition-affected measures are useful for the comparison of
its year over year revenue. Administrative fee non-GAAP
acquisition-affected revenue for the year ended
December 31, 2008 was $114.4 million, an increase of
$5.1 million, or 4.7%, from Administrative fee revenue of
$109.3 million for the year ended December 31, 2007.
The following table sets forth the reconciliation of
Administrative fee non-GAAP acquisition-affected revenue to GAAP
revenue:
| Year ended December 31, | |||||||||||||||
| 2008 | 2007 | Change | |||||||||||||
| Amount | Amount | Amount | % | ||||||||||||
|
Administrative fee revenue
|
$ | 98,805 | $ | 109,267 | $ | (10,462 | ) | (9.6)% | |||||||
|
Acquisition related purchase accounting
adjustment(1)
|
15,558 | – | 15,558 | N/A | |||||||||||
|
Total Administrative fee acquisition-affected
revenue(1)
|
114,363 | 109,267 | 5,096 | 4.7% | |||||||||||
|
Other service fee revenue
|
37,061 | 32,687 | 4,374 | 13.4% | |||||||||||
|
Total acquisition-affected
revenue(1)
|
$ | 151,424 | $ | 141,954 | 9,470 | 6.7% | |||||||||
(1) These are non-GAAP
measures. See “Use of non-GAAP financial measures”
in this section for additional information
• Organic revenue growth. The increase in
Administrative fee revenue, after excluding the impact of the
purchase accounting adjustment, was $5.1 million, or 4.7%.
The increase is a result of increased customer utilization of
Broadlane’s GPO contracts and the recruitment of new
customers.
• Other service fee revenue. The increase
in other service fee revenue of $4.4 million, or 13.4%, is
a result of existing customers expanding their relationship with
Broadlane to include additional services.
45
Total operating
expenses
The following table sets forth Xxxxxxxxx’s operating
expenses for the periods indicated (dollars in thousands):
| Year ended December 31, | |||||||||||||||||||||||
| 2008 | 2007 | Change | |||||||||||||||||||||
|
% of |
% of |
||||||||||||||||||||||
| Amount | Revenue | Amount | Revenue | Amount | % | ||||||||||||||||||
|
Operating expenses:
|
|||||||||||||||||||||||
|
Cost of revenue
|
$ | 59,175 | 43.6% | $ | 51,206 | 36.0% | $ | 7,969 | 15.6% | ||||||||||||||
|
Product development expenses
|
12,560 | 9.2% | 14,056 | 9.9% | (1,496 | ) | (10.6)% | ||||||||||||||||
|
Selling and marketing expenses
|
5,564 | 4.1% | 3,819 | 2.7% | 1,745 | 45.7% | |||||||||||||||||
|
General and administrative expenses
|
49,942 | 36.8% | 33,215 | 23.4% | 16,727 | 50.4% | |||||||||||||||||
|
Depreciation and amortization
|
10,568 | 7.8% | 9,183 | 6.5% | 1,385 | 15.1% | |||||||||||||||||
|
Amortization of intangibles
|
7,096 | 5.2% | 1,712 | 1.2% | 5,384 | 314.5% | |||||||||||||||||
|
Total operating expenses
|
$ | 144,905 | 106.7% | $ | 113,191 | 79.6% | $ | 31,714 | 28.0% | ||||||||||||||
Cost of revenue. Cost of revenue for the year ended
December 31, 2008 was $59.2 million, or 43.6% of total
net revenue, an increase of $8.0 million, or 15.6%, from
cost of revenue of $51.2 million, or 36.0% of total net
revenue, for the year ended December 31, 2007.
Of the increase, $7.2 million is a result of an increase in
the employee base to support new outsourced service agreements
and to support expanded agreements with current customers.
Xxxxxxxxx’s overall employee base increased by
65 employees from December 31, 2007 to
December 31, 2008.
Product development expenses. Product development
expenses for the year ended December 31, 2008 were
$12.6 million, or 9.2% of total net revenue, a decrease of
$1.5 million, or 10.6%, from product development expenses
of $14.1 million, or 9.9% of total net revenue, for the
year ended December 31, 2007.
The decrease was a result of the migration of Broadlane’s
data center in December 2007.
Selling and marketing expenses. Selling and
marketing expenses for the year ended December 31, 2008
were $5.6 million, or 4.1% of total net revenue, an
increase of $1.7 million, or 45.7%, from selling and
marketing expenses of $3.8 million, or 2.7% of total net
revenue, for the year ended December 31, 2007.
The increase was attributable to an increase in the employee
base to increase sales and for marketing endeavors to enhance
name recognition in the marketplace.
General and administrative expenses. General and
administrative expenses for the year ended December 31,
2008 were $49.9 million, or 36.8% of total net revenue, an
increase of $16.7 million, or 50.4%, from general and
administrative expenses of $33.2 million, or 23.4% of total
net revenue, for the year ended December 31, 2007.
46
Of the increase, $15.8 million was attributable to
acquisition related expenses from the TowerBrook Transaction on
August 15, 2008 and included in expenses for the year ended
December 31, 2008.
Depreciation and amortization. Depreciation and
amortization expense for the year ended December 31, 2008
was $10.6 million, or 7.8% of total net revenue, an
increase of $1.4 million, or 15.1%, from depreciation
expense of $9.2 million, or 6.5% of total net revenue, for
the year ended December 31, 2007.
The increase was primarily attributable to depreciation
resulting from fixed asset and software additions during the
year.
Amortization of intangibles. Amortization of
intangibles for the year ended December 31, 2008 was
$7.1 million, or 5.2% of total net revenue, an increase of
$5.4 million, or 314.5%, from amortization of intangibles
expense of $1.7 million, or 1.2% of total net revenue, for
the year ended December 31, 2007.
The increase was a result of intangible assets recorded in
connection with the TowerBrook Transaction on August 15,
2008.
Non-operating
expenses
Interest expense. Interest expense for the year
ended December 31, 2008 was $9.1 million, an increase
of $8.6 million from interest expense of $0.5 million
for the year ended December 31, 2007. As of
December 31, 2008, Xxxxxxxxx had total indebtedness of
$198.0 million compared to no indebtedness as of
December 31, 2007. The increase in interest expense is
attributable to the debt incurred on August 15, 2008 in
connection with the TowerBrook Transaction.
Income tax expense/benefit. Income tax benefit for
the year ended December 31, 2008 was $6.4 million, a
decrease of $18.2 million from an income tax expense of
$11.8 million for the year ended December 31, 2007,
which was primarily attributable to decreased income before
taxes as a result of fees and expenses associated with the
TowerBrook Transaction on August 15, 2008.
Critical
accounting policies
The preparation of financial statements in conformity with
accounting principles generally accepted in the
U.S. (“GAAP”) requires Broadlane to make
estimates and assumptions that affect the amounts of assets and
liabilities, disclosure of contingent assets and liabilities and
the date of the financial statements and the reported revenue
and expenses during the reporting period. Broadlane bases its
estimates and judgments on historical experience and other
assumptions that Xxxxxxxxx finds reasonable under the
circumstances. Actual results may differ from such estimates
under different conditions.
Xxxxxxxxx believes that the following accounting judgments and
uncertainties are the most critical to aid in fully
understanding and evaluating its reported financial results.
| (a) | Goodwill and intangible assets |
Goodwill represents the excess of acquisition costs over the
fair value of identifiable net assets acquired in business
combinations treated as purchase transactions. Xxxxxxxxx has
recorded
47
goodwill related to the TowerBrook Transaction and the
November 3, 2009 acquisition of Healthcare Performance
Partners.
Xxxxxxxxx has an indefinite-lived intangible asset related to
the Broadlane tradename and definite-lived intangible assets
related to The Preference Group and Prolucent Workforce
Management tradenames, its favorable leaseholds, its
manufacturer and distributor contracts and its customer network,
all of which are included in intangible assets on
Broadlane’s consolidated balance sheets.
| (b) | Impairment |
Definite-lived assets and intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the
undiscounted cash flows expected to result from the use and
eventual disposition of the asset. In cases where cash flows
cannot be associated with individual assets, assets are grouped
together in order to associate cash flows with the asset group.
If such assets or asset groups are considered to be impaired,
the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value
of the assets.
Goodwill is tested for impairment annually and whenever events
or changes in circumstances indicate that the carrying value may
not be recoverable. Goodwill is tested by first comparing the
book value of net assets to the fair value of the reporting
units. If the fair value is determined to be less than the book
value, a second step is performed to compute the amount of
impairment as the difference between the estimated fair value of
goodwill and the carrying value. Broadlane estimates the fair
value of the reporting units using discounted cash flows.
Forecasts of future cash flows are based on Broadlane’s
best estimate of future net sales and operating expenses.
The impairment test for the indefinite-lived tradename involves
comparing the fair value to its carrying amount. The fair value
is derived based on a discounted cash flow model (relief from
royalty approach), using assumptions about revenue growth rates,
royalty rates, the appropriate discount rates relative to risk
and estimates of terminal values.
Xxxxxxxxx conducts the annual impairment test as of July 31 of
each year, and has determined there to be no impairment for any
of the periods presented. There were no events or circumstances
from the date of the assessment through December 31, 2009
that would impact this conclusion.
Many of the factors used in assessing the fair value are outside
of Broadlane’s control, and these assumptions and estimates
may change in future periods. Changes in assumptions or
estimates can materially affect the fair value and therefore can
affect the amount of the impairment.
| (c) | Income taxes |
Broadlane accounts for deferred taxes under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to reverse.
Broadlane regularly reviews its deferred tax assets for
recoverability and
48
establish a valuation allowance, as needed, based upon
historical taxable income, projected future taxable income, the
expected timing of the reversals of existing temporary
differences and the implementation of tax-planning strategies.
Xxxxxxxxx’s tax valuation allowance requires Broadlane to
make assumptions and apply judgement regarding the forecasted
amount and timing of future taxable income.
| (d) | Equity-based compensation |
Broadlane accounts for equity-based compensation issued to
employees and non-employee directors, for their services as
directors, in accordance with the provisions of FASB
ASC 718, Compensation—Stock Compensation. Under
the provisions of this topic, equity-based compensation cost is
estimated at the grant date based on the award’s fair value
as calculated by the Black-Scholes option-pricing model and is
recognized as expense over the requisite service period. The
Black-Scholes model requires various highly judgmental
assumptions including volatility, expected dividend yield,
future employee rates and forfeiture rates. Changes in these
assumptions can materially affect the fair value estimate.
Estimating the volatility of equity for a privately held company
is complex because there is no readily available market for the
equity. Estimated volatility of Broadlane’s equity is based
on available information on the volatility of stocks of
comparable publicly traded companies.
Liquidity and
capital resources
Liquidity, cash
from operations and outlook
As shown on Xxxxxxxxx’s condensed consolidated balance
sheet, Broadlane had approximately $48.1 million in cash
and cash equivalents as of September 30, 2010, which
includes amounts collected that will be remitted to its
customers in the form of supplier and offeror rebates that
Broadlane is contractually obligated to pay under its group
purchasing contracts with these customers. The supplier and
offeror rebate liability of $24.4 million is shown on
Xxxxxxxxx’s condensed consolidated balance sheet as of
September 30, 2010.
Xxxxxxxxx’s cash flows from operations were approximately
$25.4 million for the nine months ended September 30,
2010 compared to $27.4 million for the nine months ended
September 30, 2009. The decrease in cash provided by
operations in the current year is driven by a $4.6 million
smaller increase in net working capital in the current year
offset in part by $2.6 million higher operating income
after non-cash add-backs due largely to revenue growth and
decreased interest expense as a result of the refinancing in
February 2010. See Note 5, Debt, of the Notes to
Xxxxxxxxx’s Condensed Consolidated Financial Statements
elsewhere in this offering memorandum for a discussion of the
refinancing. Broadlane expects that its operations will continue
to generate positive cash flow. However, the loss of any
material customer and any unforeseen delays in collections or
any material unanticipated expenses could result in a net use of
cash in operations.
49
Cash flow
operations
The following table summarizes Broadlane’s cash flows from
operations for the periods indicated (dollars in millions):
| Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | Change | |||||||||||||
| Amount | Amount | Amount | % | ||||||||||||
|
Net income/(loss)
|
$ | (6.9 | ) | $ | (0.5 | ) | $ | (6.4 | ) | 1280.0% | |||||
|
Non-cash items
|
28.8 | 19.8 | 9.0 | 45.5% | |||||||||||
|
Net changes in working capital
|
3.5 | 8.1 | (4.6 | ) | (56.8)% | ||||||||||
|
Net cash provided by/(used in) operations
|
$ | 25.4 | $ | 27.4 | $ | (2.0 | ) | (7.3)% | |||||||
For the nine months ended September 30, 2010, cash provided
by operations was $25.4 million and is comprised of a
$6.9 million net loss, a $3.5 million increase in net
working capital due largely to the timing of payments on
operating liabilities and non-cash net charges of
$28.8 million.
Cash used by investing activities was $8.1 million for the
nine months ended September 30, 2010, resulting from
$6.2 million in capital expenditures primarily related to
software development and $1.9 million in expenditures
related to acquisitions. See Note 3, Acquisitions, of the
Notes to Xxxxxxxxx’s Condensed Consolidated Financial
Statements elsewhere in this offering memorandum for a
discussion of the acquisitions.
For the nine months ended September 30, 2010, cash used in
financing activities was $0.9 million due to
$0.9 million in scheduled repayments on the senior term
loan and $48.7 million in net proceeds from the senior term
loan, $42.6 million in payments to extinguish the
subordinated notes, a $1.7 million prepayment premium
related to the extinguishment of the subordinated notes and
$4.7 million in debt issue costs, all related to the
February 2010 refinancing.
For the nine months ended September 30, 2009, cash provided
by operations was $27.4 million and is comprised of a
$0.5 million net loss, an $8.1 million increase in net
working capital and non-cash net charges of $19.8 million.
Cash used by investing activities was $1.5 million for the
nine months ended September 30, 2009, resulting from
$4.5 million in capital expenditures, offset in part by
$3.0 million in return of purchase price related to the
TowerBrook Transaction.
For the nine months ended September 30, 2009, cash used in
financing activities was $1.1 million due to mandatory
repayments on debt.
Debt
Broadlane refinanced all of its outstanding debt under its
credit facility on February 5, 2010 in order eliminate the
outstanding debt under its subordinated notes and significantly
lower its interest expense. The refinancing increased the
balance outstanding under its credit facility to
$180.0 million due to fees paid in connection with the
refinancing.
Xxxxxxxxx’s existing credit facility will be terminated and
all obligations thereunder will be repaid at the time of the
closing of the Transactions.
50
Contractual
obligations and commitments (in millions)
The following table summarizes Xxxxxxxxx’s contractual
obligations and commitments as of December 31, 2009. Except
for the refinancing on February 5, 2010 described above,
there has been no material changes since December 31, 2009.
| Payments due by period | ||||||||||||||||||||
|
Less than |
More than |
|||||||||||||||||||
| Contractual Obligations | Total | 1 year | 1-3 years | 3-5 years | 5 years | |||||||||||||||
|
Long-term debt obligations
|
$ | 171.1 | $ | 0.4 | $ | – | $ | 170.7 | $ | – | ||||||||||
|
Accrued interest payable related to long-term debt obligations
|
4.0 | 4.0 | – | – | – | |||||||||||||||
|
Non-cancelable operating lease obligations
|
11.8 | 5.6 | 6.2 | – | – | |||||||||||||||
|
Supplier and offeror rebates
|
22.1 | 22.1 | – | – | – | |||||||||||||||
|
Total
|
$ | 209.0 | $ | 32.1 | $ | 6.2 | $ | 170.7 | $ | – | ||||||||||
Off-balance sheet
arrangements
Other than operating leases, which Broadlane discloses with its
contractual obligations and commitments, Broadlane does not have
any off-balance sheet arrangements that are reasonably likely to
have a current or future effect on its consolidated financial
condition, revenues, results of operations, liquidity or capital
resources.
Non-GAAP
measures
In order to provide investors with greater insight, promote
transparency and allow for a more comprehensive understanding of
the information used by management and the Board of Directors of
Broadlane in its financial and operational decision-making,
Broadlane supplements its Condensed Consolidated Financial
Statements presented on a GAAP basis with the following non-GAAP
financial measures: EBITDA, Adjusted EBITDA and Adjusted EBITDA
margin.
Use of non-GAAP
financial measures
These non-GAAP financial measures have limitations as analytical
tools and should not be considered in isolation or as a
substitute for analysis of Xxxxxxxxx’s results as reported
under GAAP. Broadlane compensates for such limitations by
relying primarily on its GAAP results and using non-GAAP
financial measures only supplementally. Broadlane provides
reconciliations of non-GAAP measures to their most directly
comparable GAAP measures, where possible. Investors are
encouraged to carefully review those reconciliations. In
addition, because these non-GAAP measures are not measures of
financial performance under GAAP and are susceptible to varying
calculations, these measures, as defined by Broadlane, may
differ from and may not be comparable to similarly titled
measures used by other companies.
EBITDA, Adjusted
EBITDA and Adjusted EBITDA margin
Xxxxxxxxx uses the following non-GAAP measures to supplement its
financial statements: EBITDA, Adjusted EBITDA and Adjusted
EBITDA margin. These non-GAAP measures have
51
limitations and should not be considered as a substitute for
analysis of Xxxxxxxxx’s results as reported under GAAP.
Broadlane defines: (i) EBITDA, as consolidated earnings
before interest, taxes, depreciation and amortization;
(ii) Adjusted EBITDA, as consolidated earnings before
interest, taxes, depreciation and amortization and other
non-recurring, non-cash or non-operating items; and
(iii) Adjusted EBITDA margin, as Adjusted EBITDA as a
percentage of revenue.
|
Nine months ended |
||||||||||||||||||||
| September 30, | Fiscal year ended December 31, | |||||||||||||||||||
| 2010 | 2009 | 2009 | 2008 | 2007 | ||||||||||||||||
|
Net income (loss)
|
$ | (6,875 | ) | $ | (549 | ) | $ | (3,923 | ) | $ | (15,385 | ) | $ | 18,399 | ||||||
|
Depreciation and amortization
|
7,938 | 6,721 | 9,169 | 10,568 | 9,183 | |||||||||||||||
|
Amortization of intangibles
|
11,962 | 11,962 | 15,950 | 7,096 | 1,712 | |||||||||||||||
|
Interest expense, net of interest
income(2)
|
11,919 | 18,885 | 24,670 | 8,581 | (812 | ) | ||||||||||||||
|
Income tax expense (benefit)
|
(2,986 | ) | 368 | (1,017 | ) | (6,406 | ) | 11,841 | ||||||||||||
|
Non-GAAP EBITDA(1)
|
$ | 21,958 | $ | 37,387 | $ | 44,849 | $ | 4,454 | $ | 40,323 | ||||||||||
|
Other (gains)
losses(3)
|
(84 | ) | (455 | ) | (760 | ) | 4,171 | 845 | ||||||||||||
|
Loss on extinguishment of
debt(4)
|
11,754 | – | 3,074 | – | – | |||||||||||||||
|
Purchase accounting and other
adjustments(5)
|
249 | 890 | 3,052 | 31,307 | – | |||||||||||||||
|
Equity-based
compensation(6)
|
537 | 459 | 609 | 6,932 | 2,723 | |||||||||||||||
|
Non-GAAP Adjusted
EBITDA(1)
|
$ | 34,414 | $ | 38,281 | $ | 50,824 | $ | 46,864 | $ | 43,891 | ||||||||||
(1) Non-GAAP financial measures reported by the management
of Broadlane may have limitations as analytical tools and should
not be considered by investors in isolation or as a substitute
for analysis of Broadlane’s or the Company’s results
as reported under GAAP. The Company compensates for such
limitations by relying primarily on the Company’s GAAP
results and using non-GAAP financial measures only
supplementally. Where possible, the Company provides
reconciliations of non-GAAP financial measures to the most
directly comparable GAAP measures. Investors are encouraged to
carefully review those reconciliations. In addition, because
these non-GAAP measures are not measures of financial
performance under GAAP and are susceptible to varying
calculations, these measures may differ from and may not be
comparable to similarly titled measures used by other companies.
Broadlane measures are for illustrative and informational
purposes only and are not intended to represent or be indicative
of what the Company’s results of operations would have been
if the acquisition of Broadlane had occurred at the beginning of
such periods. Broadlane EBITDA, Adjusted EBITDA, and Adjusted
EBITDA margin measures are used by our management and the board
of directors to facilitate a comparison of Broadlane operating
performance on a consistent basis from period to period and
provide for a more complete understanding of factors and trends
affecting their business. These measures assist our management
and the board of directors and may be useful to investors in
comparing Broadlane operating performance consistently over
time. EBITDA and Adjusted EBITDA are not measures of liquidity
under GAAP, or otherwise, and are not an alternative to cash
flow from continuing operating activities.
52
(2) On Broadlane’s condensed consolidated statements
of operations and consolidated statements of operations,
investment earnings are reported as a separate line item rather
than netted against interest expense.
(3) Other (gains) losses consist primarily of (gains)
losses from interest rate derivative financial instruments.
(4) For the nine months ended September 30, 2010, the
$11.8 million loss on extinguishment of debt is due to
refinancing of Xxxxxxxxx’s senior term loan and
extinguishment of senior subordinated notes and the resulting
premium and write-off of debt discount and deferred financing
costs. For the year ended December 31, 2009, the
$3.1 million loss on extinguishment of debt is due to
prepayments of Xxxxxxxxx’s senior term loan and senior
subordinated notes and the resulting premium and write-off of
debt discount and deferred financing costs.
(5) For the nine months ended September 30, 2010, the
$0.2 million adjustment represents costs related to certain
acquisitions completed in 2010. For the nine months ended
September 30, 2009 and for the years ended
December 31, 2009 and 2008 this adjustment represents
purchase accounting adjustments related to the acquisition of
Broadlane by TowerBrook on August 15, 2008. In applying
purchase accounting required by GAAP, certain amounts that
absent purchase accounting would have been recorded as revenue
after the date of the acquisition were required to be recorded
as an accounts receivable asset at the acquisition date.
Accordingly, as a result as of purchase accounting,
administrative fee revenue for the nine months ended
September 30, 2009 and the years ended December 31,
2009 and 2008 were reduced by $0.9 million,
$0.9 million and $15.6 million, respectively. In
addition, the years ended December 31, 2009 and 2008
include approximately $2.1 million and $15.8 million,
respectively of transaction expenses related to severance, legal
and professional advisory fees and other acquisition related
expenses. Including this adjustment in calculating Adjusted
EBITDA eliminates this effect of purchase accounting.
(6) Represents non-cash equity compensation to both
employees and directors.
Recently issued
accounting standards
In October 2009, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”)
2009-13,
which amends ASC Topic 605, Revenue Recognition. Under this
standard, management is no longer required to obtain
vendor-specific objective evidence or third party evidence of
fair value for each deliverable in an arrangement with multiple
elements, and where evidence is not available Broadlane may now
estimate the proportion of the selling price attributable to
each deliverable. The adoption of ASU
2009-13 is
not expected to have a material impact on Xxxxxxxxx’s
consolidated financial condition or results of operations.
In January 2010, the FASB issued ASU
2010-6,
Improving Disclosures About Fair Value Measurements, which
requires reporting entities to make new disclosures about
recurring or non-recurring fair value measurements, including
significant transfers into and out of Level 1 and
Level 2 fair value measurements and information on
purchases, sales, issuances, and settlements on a gross basis in
the reconciliation of Level 3 fair value measurements. ASU
2010-6 is
effective for annual reporting periods beginning after
December 15, 2009, except for Level 3 reconciliation
disclosures, which are effective for annual periods beginning
after December 15, 2010. The adoption of ASU
2010-6 is
not expected to have a material impact on Xxxxxxxxx’s
consolidated financial statements.
53
Independent
auditors’ report
The Board of Directors
Broadlane Intermediate Holdings, Inc.:
Broadlane Intermediate Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
Broadlane Intermediate Holdings, Inc. and subsidiaries (the
Company) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, changes in
stockholder’s equity, and cash flows for the year ended
December 31, 2009, the period from August 16, 2008 to
December 31, 2008 (Successor), the period from
January 1, 2008 to August 15, 2008 (Predecessor) and
for the year ended December 31, 2007 (Predecessor). These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Broadlane Intermediate Holdings, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of operations, changes in
stockholder’s equity, and cash flows for the year ended
December 31, 2009, the period from August 16, 2008 to
December 31, 2008 (Successor), the period from
January 1, 2008 to August 15, 2008 (Predecessor) and
for the year ended December 31, 2007 (Predecessor) in
conformity with U.S. generally accepted accounting
principles.
As discussed in notes 1 and 3 to the consolidated financial
statements, effective August 15, 2008, Broadlane
Intermediate Holdings, Inc. was acquired in a business
combination accounted for as a purchase. As a result of the
acquisition, the consolidated financial information for the
periods after the acquisition is presented on a different cost
basis than that for the periods before the acquisition and,
therefore, is not comparable.
/s/ KPMG
LLP
Dallas, Texas
November 1, 2010
54
Broadlane
Intermediate Holdings, Inc. consolidated
balance sheets
balance sheets
| (in thousands, except share and per share data) | December 31, 2009 | December 31, 2008 | ||||||
|
Assets
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 31,703 | $ | 31,488 | ||||
|
Accounts receivable, net
|
10,843 | 8,230 | ||||||
|
Deferred income taxes, net
|
6,930 | 8,067 | ||||||
|
Prepaid income taxes
|
2,214 | 18,400 | ||||||
|
Prepaid expenses and other
|
3,650 | 2,817 | ||||||
|
Total current assets
|
55,340 | 69,002 | ||||||
|
Property and equipment at cost, net
|
10,081 | 10,529 | ||||||
|
Software and website development costs, less accumulated
amortization of $7,128 and $1,850 at December 31, 2009 and
December 31, 2008, respectively
|
16,827 | 16,379 | ||||||
|
Intangible assets, less accumulated amortization of $22,106 and
$6,062 at December 31, 2009 and December 31, 2008,
respectively
|
189,874 | 205,918 | ||||||
|
Goodwill
|
183,120 | 185,086 | ||||||
|
Deferred financing costs, net
|
5,506 | 7,951 | ||||||
|
Other
|
279 | 278 | ||||||
|
Total assets
|
$ | 461,027 | $ | 495,143 | ||||
|
Liabilities & stockholder’s equity
|
||||||||
|
Current liabilities:
|
||||||||
|
Accrued payroll and payroll taxes
|
$ | 3,882 | $ | 2,805 | ||||
|
Deferred revenue
|
413 | 344 | ||||||
|
Supplier and offeror rebates
|
22,115 | 20,463 | ||||||
|
Accounts payable and other accrued liabilities
|
8,380 | 6,391 | ||||||
|
Interest payable, related party
|
2,436 | 2,833 | ||||||
|
Accrued bonus compensation
|
2,398 | 9,160 | ||||||
|
Current portion of senior term loan
|
410 | 1,400 | ||||||
|
Total current liabilities
|
40,034 | 43,396 | ||||||
|
Senior term loan, less current portion
|
128,190 | 138,250 | ||||||
|
Senior subordinated notes, related party, net of discount of
$2,520 and $4,685 at December 31, 2009 and
December 31, 2008, respectively
|
40,021 | 58,287 | ||||||
|
Deferred income taxes, net
|
63,181 | 67,403 | ||||||
|
Interest rate swap liability
|
3,329 | 4,085 | ||||||
|
Other long-term liabilities
|
1,605 | 2,073 | ||||||
|
Total liabilities
|
276,360 | 313,494 | ||||||
|
Stockholder’s equity:
|
||||||||
|
Common stock, $0.01 par value; authorized 100 shares;
issued and outstanding 100 shares
|
– | – | ||||||
|
Additional paid-in capital
|
202,533 | 195,592 | ||||||
|
Accumulated deficit
|
(17,866 | ) | (13,943 | ) | ||||
|
Total stockholder’s equity
|
184,667 | 181,649 | ||||||
|
Total liabilities and stockholder’s equity
|
$ | 461,027 | $ | 495,143 | ||||
The accompanying notes are an
integral part of these consolidated financial
statements.
55
Broadlane
Intermediate Holdings, Inc. consolidated
statements of operations
statements of operations
| | |||||||||||||||||
|
Period from |
Period from |
||||||||||||||||
|
August 16, 2008 to |
January 1, 2008 to |
||||||||||||||||
| (in thousands) | 2009 | December 31, 2008 | August 15, 2008 | 2007 | |||||||||||||
| (Successor) | (Successor) | (Predecessor) | (Predecessor) | ||||||||||||||
|
Revenue:
|
|||||||||||||||||
|
Administrative fees, net
|
|||||||||||||||||
|
External
|
$ | 117,730 | $ | 27,582 | $ | 57,128 | $ | 88,259 | |||||||||
|
Affiliated
|
– | – | 14,095 | 21,008 | |||||||||||||
|
Total administrative fees, net
|
117,730 | 27,582 | 71,223 | 109,267 | |||||||||||||
|
Other service fees
|
|||||||||||||||||
|
External
|
49,794 | 14,497 | 21,203 | 29,609 | |||||||||||||
|
Affiliated
|
– | – | 1,361 | 3,078 | |||||||||||||
|
Total other service fees
|
49,794 | 14,497 | 22,564 | 32,687 | |||||||||||||
|
Total revenue, net
|
167,524 | 42,079 | 93,787 | 141,954 | |||||||||||||
|
Expenses:
|
|||||||||||||||||
|
Cost of revenue
|
69,327 | 21,907 | 37,268 | 51,206 | |||||||||||||
|
Product development
|
13,275 | 4,643 | 7,917 | 14,056 | |||||||||||||
|
Selling and marketing
|
6,937 | 1,845 | 3,719 | 3,819 | |||||||||||||
|
General and administrative
|
30,822 | 13,049 | 36,893 | 33,215 | |||||||||||||
|
Depreciation and amortization
|
9,169 | 3,417 | 7,151 | 9,183 | |||||||||||||
|
Amortization of intangibles
|
15,950 | 6,026 | 1,070 | 1,712 | |||||||||||||
|
Total operating expenses
|
145,480 | 50,887 | 94,018 | 113,191 | |||||||||||||
|
Operating income/(loss)
|
22,044 | (8,808 | ) | (231 | ) | 28,763 | |||||||||||
|
Interest expense
|
(24,721 | ) | (8,832 | ) | (259 | ) | (465 | ) | |||||||||
|
Investment earnings
|
51 | 64 | 446 | 1,277 | |||||||||||||
|
Loss on extinguishment of debt
|
(3,074 | ) | – | – | – | ||||||||||||
|
Other income/(loss), net
|
4 | – | (86 | ) | (27 | ) | |||||||||||
|
Gain/(loss) on interest rate swap
|
756 | (4,085 | ) | – | – | ||||||||||||
|
Income/(loss) before income taxes
|
(4,940 | ) | (21,661 | ) | (130 | ) | 29,548 | ||||||||||
|
Income tax (expense)/benefit
|
1,017 | 7,718 | (1,312 | ) | (11,841 | ) | |||||||||||
|
Income/(loss) from continuing operations
|
(3,923 | ) | (13,943 | ) | (1,442 | ) | 17,707 | ||||||||||
|
Discontinued operations
|
|||||||||||||||||
|
Income from operations
|
– | – | – | 25 | |||||||||||||
|
Net gain from sale of NOA
|
– | – | – | 1,223 | |||||||||||||
|
Income tax expense
|
– | – | – | (556 | ) | ||||||||||||
|
Income from discontinued operations
|
– | – | – | 692 | |||||||||||||
|
Net income/(loss)
|
(3,923 | ) | (13,943 | ) | (1,442 | ) | 18,399 | ||||||||||
|
Less preferred stock dividends
|
– | – | 1,093 | 1,750 | |||||||||||||
|
Net income/(loss) attributable to common stockholders
|
$ | (3,923 | ) | $ | (13,943 | ) | $ | (2,535 | ) | $ | 16,649 | ||||||
The accompanying notes are an
integral part of these consolidated financial
statements.
56
Broadlane
Intermediate Holdings, Inc.
consolidated statements of changes in stockholder’s equity
consolidated statements of changes in stockholder’s equity
| Common stock |
Additional |
Total |
||||||||||||||||||
|
Issued |
Par |
paid-in |
Accumulated |
stockholders’ |
||||||||||||||||
| (in thousands, except share data) | shares | value | capital | deficit | equity | |||||||||||||||
|
Balances, December 31, 2006
|
29,094,849 | $ | 3 | $ | 34,771 | $ | (23,825 | ) | $ | 10,949 | ||||||||||
|
Net income
|
– | – | – | 18,399 | 18,399 | |||||||||||||||
|
Tax benefit related to non-qualified stock option exercises
|
– | – | 125 | – | 125 | |||||||||||||||
|
Exercise of stock options
|
86,101 | – | 171 | – | 171 | |||||||||||||||
|
Equity-based compensation
|
– | – | 2,722 | – | 2,722 | |||||||||||||||
|
Contributed services
|
– | – | 69 | – | 69 | |||||||||||||||
|
Preferred stock dividends
|
– | – | (1,750 | ) | – | (1,750 | ) | |||||||||||||
|
Balances, December 31, 2007
|
29,180,950 | 3 | 36,108 | (5,426 | ) | 30,685 | ||||||||||||||
|
Net loss
|
– | – | – | (1,442 | ) | (1,442 | ) | |||||||||||||
|
Tax benefit related to non-qualified stock option exercises
|
– | – | 6,599 | – | 6,599 | |||||||||||||||
|
Tax benefit related to ISO disqualified dispositions
|
– | – | 948 | – | 948 | |||||||||||||||
|
Exercise of stock options
|
188,152 | – | 238 | – | 238 | |||||||||||||||
|
Equity-based compensation
|
– | – | 6,932 | – | 6,932 | |||||||||||||||
|
Preferred stock dividends
|
– | – | – | (1,093 | ) | (1,093 | ) | |||||||||||||
|
Balances, August 15, 2008
|
29,369,102 | 3 | 50,825 | (7,961 | ) | 42,867 | ||||||||||||||
|
Successor period from August 16, 2008 to December 31,
2009:
|
||||||||||||||||||||
|
Initial capitalization
|
100 | – | 195,592 | – | 195,592 | |||||||||||||||
|
Net loss
|
– | – | – | (13,943 | ) | (13,943 | ) | |||||||||||||
|
Balances, December 31, 2008
|
100 | – | 195,592 | (13,943 | ) | 181,649 | ||||||||||||||
|
Net loss
|
– | – | – | (3,923 | ) | (3,923 | ) | |||||||||||||
|
Capital contribution
|
– | – | 6,332 | – | 6,332 | |||||||||||||||
|
Equity-based compensation
|
– | – | 609 | – | 609 | |||||||||||||||
|
Balances, December 31, 2009
|
100 | $ | – | $ | 202,533 | $ | (17,866 | ) | $ | 184,667 | ||||||||||
The accompanying notes are an
integral part of these consolidated financial
statements.
57
Broadlane
Intermediate Holdings, Inc.
consolidated statements of cash flows
consolidated statements of cash flows
| | |||||||||||||||||
|
Period from |
Period from |
||||||||||||||||
|
August 16, 2008 to |
January 1, 2008 to |
||||||||||||||||
| (in thousands) | 2009 | December 31, 2008 | August 15, 2008 | 2007 | |||||||||||||
| (Successor) | (Successor) | (Predecessor) | (Predecessor) | ||||||||||||||
|
Cash flows from operating activities:
|
|||||||||||||||||
|
Net income/(loss)
|
$ | (3,923 | ) | $ | (13,943 | ) | $ | (1,442 | ) | $ | 18,399 | ||||||
|
Adjustments to reconcile net income/(loss) to cash provided
by/(used in) operating activities:
|
|||||||||||||||||
|
Depreciation and amortization
|
25,119 | 9,443 | 8,221 | 10,895 | |||||||||||||
|
Bad debt expense
|
236 | 109 | 156 | 214 | |||||||||||||
|
Lease recovery
|
(89 | ) | (76 | ) | – | (52 | ) | ||||||||||
|
Deferred income tax expense/(benefit)
|
(3,658 | ) | (8,792 | ) | 2,948 | 764 | |||||||||||
|
Contributed services
|
– | – | – | 69 | |||||||||||||
|
Interest rate swap (gain)/loss
|
(756 | ) | 4,085 | – | – | ||||||||||||
|
Equity-based compensation
|
609 | – | 6,932 | 2,722 | |||||||||||||
|
Excess tax benefit related to stock option exercises
|
– | – | (7,547 | ) | (125 | ) | |||||||||||
|
Issuance of notes in lieu of interest
|
1,186 | 472 | – | – | |||||||||||||
|
Amortization of deferred financing costs and debt discount
|
2,450 | 970 | 112 | 180 | |||||||||||||
|
Loss on extinguishment of debt
|
3,074 | – | – | – | |||||||||||||
|
(Gain)/loss on sale of equipment
|
(3 | ) | – | 86 | 27 | ||||||||||||
|
Pre-tax income from discontinued operations
|
– | – | – | (25 | ) | ||||||||||||
|
Changes in operating assets and liabilities:
|
|||||||||||||||||
|
(Increase)/decrease in accounts receivable
|
(1,960 | ) | 29,874 | 200 | (195 | ) | |||||||||||
|
Decrease in accounts receivable from affiliate
|
– | – | 307 | 50 | |||||||||||||
|
(Increase)/decrease in prepaids and other current assets
|
(833 | ) | (215 | ) | 430 | (36 | ) | ||||||||||
|
(Increase)/decrease in other assets
|
(51 | ) | (119 | ) | 9 | – | |||||||||||
|
(Increase)/decrease in prepaid income taxes
|
16,186 | (757 | ) | (7,880 | ) | 1,777 | |||||||||||
|
Increase/(decrease) in supplier and offeror rebates
|
1,652 | 538 | (14,312 | ) | 780 | ||||||||||||
|
Increase/(decrease) in deferred revenue
|
69 | (738 | ) | 215 | – | ||||||||||||
|
Increase/(decrease) in accrued interest
|
(7 | ) | 1,143 | – | – | ||||||||||||
|
Increase/(decrease) in accrued interest, related party
|
(397 | ) | 3,306 | – | – | ||||||||||||
|
Increase/(decrease) in other liabilities
|
(4,078 | ) | (11,588 | ) | 8,396 | 1,832 | |||||||||||
|
Net cash used in operating activities from discontinued
operations
|
– | – | – | (180 | ) | ||||||||||||
| 34,826 | 13,712 | (3,169 | ) | 37,096 | |||||||||||||
58
| | |||||||||||||||||
|
Period from |
Period from |
||||||||||||||||
|
August 16, 2008 to |
January 1, 2008 to |
||||||||||||||||
| (in thousands) | 2009 | December 31, 2008 | August 15, 2008 | 2007 | |||||||||||||
| (Successor) | (Successor) | (Predecessor) | (Predecessor) | ||||||||||||||
|
Cash flows from investing activities:
|
|||||||||||||||||
|
Return of purchase price from escrow
|
2,991 | – | – | – | |||||||||||||
|
Cost of acquisition, net of cash acquired
|
(1,331 | ) | (351,393 | ) | – | – | |||||||||||
|
Proceeds from sale of property and equipment
|
3 | – | – | – | |||||||||||||
|
Purchase of property and equipment
|
(3,350 | ) | (902 | ) | (929 | ) | (5,594 | ) | |||||||||
|
Capitalized software and website development costs
|
(5,725 | ) | (2,731 | ) | (3,434 | ) | (8,644 | ) | |||||||||
| (7,412 | ) | (355,026 | ) | (4,363 | ) | (14,238 | ) | ||||||||||
|
Cash flows from financing activities:
|
|||||||||||||||||
|
Capital contributions
|
6,332 | 184,482 | – | – | |||||||||||||
|
Proceeds from senior term loan
|
– | 140,000 | – | – | |||||||||||||
|
Payments on senior term loan
|
(11,050 | ) | (350 | ) | – | – | |||||||||||
|
Proceeds from senior subordinated notes, related party
|
– | 57,500 | – | – | |||||||||||||
|
Payments on senior subordinated notes, related party
|
(21,617 | ) | – | – | – | ||||||||||||
|
Premium on early payments on senior subordinated notes, related
party
|
(864 | ) | – | – | – | ||||||||||||
|
Payments on revolving credit facility
|
– | – | – | (14,000 | ) | ||||||||||||
|
Debt issue costs
|
– | (8,606 | ) | – | – | ||||||||||||
|
Proceeds from stock options exercised
|
– | – | 238 | 171 | |||||||||||||
|
Excess tax benefit related to stock option exercises
|
– | – | 7,547 | 125 | |||||||||||||
|
Payment of dividends on preferred stock
|
– | (224 | ) | (875 | ) | (1,750 | ) | ||||||||||
| (27,199 | ) | 372,802 | 6,910 | (15,454 | ) | ||||||||||||
|
Net increase/(decrease) in cash and cash equivalents
|
215 | 31,488 | (622 | ) | 7,404 | ||||||||||||
|
Cash and cash equivalents at beginning of period
|
31,488 | – | 30,975 | 23,571 | |||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 31,703 | $ | 31,488 | $ | 30,353 | $ | 30,975 | |||||||||
|
Supplemental disclosures of cash flow information:
|
|||||||||||||||||
|
Income taxes paid/(refunded)
|
$ | (13,547 | ) | $ | 190 | $ | 5,776 | $ | 10,152 | ||||||||
|
Interest paid
|
$ | 21,675 | $ | 3,002 | $ | 75 | $ | 171 | |||||||||
The accompanying notes are an
integral part of these consolidated financial
statements.
59
Broadlane
Intermediate Holdings, Inc. notes to consolidated financial
statements
| (1) | Nature of operations |
Unless the context otherwise requires, the use of the terms
“Broadlane”, “Company”, “we”,
“us” and “our” in the following refers to
Broadlane Intermediate Holdings, Inc. Broadlane Intermediate
Holdings, Inc. is a holding company whose sole wholly owned
subsidiary is The Broadlane Group, Inc. (formerly known as
Broadlane, Inc.). All of Broadlane Intermediate Holdings, Inc.
operations are conducted through its subsidiary The Broadlane
Group, Inc. and its consolidated subsidiaries.
Broadlane is a leading healthcare services company that delivers
supply chain management and procurement services to healthcare
providers. In addition to our core group purchasing services, we
leverage our procurement management expertise and apply
technology and scaled solutions to allow our customers to
maintain focus on their core business while realizing additional
cost savings. We reduce costs and create operational
efficiencies for thousands of acute care hospitals, ambulatory
care facilities, physician practices and other healthcare
providers in the U.S. We operate under one reportable
segment.
On August 15, 2008 TowerBrook Capital Partners
(“TowerBrook”) acquired Broadlane (referred to herein
as the “Transaction”) for $394.3 million,
including fees and expenses. The purchase price was funded with
a $140.0 million term loan, $62.5 million of senior
subordinated notes and $191.8 million of equity. See
Note 3, Mergers and Acquisitions.
As result of the Transaction, our consolidated results of
operations and cash flows included in the accompanying
consolidated statements of operations, changes in
stockholder’s equity and cash flows for periods prior to
August 15, 2008 are those of The Broadlane Group, Inc and
are presented as the “Predecessor” periods. Broadlane
Intermediate Holdings, Inc. was formed in connection with the
Transaction and the common stock of The Broadlane Group, Inc.
was contributed to Broadlane Intermediate Holdings, Inc. Our
consolidated financial position, results of operations and cash
flows included in the accompanying consolidated statement of
financial position, statements of operations, changes in
stockholder’s equity and cash flows for periods after
August 15, 2008 are those of Broadlane Intermediate
Holdings, Inc. and are presented as the “Successor”
periods. The consolidated financial information for the
Successor periods is presented on a different cost basis than
that for the Predecessor periods and, therefore, is not
comparable.
Broadlane is headquartered in Dallas, Texas and has offices in
California, Michigan, New York, Ohio, Tennessee and Texas.
| (2) | Summary of significant accounting policies |
| (a) | Basis of presentation |
The consolidated financial statements include the accounts of
Broadlane and its wholly owned subsidiaries. Intercompany
accounts and transactions are eliminated in consolidation.
60
| (b) | Reclassifications |
Certain reclassifications have been made to the prior year
financial statements in order for them to be in conformity with
the current year presentation.
| (c) | Use of estimates |
The preparation of financial statements in conformity with
accounting principles generally accepted in the
U.S. (“GAAP”) requires us to make estimates and
assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Future results
could be materially affected if actual results were to differ
from these estimates and assumptions.
| (d) | Subsequent events |
We have evaluated subsequent events and transactions for
potential recognition or disclosure in the financial statements
through November 1, 2010, the day the financial statements
were available to be issued. Refer to Note 16,
Subsequent Events.
| (e) | Cash and cash equivalents |
We consider all highly liquid securities with maturities at the
date of purchase of three months or less to be cash equivalents.
| (f) | Financial instruments and concentration of credit risk |
The carrying values of cash equivalents, accounts receivable and
accounts payable approximate fair value because of the
short-term maturity of these instruments. Financial instruments
that expose us to concentrations of credit risk consist
primarily of accounts receivable. Although this concentration
could affect our overall exposure to credit risk, we believe
that the risk is minimal since the majority of our business is
conducted with major companies in the healthcare industry.
| (g) | Property and equipment |
Property and equipment consists primarily of furniture and
fixtures, office and computer equipment, and leasehold
improvements related to the offices in Dallas, Texas and
Oakland, California. Property and equipment are recorded at
cost. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the
assets or for leasehold improvements, the term of the lease, if
shorter.
When property is fully depreciated, retired or otherwise
disposed of, the cost and accumulated depreciation are removed
from the accounts and any resulting gain or loss is reflected in
the consolidated results of operations.
Repairs and maintenance costs are charged directly to expense as
incurred. Major renewals or replacements that substantially
extend the useful life of an asset are capitalized and
depreciated.
61
Estimated useful lives by major asset category are below:
|
Estimated |
||||
| Category | useful life | |||
|
Furniture and fixtures
|
5-7 years | |||
|
Office and computer equipment
|
3-7 years | |||
|
Leasehold improvements
|
3-15 years | |||
| (h) | Capitalized software costs |
Costs associated with the acquisition or development of software
for internal use are capitalized based on the guidance provided
by FASB
ASC 350-40,
Internal-Use Software. Capitalized costs are amortized
over an estimated life of three years. A subsequent addition,
modification or upgrade to internal-use software is capitalized
only to the extent that it enables the software to perform a
task it previously did not perform. Software maintenance and
training costs are expensed as incurred.
| (i) | Goodwill and intangible assets |
Goodwill represents the excess of acquisition costs over the
fair value of identifiable net assets acquired in business
combinations treated as purchase transactions. We have recorded
goodwill related to the August 15, 2008 Transaction and the
November 3, 2009 acquisition of Healthcare Performance
Partners. See Note 3, Mergers and Acquisitions.
We have an indefinite-lived intangible asset related to the
Broadlane tradename and definite-lived intangible assets related
to The Preference Group and Workforce Management tradenames, our
favorable leaseholds, our manufacturer and distributor contracts
and our customer network, all of which are included in
intangible assets on our consolidated balance sheets.
See Note 6, Goodwill and Intangible Assets, for
information regarding goodwill and intangible asset valuation.
| (j) | Impairment |
Definite-lived assets and intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the
undiscounted cash flows expected to result from the use and
eventual disposition of the asset. In cases where cash flows
cannot be associated with individual assets, assets are grouped
together in order to associate cash flows with the asset group.
If such assets or asset groups are considered to be impaired,
the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value
of the assets.
Goodwill is tested for impairment annually and whenever events
or changes in circumstances indicate that the carrying value may
not be recoverable. Goodwill is tested by first comparing the
book value of net assets to the fair value of the reporting
units. If the fair value is determined to be less than the book
value, a second step is performed to compute the amount of
impairment as the difference between the estimated fair value of
goodwill and the carrying
62
value. We estimate the fair value of the reporting unit using
discounted cash flows. Forecasts of future cash flows are based
on our best estimate of future net sales and operating expenses.
The impairment test for the indefinite-lived tradename involves
comparing the fair value to its carrying amount. The fair value
is derived based on a discounted cash flow model (relief from
royalty approach), using assumptions about revenue growth rates,
royalty rates, the appropriate discount rates relative to risk
and estimates of terminal values.
We conduct the annual impairment test as of July 31 of each
year, and have determined there to be no impairment for any of
the periods presented. There were no events or circumstances
from the date of the assessment through December 31, 2009
that required reassessment.
| (k) | Derivative financial instruments |
We account for derivative activities under the provisions of
FASB ASC 815, Derivatives and Hedging. This topic
establishes accounting and reporting standards requiring that
every derivative instrument be recorded on the balance sheet as
either an asset or a liability measured at its fair value. It
requires that changes in the derivative’s fair value be
recognized currently in earnings unless specific hedge
accounting criteria are met. We use derivative instruments to
manage the interest rate risk associated with our senior term
loan. Cash flows related to interest payments are reflected in
operating activities in our consolidated statements of cash
flows. We have not applied hedge accounting to this instrument,
and as a result all changes in the market value of this
derivative are recognized currently in our consolidated results
of operations.
| (l) | Income taxes |
We account for deferred taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to reverse.
| (m) | Revenue recognition |
We recognize revenue when persuasive evidence of an arrangement
exists, services have been rendered, collectability is
reasonably assured, and when the earnings are fixed or
determinable.
Suppliers that are members of our group purchasing network pay
us an administrative fee based on the amount of purchases made
by healthcare providers who purchase from our contracts.
Administrative fees are recognized as revenue in the period
purchase information is received from the suppliers. Information
on the amount of contract purchases often becomes available
subsequent to the period in which the purchases were made.
Consequently, as of the end of any reporting period, an
indeterminable amount of administrative fees have been earned
that do not qualify for revenue recognition.
We recognize revenue upon the receipt of supplier sales reports
as this reporting proves that the delivery of product or service
has occurred, the administrative fees are fixed and determinable
based on reported purchasing volume, and collectability is
reasonably assured. Our customer and vendor contracts
substantiate persuasive evidence of an arrangement.
63
In certain situations, our supplier agreements allow our
customers to return goods purchased under our contracts based on
the suppliers return policy. These returns result in a refund of
previously reported administrative fees. Our customers provide
us with sufficient purchase and return data to establish and
maintain an administrative fee refund reserve related to
reported and recognized administrative fees. We follow the
guidance provided by Staff Accounting Bulletin No. 104
(“SAB 104”) to establish and record the
administrative fee refund reserve. Specifically we considered
the following criteria:
| • | The estimates of refunded fees are made for a large pool of homogeneous items with similar characteristics | |
| • | Reliable estimates of the expected returns can be made on a timely basis | |
| • | There is sufficient company-specific historical basis upon which to estimate the returns and we believe such historical experience is predictive of future events | |
| • | The amount of administrative fees reported are fixed, other than the customer’s right of return |
Under certain customer agreements, we rebate a portion of the
administrative fees back to our customers based on their
purchases. Revenue in the accompanying consolidated financial
statements is shown net of these offeror rebates because we do
not originate price, take title, or assume risk of loss for
product purchases, and do not bear any credit risk that exists
between suppliers and customers.
We have a select number of customer agreements in which the
customer pays a management fee for services and we rebate all of
the administrative fees back to the customer, with the exception
of a limited number of specialty categories where we retain the
administrative fee. Revenue from management fee agreements is
recognized on a straight-line basis as services are provided.
We enter into fixed-price and
time-and-expenses
contracts to provide outsourced contracting, procurement, and
implementation services. Revenue under
time-and-expenses
contracts is based on fixed billable rates for hours delivered
plus reimbursable costs. Revenue under fixed-price contracts is
recognized on a straight-line basis as services are provided
over the term of the agreement.
We earn transaction fees from suppliers for the transmission of
purchase orders through our proprietary electronic exchange.
These fees are typically based on a percentage of transmitted
volume or on the number of orders transmitted. Transaction fee
revenue is recognized as the transactions occur.
Fees that are contingent on cost savings to be realized by the
customer are recognized as revenue only once the cost savings
have been realized and the amount of revenue can be determined.
| (n) | Equity-based compensation |
We account for equity-based compensation issued to employees and
non-employee directors, for their services as directors, in
accordance with the provisions of FASB ASC 718,
Compensation—Stock Compensation. Under the
provisions of this topic, equity-based compensation cost is
estimated at the grant date based on the award’s fair value
as calculated by the Black-Scholes
64
option-pricing model and is recognized as expense over the
requisite service period. The Black-Scholes model requires
various highly judgmental assumptions including volatility and
expected option life. If any of the assumptions used in the
Black-Scholes model change significantly, equity-based
compensation may differ materially in the future from that
recorded in the current period. In addition, we are required to
estimate the expected forfeiture rate and only recognize expense
for those shares expected to vest. We estimate the forfeiture
rate based on historical experience.
| (o) | Recently issued accounting standards |
In June 2009, the Financial Accounting Standards Board issued
SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles—a replacement of FASB Statement No. 162,
(FASB Accounting Standards Codification 105, Generally
Accepted Accounting Principles). This standard establishes
only two levels of U.S. GAAP, authoritative and
non-authoritative. The FASB Accounting Standards Codification
(the “Codification”) is the source of authoritative,
non-governmental GAAP, except for rules and interpretive
releases of the Securities and Exchange Commission
(“SEC”), which are sources of authoritative GAAP for
SEC registrants. All other non-grandfathered, non-SEC accounting
literature not included in the Codification is
non-authoritative. This standard is effective for financial
statements for interim or annual reporting periods ending after
September 15, 2009. The adoption of this standard did not
have an impact on our consolidated financial statements, other
than the manner of referencing accounting literature.
FASB ASC 855, Subsequent Events, was issued in May
2009. This standard is intended to establish general standards
of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or
are available to be issued. Specifically, this standard sets
forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions
occurring after the balance sheet date in its financial
statements, and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date. In accordance with this standard, which is effective for
periods ending after June 15, 2009, we have evaluated
subsequent events for accounting and disclosure through
November 1, 2010, the day the financial statements were
available to be issued—see Note 16, Subsequent
Events.
In August 2009, the FASB issued Accounting Standards Update
(“ASU”)
No. 2009-05,
Measuring Liabilities at Fair Value. ASU
2009-05
applies to all entities that measure fair value within the scope
of FASB ASC 820. ASU
2009-05
provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value
using one or more of the following methods:
1) A valuation technique that uses:
a. The quoted price of the identical liability when traded
as an asset.
b. Quoted prices for similar liabilities or similar
liabilities when traded as assets.
2) Another valuation technique that is consistent with the
principles of ASC 820 (e.g. an income approach or market
approach).
65
ASU 2009-05
clarifies that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of the liability. It also
clarifies that both a quoted price in an active market for the
identical liability at the measurement date and the quoted price
for the identical liability when traded as an asset in an active
market when no adjustments to the quoted price of the asset are
required are Level 1 fair value measurements. The guidance
provided in ASU
2009-05 is
effective for the first reporting period beginning after
issuance. The adoption of ASU
2009-05 did
not have a material effect on our consolidated financial
condition or results of operations.
In October 2009, the FASB issued ASU
2009-13,
which amends ASC Topic 605, Revenue Recognition. Under
this standard, management is no longer required to obtain
vendor-specific objective evidence or third party evidence of
fair value for each deliverable in an arrangement with multiple
elements, and where evidence is not available we may now
estimate the proportion of the selling price attributable to
each deliverable. We do not anticipate the adoption of
ASU 2009-13
to have a material impact on our consolidated financial
condition or results of operations.
In January 2010, the FASB issued ASU
2010-6,
Improving Disclosures About Fair Value Measurements,
which requires reporting entities to make new disclosures about
recurring or non-recurring fair value measurements, including
significant transfers into and out of Level 1 and
Level 2 fair value measurements and information on
purchases, sales, issuances, and settlements on a gross basis in
the reconciliation of Level 3 fair value measurements. ASU
2010-6 is
effective for annual reporting periods beginning after
December 15, 2009, except for Level 3 reconciliation
disclosures, which are effective for annual periods beginning
after December 15, 2010. The adoption of ASU
2010-6 did
not have a material impact on our consolidated financial
statements.
| (3) | Mergers and acquisitions |
We entered into an Agreement and Plan of Merger on June 20,
2008 with Broadlane Holdings, LLC (the “Parent
Company”), an entity affiliated with TowerBrook. TowerBrook
is a private equity firm with offices in New York and London and
focuses on making investments in North American and European
companies.
On August 15, 2008, upon approval and adoption by
stockholders and as the other closing conditions of the Merger
Agreement were satisfied or waived, Bondi Merger Sub, Inc., a
wholly-owned subsidiary of the Parent Company created in
contemplation of the Parent Company’s acquisition of
Broadlane, Inc. (the “Merger Sub”), was merged with
and into Broadlane. Broadlane, Inc. is treated as the surviving
corporation and became a wholly-owned subsidiary of the Parent
Company. Prior to the merger, the Merger Sub had no independent
assets or operations.
As consideration for acquiring Broadlane, TowerBrook arranged to
pay $373.8 million to persons holding (a) shares of
preferred stock, (b) shares of common stock, and
(c) options to acquire common stock of Broadlane that were
“in-the-money.”
Holders of options to buy common stock that were
“out-of-the-money,”
because they have an exercise price per share higher than the
per share merger consideration, did not receive any
consideration in exchange for cancellation of their options.
66
The purchase price was allocated as follows (dollars in
thousands):
|
Purchase price calculation:
|
||||
|
Xxxx paid in exchange for equity interests
|
$ | 373,757 | ||
|
Contribution of equity from previous investors
|
11,110 | |||
|
Transaction costs
|
9,452 | |||
|
Total purchase price
|
$ | 394,319 | ||
|
Allocation of purchase price:
|
||||
|
Current assets
|
$ | 91,005 | ||
|
Property and equipment
|
11,378 | |||
|
Software
|
15,661 | |||
|
Intangible assets
|
211,980 | |||
|
Goodwill
|
185,933 | |||
|
Other non-current assets
|
6,077 | |||
|
Current liabilities
|
(49,607 | ) | ||
|
Non-current liabilities
|
(78,108 | ) | ||
|
Total purchase price allocated
|
$ | 394,319 | ||
The Transaction was treated as a purchase and a new basis of
accounting was established on August 16, 2008. We have
reflected all applicable purchase accounting adjustments in the
consolidated financial statements using the push-down basis of
purchase accounting. The closing balances as of August 15,
2008 effectively represent the opening balances as of
August 16, 2008. Our consolidated financial position,
results of operations and cash flows prior to the transaction
are presented as “Predecessor” periods through
August 15, 2008. Our consolidated financial position,
results of operations and cash flows thereafter are presented as
the “Successor” period commencing on August 16,
2008. Our fiscal year-end continues to be December 31.
We obtained a third party valuation to support the fair value of
certain identifiable intangible assets as of August 15,
2008. The fair values of the intangible assets valued as of
August 15, 2008 are as follows (dollars in thousands):
|
Estimated |
||||||||
| Fair value | life (in years) | |||||||
|
Favorable leaseholds
|
$ | 350 | 2 - 4 years | |||||
|
Broadlane tradename
|
22,460 | Indefinite | ||||||
|
Workforce Management tradename
|
700 | 10 years | ||||||
|
The Preference Group tradename
|
200 | 10 years | ||||||
|
Manufacturer and distributor contracts
|
99,390 | 10 years | ||||||
|
Customer network
|
88,880 | 15 years | ||||||
|
Total identifiable intangible assets
|
$ | 211,980 | ||||||
On November 3, 2009, Xxxxxxxxx acquired 100% of Healthcare
Performance Partners, LLC (“HPP”), a leading
boutique consulting firm based in Nashville, Tennessee, offering
clinical and administrative solutions through lean healthcare
and six sigma consulting services, training and tools, for
consideration of $1.1 million, 76,923 Series A
Preferred Units of Broadlane Holdings, LLC, valued at
approximately $0.1 million, and contingent consideration
based on future earnings targets, estimated at approximately
$0.4 million. HPP’s offerings complement our strategy
of helping clients reduce costs and improve operating
efficiencies, and serve to
67
further differentiate us from our competitors. The acquisition
did not violate any of the loan covenants under our senior term
loan, senior subordinated notes, or revolving line of credit
referred to in Note 9, Debt. This transaction has
been accounted for using the purchase method and the results of
the acquired business are included in our consolidated
operations subsequent to the date of acquisition.
The purchase price for the acquisition was allocated to the
assets acquired and liabilities assumed based on their fair
values at the acquisition date. Included in this acquisition is
goodwill of approximately $1.3 million. As the acquisition
is not considered significant, pro forma and purchase price
allocation financial information are not presented.
| (4) | Property and equipment |
Property and equipment, at cost, consisted of the following
(dollars in thousands):
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Furniture and fixtures
|
$ | 1,136 | $ | 985 | ||||
|
Office and computer equipment
|
9,857 | 6,808 | ||||||
|
Leasehold improvements
|
4,353 | 4,215 | ||||||
| 15,346 | 12,008 | |||||||
|
Less accumulated depreciation and amortization
|
(5,265 | ) | (1,479 | ) | ||||
|
Property and equipment, net
|
$ | 10,081 | $ | 10,529 | ||||
Depreciation and amortization expense for property and equipment
was approximately $3.8 million for the year ended
December 31, 2009, $1.5 million for the period
August 16, 2008 to December 31, 2008,
$2.6 million for the period January 1, 2008 to
August 15, 2008, and $3.2 million for the year ended
December 31, 2007.
| (5) | Software and web site development |
Software and web site development consists of certain
capitalized costs related to the following:
| • | Broadlane’s enterprise resource planning (ERP) system, | |
| • | Software applications to improve the operational efficiency and functionality of Contract Management System (CMS), | |
| • | Xxxxxxxxx’s proprietary “procure-to-pay” solution (P2P), a requisitioning and procurement application supporting centralized purchasing services, | |
| • | OnRamp® client portal, | |
| • | Cost analysis software program, and | |
| • | wfxtm Workforce Exchange, a labor application that assists clients in the management and tracking of both full-time and temporary clinical labor | |
| • | Broadlane’s data console, a platform for primarily mid-market client supply chain decision-making |
68
Amortization expense for software and web site development was
approximately $5.3 million for the year ended
December 31, 2009, $1.8 million for the period from
August 16, 2008 to December 31, 2008,
$4.5 million for the period from January 1, 2008 to
August 15, 2008 and $5.9 million for the year ended
December 31, 2007.
| (6) | Goodwill and intangible assets |
As a result of the Transaction referred to in Note 3,
Mergers and Acquisitions, we engaged an external third
party to assist us in valuing our intangible assets acquired as
of August 15, 2008. A total of $212.0 million was
assigned to the separately identifiable intangible assets and
residual goodwill of $185.9 million was recorded. The
assets are amortized over their estimated lives, except for the
Broadlane tradename and goodwill, both of which have indefinite
lives.
The changes in the carrying amount of goodwill were as follows
in 2009 and 2008 (in thousands):
|
Balance, December 31, 2007
|
$ | – | ||
|
Acquisition
|
185,933 | |||
|
Adjustment for uncertain tax positions
|
(822 | ) | ||
|
Backlog revenue
adjustment(1)
|
(39 | ) | ||
|
Tax adjustment
|
14 | |||
|
Balance, December 31, 2008
|
185,086 | |||
|
Return of purchase price from escrow
|
(2,991 | ) | ||
|
Backlog revenue
adjustment(1)
|
(889 | ) | ||
|
Tax adjustment
|
584 | |||
|
Acquisition
|
1,330 | |||
|
Balance, December 31, 2009
|
$ | 183,120 | ||
| (1) | Represents fees collected for revenue earned prior to the Transaction date. The revenue associated with these fees is not deemed revenue of the Successor as no legal performance obligation is assumed by the Successor. |
Intangible assets consist of the following (dollars in
thousands):
| December 31, 2009 | December 31, 2008 | |||||||||||||||
|
Carrying |
Accumulated |
Carrying |
Accumulated |
|||||||||||||
| value | amortization | value | amortization | |||||||||||||
|
Favorable leaseholds
|
$ | 350 | $ | (130 | ) | $ | 350 | $ | (36 | ) | ||||||
|
Broadlane tradename
|
22,460 | – | 22,460 | – | ||||||||||||
|
Workforce Management tradename
|
700 | (96 | ) | 700 | (26 | ) | ||||||||||
|
The Preference Group tradename
|
200 | (28 | ) | 200 | (8 | ) | ||||||||||
|
Manufacturer and distributor contracts
|
99,390 | (13,690 | ) | 99,390 | (3,754 | ) | ||||||||||
|
Customer network
|
88,880 | (8,162 | ) | 88,880 | (2,238 | ) | ||||||||||
|
Totals
|
$ | 211,980 | $ | (22,106 | ) | $ | 211,980 | $ | (6,062 | ) | ||||||
69
We recorded amortization expense in relation to these intangible
assets of $16.0 million for the year ended
December 31, 2009, $6.1 million for the period from
August 16, 2008 to December 31, 2008,
$1.1 million for the period from January 1, 2008 to
August 15, 2008 and $1.7 million for the year ended
December 31, 2007. The following table presents the
estimated future amortization expense for these intangible
assets as of December 31, 2009 (dollars in thousands):
|
2010
|
$ | 16,045 | ||
|
2011
|
16,045 | |||
|
2012
|
15,982 | |||
|
2013
|
15,950 | |||
|
2014
|
15,950 | |||
|
Thereafter
|
87,442 | |||
|
Total
|
$ | 167,414 | ||
| (7) | Related party transactions |
Prior to the August 15, 2008 Transaction discussed in
Note 3, Mergers and Acquisitions, Xxxxx Healthcare
Corporation (“Xxxxx”) owned approximately 48% of our
outstanding stock, and as a result, Xxxxx was considered a
related party. Transactions with Xxxxx prior to August 16,
2008 are reflected as transactions with an “Affiliate”
on the consolidated statements of operations. Subsequent to
August 16, 2008, Xxxxx is no longer considered a related
party. We entered into the following agreements with Xxxxx prior
to August 16, 2008.
| (a) | Management outsourcing agreement |
Xxxxx retained us to manage certain functions of its corporate
materials management program. Xxxxx also appointed us as its
exclusive contracting representative and group purchasing
organization. These services are being provided pursuant to an
agreement, as amended, which was originally entered into on
December 9, 1999 for a
10-year
term. Under this agreement, we recognized administrative fee
revenue of approximately $11.4 million for the
seven-and-a-half
months ended August 15, 2008 and $18.2 million for the
year ended December 31, 2007.
| (b) | Other services agreements |
During 2002, we entered into multiple consulting agreements with
Xxxxx in which we provided diagnostic, sourcing, and
implementation services in the area of temporary nurse staffing.
For services rendered, we recognized approximately
$2.6 million for the
seven-and-a-half
months ended August 15, 2008 and $4.1 million for the
year ended December 31, 2007.
Since 2003, we entered into various other consulting agreements
with Xxxxx, under which we provided additional diagnostic and
contracting support in an effort to lower Xxxxx’x operating
expenses in both supplies and through specialized procedural
improvements, pharmacy cost management, and in non-traditional
areas. We are paid for consulting services and in some cases can
also earn performance fees based on cost savings resulting from
these initiatives. For services rendered, we recognized
$1.1 million for the
seven-and-a-half
months ended August 15, 2008 and $1.7 million for the
year ended December 31, 2007.
70
| (c) | Office lease guarantees |
Xxxxx has guaranteed our office building lease in
San Francisco for the original terms through May 2010. The
remaining minimum lease payments for this lease total
approximately $0.7 million. This agreement was entered into
on December 9, 1999, and is for a
10-year term.
| (d) | Shared services |
From our inception in December 1999 until June 27, 2003, we
were a majority-owned subsidiary of Xxxxx. During this time, we
reimbursed Xxxxx for the incremental cost of all shared services
and recognized that amount as expense. However, some services
that we received, such as insurance coverage, participation in
Xxxxx’x 401(k) plan, and use of an accounting software
license, had no incremental cost. These services are considered
to be contributed services for the year ended December 31,
2007. Effective January 1, 2008, we reimbursed Xxxxx for
all shared services and there were no services considered to be
contributed services. We recognized $69 thousand in contributed
services from Xxxxx for the year ended December 31, 2007.
The 2007 contributed services have been recorded as expenses in
the accompanying consolidated statements of operations and since
we were not required to pay Xxxxx, these amounts are also
recorded as additional contributed capital.
| (e) | Revenues generated from other entities with stockholder representation |
Prior to the Transaction, certain stockholders owning an
aggregate of 16.7% of our stock were also healthcare provider
organizations that had customer contracts with us. Stock
ownership by these organizations was not contingent upon the
customer agreements nor upon the services rendered and resulting
consideration paid for services. We recognized revenues of
approximately $17.6 million for the
seven-and-a-half
months ended August 15, 2008 and $27.3 million for the
year ended December 31, 2007, related to services provided
to these customers and administrative fees earned from suppliers
as a result of these customers’ purchase activity. Pursuant
to the Transaction, two of these healthcare providers continue
to be equity holders, owning approximately 3% of total equity.
| (f) | Activity related to the company’s stock option and purchase plan |
In 2000, we sold 4,262,518 shares of common stock at $1.45
per share to officers and other employees of Xxxxx according to
the 2000 Senior Executive Stock Purchase Plan. Also in 2000, we
granted option of 762,473 shares of our common stock at an
exercise price of $1.45 to officer and other employees of Xxxxx
in return for services provided by Xxxxx employees to the
Company. Pursuant to the Transaction, all options, including
those held by former Xxxxx employees, have been cancelled as of
August 16, 2008.
As a result of the Transaction, TowerBrook owns approximately
94% of the Parent Company’s outstanding equity units, and
as a result, is considered a related party. On August 15,
2008 we entered into a six-year subordinated note agreement with
TowerBrook. Refer to Note 9, Debt, for a description
of the terms of the subordinated notes. The subordinated notes
bear interest at 14%, including 12% basic interest and 2%
paid-in-kind
interest. The outstanding balance on the subordinated notes (net
of a $2.5 and $4.7 million discount as of December 31,
2009 and December 31, 2008, respectively) was $40.0 and
$58.3 million, as of December 31, 2009 and
December 31, 2008, respectively. The related accrued
interest was $2.4 and $2.8 million as of December 31,
2009 and December 31, 2008, respectively.
71
| (8) | Lease obligations |
Total rent expense for all operating leases was approximately
$4.8 million for the year ended December 31, 2009,
$1.8 million for the period from August 16, 2008 to
December 31, 2008, $2.7 million for the period from
January 1, 2008 to August 15, 2008 and
$4.5 million for the year ended December 31, 2007.
We have several non-cancelable operating leases, primarily for
the San Francisco and Dallas offices. The following is a
schedule of future minimum rental payments required under
operating leases that have initial or remaining non-cancelable
terms in excess of one year as of December 31, 2009
(dollars in thousands):
|
2010
|
$ | 5,585 | ||
|
2011
|
4,677 | |||
|
2012
|
1,566 | |||
|
2013
|
16 | |||
|
Total
|
$ | 11,844 | ||
In connection with the decision to move the Broadlane
headquarters from San Francisco to Dallas, the related
San Francisco office space was subleased. The sublease
agreement commenced on December 1, 2006 with a termination
date of May 31, 2010, which is coterminous with the master
lease.
Due to the decrease in market lease rates since we signed the
master lease in October 2000, we recorded a loss on sublease for
the difference between remaining rents and estimated operating
costs in November 2006. The loss related to rent and operating
costs is discounted to its present value, and interest expense
recorded over the remaining term of the lease.
Consequent to the lease loss expense, we established a lease
loss reserve liability. This liability will be depleted until
the termination date of May 31, 2010 by the continuing
lease and operating expenses, net of sublease receipts.
| (9) | Debt |
On August 15, 2008, we entered into a five-year term loan
agreement with Xxxxxxxxx Finance LLC (administrative agent) and
a syndicate of commercial banks whereby we may borrow up to
$140.0 million in a senior term loan and $13.0 million
in a revolving line of credit. The senior term loan and the
revolving line of credit were obtained to finance the
Transaction discussed in Note 3, Mergers and
Acquisitions, and are secured by essentially all of our
assets. The costs related to the issuance of the senior term
loan and revolving line of credit were $7.1 million. These
costs are recorded as deferred financing costs and are being
amortized over the term of the credit agreement. For the year
ended December 31, 2009, we recognized approximately
$1.5 million related to amortization of these deferred
financing costs. For the period from August 16 to
December 31, 2008, we recognized approximately
$0.6 million related to amortization of these deferred
financing costs.
We also entered into a six-year senior subordinated note
agreement on August 15, 2008 with TowerBrook
(administrative agent) whereby we may borrow up to
$62.5 million. The senior subordinated notes were also
obtained to finance the acquisition. The notes are guaranteed by
us and each of our subsidiaries. The discount on the senior
subordinated notes is $5.0 million and has been recorded as
a reduction to the carrying amount of the senior subordinated
notes.
72
The costs related to the issuance of the notes were
$1.5 million. The issuance costs are recorded as deferred
financing costs and are being amortized over the term of the
note agreement. For the year ended December 31, 2009, we
recognized approximately $0.8 million related to
amortization of the debt discount and $0.2 million related
to the amortization of deferred financing costs. For the
four-and-a-half
months ended December 31, 2008, we recognized approximately
$0.3 million related to amortization of the debt discount
and $0.1 million related to the amortization of deferred
financing costs.
The table below summarizes the debt agreements (dollars in
thousands):
|
Outstanding at |
Outstanding at |
|||||||||||||
|
December 31, |
December 31, |
Maturity dates |
||||||||||||
| 2009 | 2008 | (fiscal year) | Interest rates | |||||||||||
|
Senior term loan
|
$ | 128,600 | $ | 139,650 | 2013 | LIBOR* rate plus applicable margin(a) (5.25%)(b) | ||||||||
|
Senior subordinated notes (net of $2,520 and $4,685 discount,
respectively)
|
40,021 | 58,287 | 2014 |
(i) Basic interest rate—12% on principal amount (ii) PIK (c) interest rate—2% on principal amount |
||||||||||
|
Revolving line of credit
|
– | – | 2013 | LIBOR* rate plus applicable margin(a) (5.25%)(b) | ||||||||||
| * | The greater of London Interbank Offered Rate (“LIBOR”) or 3.25%. As of December 31, 2009 the applicable rate is 3.25%. |
| (a) | Applicable margin is based on total leverage ratio | |
| (b) | If the total leverage ratio is greater than or equal to 3.5 to 1.0, the applicable margin used for the next quarterly interest payment is 5.25% | |
| If the total leverage ratio is less than 3.5 to 1.0, the applicable margin used for the next quarterly interest payment is 4.75% Broadlane’s applicable margin at December 31, 2009 is 5.25% |
| (c) | Paid-in-kind interest rate (PIK) | |
| Per the terms of the loan agreement, the mandatory principal payments on the senior term loan are made each March 31, June 30, September 30, and December 31 for the period from December 31, 2008 through and including March 31, 2013. However, in November 2009 we made a $10.0 million prepayment on the term loan, and as a result the remaining quarterly amortization payments were eliminated. Upon maturity, we will be required to pay any outstanding principal amount. As a result of the partial extinguishment, we recognized a loss of $0.4 million related to the write-off of related deferred financing costs. | ||
| An excess cash flow based principal payment will be paid 125 days after the end of the calendar year starting with the year ending December 31, 2009. As of December 31, 2009 this payment is estimated to be $0.4 million. As a result, $0.4 million of the senior term loan balance has been classified as short-term on our consolidated balance sheets as of December 31, 2009. Any remaining outstanding principal amount is due on the maturity date. The interest payments on the senior term loan are made on February 15, May 15, August 15 and November 15 each year for the term of the loan. |
There are no mandatory principal payments on the senior
subordinated notes until the maturity date. We have the right to
repay all or a portion of the notes outstanding by payment of
the percentage of the principal amount of the notes outstanding
together with accrued interest on
73
the principal amount of the notes outstanding to the date of
such repayment according to the following chart:
| Price | ||||
|
Twelve-month period ending on August 15, in the year:
|
||||
|
2009
|
105.0% | |||
|
2010
|
104.0% | |||
|
2011
|
103.0% | |||
|
2012
|
102.0% | |||
|
2013 and thereafter
|
100.0% | |||
In October 2009, we made a $21.6 million prepayment on the
senior subordinated notes and paid a 4% premium, or
$0.9 million. We recognized as a loss on extinguishment of
debt of $2.7 million on our consolidated statements of
operations for the year ended December 31, 2009 as a result
of the premium and write-off of related debt discount and
deferred financing costs.
The interest payments on the senior subordinated notes are due
semi-annually on the third business day of January and July of
each year.
| (a) | Loan covenants |
The 2008 senior term loan, senior subordinated notes, and
revolving line of credit contain affirmative, negative and
financial covenants which among other requirements, prohibit
(i) certain types of investments and (ii) the payment
of more than $1.0 million of dividends per year for the
senior term loan and revolving line of credit and
$1.2 million per year for the senior subordinated notes.
| (b) | Financial ratios and default provisions |
We are required to satisfy certain financial requirements as
long as the senior term loan, revolving line of credit, and
senior subordinated notes are outstanding:
Our total leverage ratio, which is defined as the ratio of
consolidated indebtedness to consolidated earnings before
interest, taxes, depreciation and amortization
(“EBITDA”), must not be more than 5.0 to 1.0 for the
senior term loan and revolving line of credit and 5.75 to 1.00
for the senior subordinated notes for the period from
August 16, 2008 to June 30, 2010.
Our fixed charge ratio, which is defined as the ratio of EBITDA
minus (i) capital expenditures, (ii) cash payment of
taxes, and (iii) cash dividends to holdings, to
consolidated fixed charges, which is defined as the sum of cash
interest expense and payment of indebtedness, must not be less
than 1.20 to 1.00 for the senior term loan and revolving line of
credit and 1.00 to 1.00 for the senior subordinated notes for
the period from July 1, 2009 to June 30, 2010.
Our capital expenditures must not be more than
$13.5 million for the senior term loan and revolving line
of credit and $15.5 million for the senior subordinated
notes for the year ended December 31, 2009.
Additionally, the senior term loan and revolving line of credit
are subject to certain default provisions, including nonpayment
of principal, interest, or fees when due, failure to comply with
certain covenants, or the occurrence of a material adverse
change in operations, business, properties, liabilities, or
condition (financial or otherwise). In the event of default, the
remedies include acceleration of unpaid principal, accrued
interest, and other unpaid fees.
74
As of December 31, 2009, we believe we were in compliance
with all debt covenants.
| (10) | Derivative financial instrument |
We entered into a
floating-to-fixed
rate LIBOR-based interest rate swap, effective November 15,
2008, for a notional amount of $100 million of the senior
term loan debt, with a maturity date of November 15, 2011,
to manage risk associated with the variable rate of that debt.
We receive three-month floating LIBOR interest payments from our
creditor counterparty. Settlement payments are then made
quarterly between us and the counterparty for the differences
between the three-month floating LIBOR rates and our contracted
fixed rates. The swap does not hedge the applicable margin that
the counterparty charges on our indebtedness in addition to
LIBOR (5.25% as of December 31, 2009).
The fair value of the swap was recorded as a liability of $3.3
and $4.1 million on December 31, 2009 and
December 31, 2008, respectively. The corresponding changes
in the fair value were recorded as a gain of $0.8 million
and loss of $4.1 million on interest rate swap in our
consolidated statement of operations for the years ended
December 31, 2009 and 2008, respectively.
| (11) | Fair value measurements |
Effective January 1, 2008, we adopted FASB ASC 820,
Fair Value Measurements and Disclosures, which among
other things, requires enhanced disclosures about assets and
liabilities carried at fair value. Fair value is the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date. FASB ASC 820 describes three
approaches to measuring the fair value of assets and
liabilities: the market approach, the income approach and the
cost approach, each of which include multiple valuation
techniques. The market approach uses prices and other relevant
information generated by market transactions involving identical
or comparable assets or liabilities. The income approach uses
valuation techniques to measure fair value by converting future
amounts, such as cash flows or earnings, into a single present
value amount using current market expectations about those
future amounts. The cost approach is based on the amount that
would currently be required to replace the service capacity of
an asset.
FASB ASC 820 does not prescribe which valuation technique
should be used when measuring fair value and does not prioritize
among techniques. FASB ASC 820 establishes a fair value
hierarchy that prioritizes the inputs used in applying the
various valuation techniques. Inputs broadly refer to the
assumptions that market participants use to make pricing
decisions, including assumptions about risk. The hierarchy gives
the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1
measurement) and lowest priority to unobservable inputs
(Level 3 measurements). The three levels of fair value
hierarchy are as follows:
Level 1—Inputs are unadjusted, quoted prices in
active markets for identical assets or liabilities as of the
reporting date. As of December 31, 2009 and
December 31, 2008, we have no Level 1 measurements.
Level 2—Pricing inputs are other than quoted
prices in active markets included in either Level 1, which
are directly or indirectly observable as of the reporting date.
Level 2 includes those financial instruments that are
valued using models or other valuation methodologies. These
models are primarily industry-standard models that consider
various assumptions,
75
including quoted forward prices for commodities, time value,
volatility factors, and current market and contractual prices
for the underlying instruments, as well as other relevant
economic measures. Our derivative is valued using inputs based
on observable market data and the liability is therefore
categorized in Level 2.
Level 3—Pricing inputs include significant
inputs that are generally less observable from objective
sources. These inputs may be used with internally developed
methodologies that result in our best estimate of fair value. As
of December 31, 2009 and December 31, 2008, we have no
Level 3 measurements.
We use a market approach for our fair value measurements and
endeavor to use the best information available. Accordingly,
valuation techniques that maximize the use of observable impacts
are favored. The following table presents the fair value
hierarchy table for assets and liabilities measured at fair
value, on a recurring basis (in thousands):
| December 31, 2009 | December 31, 2008 | |||||||||||||||
|
Carrying |
Fair value |
Carrying |
Fair value |
|||||||||||||
| value | (Level 2) | value | (Level 2) | |||||||||||||
|
Interest rate swap liability
|
$ | 3,329 | 3,329 | $ | 4,085 | 4,085 | ||||||||||
This item is classified in its entirety based on the lowest
priority level of input that is significant to the fair value
measurement. The assessment of the significance of a particular
input to the fair value measurement requires judgment and may
affect the placement of assets and liabilities within the levels
of the fair value hierarchy. Our derivative in Level 2 is
measured at fair value with a market approach using third-party
pricing services which have been corroborated with data from
active markets or broker quotes.
The following table presents the estimated carrying and fair
values for financial instruments that are not measured at fair
value on a recurring basis (in thousands):
| December 31, 2009 | December 31, 2008 | |||||||||||||||
|
Carrying |
Fair value |
Carrying |
Fair value |
|||||||||||||
| value | (Level 2) | value | (Level 2) | |||||||||||||
|
Senior term
loan(1)
|
$ | 128,600 | 108,966 | $ | 139,650 | 139,650 | ||||||||||
|
Senior subordinated notes, related
party(2)
|
$ | 40,021 | 40,021 | $ | 58,287 | 58,287 | ||||||||||
| (1) | The fair value of our senior term loan is estimated based on the current rate available to us. The difference between the fair value of our senior term loan and its carrying value is due to the rate available at December 31, 2009 being lower than the interest rate on our debt obligation at that date. | |
| (2) | The difference between market interest rate and the rate in existence on our senior subordinated debt is assumed to represent the premium paid for such debt being unsecured plus a size risk premium. As such, the carrying value approximates the fair value. |
| (12) | Discontinued operations |
In November 2004, we acquired substantially all of the assets of
National Oncology Alliance, Inc. (“NOA”). NOA is a
group purchasing organization serving the medical oncology
community by providing members with access to pharmaceutical
products and clinical and business programs. In December 2005,
we divested substantially all of the assets of our NOA
subsidiary. Consequently, we have reported NOA as discontinued
operations in the accompanying consolidated financial
statements. Income from discontinued operations of
$0.7 million was recognized during the year ended
December 31, 2007.
76
| (13) | Employee benefit plans |
2008 senior
executive equity plan
On October 14, 2008, the Parent Company adopted its Senior
Executive Equity Plan (the “Senior Plan”) for senior
executives and directors of Broadlane to provide a means to
motivate, attract and retain the services of such individuals in
order to promote the success of Broadlane. The Senior Plan
reserved 26,671,476 Class A and Class B Common Units
of the Parent Company, Broadlane Holdings, LLC, in the aggregate
for issuance directly as equity awards. The Class A Common
Units are voting units and the Class B Common Units have no
voting rights. Through December 31, 2009, the Parent
Company has granted 25,355,123 Class B Common Units to
employees and directors of Broadlane. Compensation cost related
to these awards is reflected in general and administrative
expenses on our consolidated statements of operations. During
2009, 7,452,733 units were forfeited as a result of
employee turnover. At December 31, 2009,
8,769,086 units were available under the Senior Plan for
future issuance. Units granted under the Senior Plan typically
vest one-quarter on the second, third and fourth anniversary
dates of the reference date or August 15, 2008, with the
remaining one-quarter vesting in the event of a public offering
or sale of the company.
2008 omnibus
incentive plan
Prior to August 15, 2008, we granted stock-based awards
pursuant to the Broadlane, Inc. 2008 Omnibus Incentive Plan (the
“Omnibus Plan”) as approved by our stockholders on
March 7, 2008. The Omnibus Plan was terminated as a result
of the Transaction, discussed in Note 3, Mergers and
Acquisitions.
2000 and
2004 directors’ stock option plans
Our 2000 Directors’ Stock Option Plan, adopted by the
Board of Directors on May 24, 2000 and approved by our
stockholders on May 7, 2001 (the 2000 Plan), and our
2004 Directors’ Incentive Plan, adopted by the Board
of Directors on December 1, 2003 and approved by our
stockholders on December 18, 2003, as amended and adopted
by the Board of Directors on March 7, 2008 (the 2004 Plan)
provided for the granting of stock options to our eligible
directors. Grants under the 2004 Plan were non-discretionary and
consisted of options to purchase 30,000 shares at the fair
value of a share on the day that the director joined our board,
options to purchase 15,000 shares on the date of each
annual shareholders’ meeting thereafter and options to
purchase shares converted from retainer fees and meeting fees.
The 2000 Plan and 2004 Plan were terminated as a result of the
Transaction.
We recorded equity-based compensation expense in connection with
the above plans of $0.6 million for the year ended
December 31, 2009. No equity-based compensation expense was
recorded for the
four-and-a-half
months ended December 31, 2008. We recorded
$6.9 million for the
seven-and-a-half
months ended August 15, 2008 and $2.7 million for the
year ended December 31, 2007.
The fair value of the equity awards granted under the Senior
Plan (Successor awards) has been estimated as of the date of
each grant and the value of the awards is based on the fair
value of the underlying equity. We established the fair value of
the underlying equity by using a Black-Scholes model that
incorporates the enterprise value of Broadlane Holdings, LLC.
Within this model, the aggregate and per-share value of the
classes are determined and allocated to the Class A and
Class B Common Units. The fair value of the option grants
prior to the Transaction
77
(Predecessor grants) has been estimated as of the date of each
grant using the Black-Scholes option-pricing model. The
assumptions used to estimate the fair value of the grants are
shown in the table below. All Predecessor options were cancelled
pursuant to the Transaction on August 15, 2008.
| | |||||||||||||||||
|
August 16, 2008 to |
January 1, 2008 to |
||||||||||||||||
| 2009 | December 31, 2008 | August 15, 2008 | 2007 | ||||||||||||||
| (Successor) | (Successor) | (Predecessor) | (Predecessor) | ||||||||||||||
|
Expected volatility
|
27% | 27% | 50% | 50% | |||||||||||||
|
Risk-free interest rate
|
1.87% - 2.66% | 2.83% | 2.80% | 4.51% - 4.86% | |||||||||||||
|
Expected life
|
4.5 years | 4.5 years | 6 years | 6 years | |||||||||||||
|
Expected dividend yield
|
0% | 0% | 0% | 0% | |||||||||||||
Since we are privately-held, our historical volatility is not
measurable. As such, volatility is estimated after considering
volatility of publicly traded companies that are believed to be
comparable with us.
The following table summarizes Predecessor grant activity for
the period from January 1 to August 15, 2008, and the year
ended December 31, 2007:
|
Weighted average |
Aggregate |
|||||||||||||||
|
exercise price |
intrinsic value |
Weighted average |
||||||||||||||
| Options | per share | (in millions) | remaining life | |||||||||||||
|
Outstanding at December 31, 2006
|
10,401,847 | $ | 4.27 | |||||||||||||
|
Granted
|
611,823 | 10.53 | ||||||||||||||
|
Exercised
|
(86,101 | ) | 1.99 | |||||||||||||
|
Forfeited
|
(885,213 | ) | 4.26 | |||||||||||||
|
Expired
|
– | – | ||||||||||||||
|
Outstanding at December 31, 2007
|
10,042,356 | $ | 4.23 | |||||||||||||
|
Granted
|
1,210,543 | 6.94 | ||||||||||||||
|
Exercised
|
(310,699 | ) | 4.12 | |||||||||||||
|
Forfeited
|
(629,516 | ) | 4.81 | |||||||||||||
|
Expired
|
– | – | ||||||||||||||
|
Outstanding at August 15, 2008
|
10,312,684 | $ | 4.52 | $ | 52.4 | 4.54 years | ||||||||||
As a result of the Transaction discussed in Note 3, all unvested
stock options immediately vested and all unrecognized stock
compensation expense was charged to operations. All stock
options have been cancelled as of August 15, 2008.
78
The following table summarizes Successor award activity for the
year ended December 31, 2009 and for the period from August 15
to December 31, 2008:
|
Weighted average |
||||||||
|
grant date fair |
||||||||
| Common units | value per unit | |||||||
|
Outstanding at August 16, 2008
|
– | $ | – | |||||
|
Granted
|
19,042,323 | 0.09 | ||||||
|
Forfeited
|
– | – | ||||||
|
Outstanding at December 31, 2008
|
19,042,323 | $ | 0.09 | |||||
|
Granted
|
6,312,800 | 0.08 | ||||||
|
Forfeited
|
(7,452,733 | ) | 0.09 | |||||
|
Outstanding at December 31, 2009
|
17,902,390 | $ | 0.09 | |||||
| (14) | Income taxes |
Income tax expense/(benefit) for the year ended
December 31, 2009, the periods August 16, 2008 to
December 31, 2008, January 1, 2008 to August 15,
2008, and the year ended December 31, 2007 consists of the
following (dollars in thousands):
| | |||||||||||||||||
|
August 16, 2008 to |
January 1, 2008 to |
||||||||||||||||
| 2009 | December 31, 2008 | August 15, 2008 | 2007 | ||||||||||||||
| (Successor) | (Successor) | (Predecessor) | (Predecessor) | ||||||||||||||
|
Current income tax expense/(benefit):
|
|||||||||||||||||
|
Federal
|
$ | 2,899 | $ | 722 | $ | (1,840 | ) | $ | 10,203 | ||||||||
|
State
|
1,038 | 352 | 204 | 874 | |||||||||||||
| 3,937 | 1,074 | (1,636 | ) | 11,077 | |||||||||||||
|
Deferred income tax expense/(benefit):
|
|||||||||||||||||
|
Federal
|
(4,722 | ) | (8,274 | ) | 2,748 | 648 | |||||||||||
|
State
|
(232 | ) | (518 | ) | 200 | 116 | |||||||||||
| (4,954 | ) | (8,792 | ) | 2,948 | 764 | ||||||||||||
|
Income tax expense/(benefit)
|
$ | (1,017 | ) | $ | (7,718 | ) | $ | 1,312 | $ | 11,841 | |||||||
Income tax expense differed from the amounts computed by
applying the U.S. federal income tax rate of 35% in the
year ended December 31, 2009, the periods August 16,
2008 to
79
December 31, 2008, January 1, 2008 to August 15,
2008, and the year ended December 31, 2007 as shown in the
following table (dollars in thousands):
| | |||||||||||||||||
|
August 16, 2008 to |
January 1, 2008 to |
||||||||||||||||
| 2009 | December 31, 2008 | August 15, 2008 | 2007 | ||||||||||||||
|
Tax provision at statutory federal rate
|
$ | (1,708 | ) | $ | (7,587 | ) | $ | (55 | ) | $ | 10,411 | ||||||
|
State and local income taxes, net of federal benefit
|
312 | (206 | ) | 674 | 219 | ||||||||||||
|
Non-deductible meals and entertainment
|
163 | 74 | 85 | 134 | |||||||||||||
|
Non-deductible stock option forfeitures
|
– | – | 188 | 686 | |||||||||||||
|
Non-deductible Transaction expenses
|
– | – | 2,522 | – | |||||||||||||
|
Benefit of disqualification of ISO’s
|
– | – | (2,109 | ) | – | ||||||||||||
|
Non-deductible equity compensation
|
213 | – | – | – | |||||||||||||
|
Other non-deductible expenses
|
3 | 1 | 7 | 391 | |||||||||||||
|
Income tax expense/(benefit)
|
$ | (1,017 | ) | $ | (7,718 | ) | $ | 1,312 | $ | 11,841 | |||||||
Deferred income taxes reflect the net effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of our
deferred tax assets and liabilities are as follows (dollars in
thousands):
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Deferred tax assets:
|
||||||||
|
Revenue recognized for tax purposes in excess of revenue for
financial reporting purposes
|
$ | 6,511 | $ | 7,551 | ||||
|
Derivative financial instrument, principally due to differences
in basis for tax and financial reporting purposes
|
1,198 | 1,471 | ||||||
|
Property and equipment, principally due to differences in
depreciation
|
965 | 1,729 | ||||||
|
Other
|
829 | 1,014 | ||||||
|
Total deferred tax assets
|
9,503 | 11,765 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Intangible assets, principally due to differences in amortization
|
(65,754 | ) | (71,101 | ) | ||||
|
Total deferred tax liabilities
|
(65,754 | ) | (71,101 | ) | ||||
|
Net deferred tax liabilities
|
$ | (56,251 | ) | $ | (59,336 | ) | ||
We believe it is more likely than not we will generate
sufficient taxable income in the future to fully recover our
deferred tax assets.
Effective January 1, 2007 we adopted FASB
ASC 000-00-00
(formerly FIN 48), which prescribes a comprehensive method
for recognition, measurement, presentation and disclosure of
uncertain tax positions taken or expected to be taken in income
tax returns. We engaged an independent third party to assist in
the identification and subsequent measurement of our tax
positions.
80
The cumulative effect of adopting FASB
ASC 000-00-00
resulted in no adjustment to the opening balance of retained
earnings. We believe the material tax positions meet the
criteria of
FASB ASC 000-00-00
for the recognition of benefits and no adjustment was necessary
upon implementation.
Interest and penalty expenses are recognized on estimated
liabilities for uncertain tax positions in the period in which
the uncertain tax position is taken. Our policy is to record
interest on uncertain tax positions in interest expense and
penalties are recorded in other operating expenses. No interest
or penalty expense was accrued for uncertain tax positions upon
the implementation of FASB
ASC 000-00-00.
We had no unrecognized tax benefits as of December 31,
2007. We recorded $0.8 million as an unrecognized tax
benefit for the year ended December 31, 2008. We accrued
interest and penalties of $9 thousand for the year ended
December 31, 2009.
In March 2007, the IRS completed its examination of our federal
income tax return for the year ended December 31, 2004 with
no changes to the reported tax. In January 2009, the IRS
completed its examination of our federal income tax return for
the year ended December 31, 2005, also with no changes to
the reported tax. The IRS is in the process of reviewing our
federal tax return for the Predecessor period ended
August 15, 2008. We do not anticipate any changes to the
reported tax. Tax years 2005 through 2008 are open and subject
to examination by state income taxing authorities and the years
2006 through 2008 are open and subject to examination by federal
income taxing authorities.
| (15) | Claims, lawsuits, and other legal matters |
In the ordinary course of business, we are subject to certain
claims or lawsuits. In our opinion, the outcome of such matters
will not have a material adverse effect on our financial
condition or results of operations.
| (16) | Subsequent events |
Refinancing
On February 5, 2010 we entered into a Restated Credit
Agreement under our term loan, which among other things,
(1) provided $51.4 million in new proceeds,
(2) increased the capacity of the revolving
line-of-credit
by $2.0 million, (3) lowered the interest rate at the
date of the amendment from the higher of LIBOR or 3.25% plus the
applicable margin of 5.25% to the higher of LIBOR or 2% plus the
applicable margin of 4% and (4) extends the scheduled
maturity of the credit agreement to February 5, 2015. The
Restated Credit Agreement requires quarterly amortization
payments of $0.5 million to be made every March 31st, June
30th, September 30th, and December 31st, beginning June 30,
2010.
We used $44.7 million of the new proceeds to extinguish our
senior subordinated notes, of which $0.4 million and
$1.7 million, respectively, was applied to accrued interest
and a 4% prepayment premium. We recorded a non-cash charge of
approximately $3.2 million related to the write-off of the
unamortized discount and unamortized debt issuance costs. The
remaining $4.0 million in new proceeds and
$3.2 million in operating cash were used to pay related
fees and expenses and $2.4 million in accrued interest on
the term loan. Approximately $1.9 million of those fees and
expenses were deferred and will be amortized over the life of
the agreement. In recording the total borrowings outstanding
under the Restated Credit Agreement at fair
81
value, we recorded a discount on the term loan of
$2.7 million, which is reflected as a reduction to the
carrying amount of the term loan.
As the changes to the credit agreement result in a substantial
modification as defined by FASB
ASC 000-00-00,
we recorded a charge of approximately $6.8 million in the
first quarter of 2010, related to fees and the write-off of the
unamortized debt issuance costs, approximately $4.5 million
of which is non-cash.
We are subject to the same loan covenants and default provisions
under the Restated Credit Agreement. Our total leverage ratio
must not be more than 4.5 to 1.0 for the period from
February 5, 2010 to September 30, 2010. Our fixed
charge ratio must not be less than 1.25 to 1.00 for the period
from February 5, 2010 to December 31, 2010. Our
capital expenditures must not be more than $11.5 million
for the year ended December 31, 2010.
Acquisitions
On March 1, 2010, we acquired Symbio Solutions, Inc.
(“Symbio”), a company specializing in workforce
scheduling management, for consideration of $0.7 million.
On April 30, 2010, we acquired 100% of Health Equipment
Logistics and Planning, Inc. (“HELP”), a company
specializing in equipment planning, procurement and equipment
services for healthcare organizations, for consideration of
$1.2 million. These acquisitions did not violate any of the
loan covenants under our Restated Credit Agreement. Both
transactions have been accounted for using the purchase method.
Derivative
financial instrument
In anticipation of future increases in interest rates, we
entered into a LIBOR-based rate cap agreement on April 30,
2010 for a notional amount of $100 million of the senior
term loan debt. The effective date of the rate cap is set for
November 15, 2011 and will expire February 15, 2013.
The effective date of November 15, 2011 coincides with the
maturity of our interest rate swap discussed in Note 10,
Derivative Financial Instrument. The cap strike is set at
4% and we paid a premium of $0.4 million.
Entry into a
material definitive agreement
On September 14, 2010 Broadlane and Broadlane Holdings, LLC
entered into a stock purchase agreement (the “purchase
agreement”) with MedAssets, Inc. (“MedAssets”).
The purchase agreement contemplates the purchase by MedAssets of
all of the issued and outstanding shares of Broadlane for
consideration of approximately $850 million, of which
$725 million is payable in cash upon the closing and
$125 million is payable in cash on or before
January 4, 2012, subject to adjustment and to certain
limitations.
This transaction is subject to customary closing conditions and
regulatory approvals, including expiration or termination of any
applicable waiting period under the
Xxxx-Xxxxx-Xxxxxx
Antitrust Improvements Act of 1976, as amended. The transaction
is anticipated to be completed within 60 to 90 days from
the date of the stock purchase agreement.
82
|
September 30, |
||||||||
|
2010 |
December 31, |
|||||||
| (in thousands, except share and per share data) | (Unaudited) | 2009 | ||||||
|
Assets
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 48,145 | $ | 31,703 | ||||
|
Accounts receivable, net
|
11,881 | 10,843 | ||||||
|
Deferred income taxes, net
|
7,212 | 6,930 | ||||||
|
Prepaid income taxes
|
1,828 | 2,214 | ||||||
|
Prepaid expenses and other
|
3,033 | 3,650 | ||||||
|
Total current assets
|
72,099 | 55,340 | ||||||
|
Property and equipment at cost, net
|
7,312 | 10,081 | ||||||
|
Software and website development costs, less accumulated
amortization of $12,023 and $7,128 at September 30, 2010
and December 31, 2009, respectively
|
18,756 | 16,827 | ||||||
|
Intangible assets, less accumulated amortization of $34,140 and
$22,106 at September 30, 2010 and December 31, 2009,
respectively
|
177,840 | 189,874 | ||||||
|
Goodwill
|
184,115 | 183,120 | ||||||
|
Deferred financing costs, net
|
2,130 | 5,506 | ||||||
|
Other
|
134 | 279 | ||||||
|
Total assets
|
$ | 462,386 | $ | 461,027 | ||||
|
Liabilities & stockholder’s equity
|
||||||||
|
Current liabilities:
|
||||||||
|
Accrued payroll and payroll taxes
|
$ | 6,243 | $ | 3,882 | ||||
|
Deferred revenue
|
915 | 413 | ||||||
|
Supplier and offeror rebates
|
24,448 | 22,115 | ||||||
|
Accounts payable and other accrued liabilities
|
12,070 | 10,778 | ||||||
|
Interest payable, related party
|
– | 2,436 | ||||||
|
Current portion of senior term loan
|
10,228 | 410 | ||||||
|
Total current liabilities
|
53,904 | 40,034 | ||||||
|
Senior term loan, less current portion and net of discount of
$2,340 at September 30, 2010 and $0 at December 31,
2009
|
166,532 | 128,190 | ||||||
|
Senior subordinated notes, related party, net of discount of
$2,520 at December 31, 2009
|
– | 40,021 | ||||||
|
Deferred income taxes, net
|
59,057 | 63,181 | ||||||
|
Interest rate swap liability
|
3,017 | 3,329 | ||||||
|
Other long-term liabilities
|
1,226 | 1,605 | ||||||
|
Total liabilities
|
283,736 | 276,360 | ||||||
|
Stockholder’s equity:
|
||||||||
|
Common stock, $0.01 par value; authorized 100 shares;
issued and outstanding 100 shares
|
– | – | ||||||
|
Additional paid-in capital
|
203,391 | 202,533 | ||||||
|
Accumulated deficit
|
(24,741 | ) | (17,866 | ) | ||||
|
Total stockholder’s equity
|
178,650 | 184,667 | ||||||
|
Total liabilities and stockholder’s equity
|
$ | 462,386 | $ | 461,027 | ||||
The accompanying notes are an
integral part of these condensed consolidated financial
statements.
83
| Three months ended | Nine months ended | |||||||||||||||
|
(in thousands) |
September 30, |
September 30, |
September 30, |
September 30, |
||||||||||||
| (unaudited) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Revenue:
|
||||||||||||||||
|
Administrative fees, net
|
$ | 30,179 | $ | 29,505 | $ | 88,121 | $ | 86,801 | ||||||||
|
Other service fees
|
14,164 | 11,870 | 42,525 | 35,890 | ||||||||||||
|
Total revenue, net
|
44,343 | 41,375 | 130,646 | 122,691 | ||||||||||||
|
Expenses:
|
||||||||||||||||
|
Cost of revenue
|
19,884 | 17,520 | 58,777 | 50,769 | ||||||||||||
|
Product development
|
3,033 | 2,906 | 9,534 | 9,539 | ||||||||||||
|
Selling and marketing
|
1,806 | 1,846 | 5,909 | 4,834 | ||||||||||||
|
General and administrative
|
8,286 | 7,443 | 22,798 | 20,617 | ||||||||||||
|
Depreciation and amortization
|
2,719 | 2,267 | 7,938 | 6,721 | ||||||||||||
|
Amortization of intangibles
|
3,988 | 3,988 | 11,962 | 11,962 | ||||||||||||
|
Total operating expenses
|
39,716 | 35,970 | 116,918 | 104,442 | ||||||||||||
|
Operating income
|
4,627 | 5,405 | 13,728 | 18,249 | ||||||||||||
|
Interest expense
|
(3,698 | ) | (6,475 | ) | (11,922 | ) | (18,936 | ) | ||||||||
|
Investment earnings
|
2 | 1 | 3 | 51 | ||||||||||||
|
Gain on bargain purchase
|
– | – | 226 | – | ||||||||||||
|
Loss on disposal of assets
|
(21 | ) | – | (76 | ) | – | ||||||||||
|
Other income
|
6 | 4 | 6 | 4 | ||||||||||||
|
Loss on extinguishment of debt
|
– | – | (11,754 | ) | – | |||||||||||
|
Loss on interest rate cap
|
(105 | ) | – | (384 | ) | – | ||||||||||
|
Gain/(loss) on interest rate swap
|
183 | (495 | ) | 312 | 451 | |||||||||||
|
Income/(loss) before income taxes
|
994 | (1,560 | ) | (9,861 | ) | (181 | ) | |||||||||
|
Income tax (expense)/benefit
|
(454 | ) | 575 | 2,986 | (368 | ) | ||||||||||
|
Net income/(loss)
|
$ | 540 | $ | (985 | ) | $ | (6,875 | ) | $ | (549 | ) | |||||
The accompanying notes are an
integral part of these condensed consolidated financial
statements.
84
| Common stock |
Additional |
Total |
||||||||||||||||||
|
(in thousands, except share
data) |
Issued |
Par |
paid-in |
Accumulated |
stockholder’s |
|||||||||||||||
| (unaudited) | shares | value | capital | deficit | equity | |||||||||||||||
|
Balances, December 31, 2009
|
100 | $ | – | $ | 202,533 | $ | (17,866 | ) | $ | 184,667 | ||||||||||
|
Tax benefit related to escrow release
|
– | – | 321 | – | 321 | |||||||||||||||
|
Equity-based compensation
|
– | – | 537 | – | 537 | |||||||||||||||
|
Net loss
|
– | – | – | (6,875 | ) | (6,875 | ) | |||||||||||||
|
Balances, September 30, 2010
|
100 | $ | – | $ | 203,391 | $ | (24,741 | ) | $ | 178,650 | ||||||||||
The accompanying notes are an
integral part of these condensed consolidated financial
statements.
85
| Nine months ended | ||||||||
|
(in thousands) |
September 30, |
September 30, |
||||||
| (unaudited) | 2010 | 2009 | ||||||
|
Cash flows from operating activities:
|
||||||||
|
Net loss
|
$ | (6,875 | ) | $ | (549 | ) | ||
|
Adjustments to reconcile net loss to cash provided by operating
activities:
|
||||||||
|
Depreciation and amortization
|
19,900 | 18,683 | ||||||
|
Bad debt expense
|
84 | 174 | ||||||
|
Deferred income tax benefit
|
(4,390 | ) | (1,966 | ) | ||||
|
Interest rate swap gain
|
(312 | ) | (451 | ) | ||||
|
Interest rate cap loss
|
384 | – | ||||||
|
Equity-based compensation
|
537 | 459 | ||||||
|
Issuance of notes in lieu of interest
|
83 | 948 | ||||||
|
Amortization of deferred financing costs and debt discount
|
858 | 1,926 | ||||||
|
Gain on bargain purchase
|
(226 | ) | – | |||||
|
(Gain)/loss on disposal of assets
|
76 | (3 | ) | |||||
|
Loss on extinguishment of debt
|
11,754 | – | ||||||
|
Lease recovery
|
(20 | ) | – | |||||
|
Changes in operating assets and liabilities, net of acquisitions:
|
||||||||
|
Increase in accounts receivable
|
(904 | ) | (885 | ) | ||||
|
(Increase)/decrease in prepaid and other current assets
|
624 | (393 | ) | |||||
|
Increase in other assets
|
(239 | ) | (49 | ) | ||||
|
Decrease in prepaid income taxes
|
387 | 15,875 | ||||||
|
Increase in supplier and offeror rebates
|
2,333 | 1,023 | ||||||
|
Increase/(decrease) in deferred revenue
|
502 | (146 | ) | |||||
|
Increase/(decrease) in accrued interest
|
439 | (880 | ) | |||||
|
Decrease in accrued interest, related party
|
(2,436 | ) | (105 | ) | ||||
|
Increase/(decrease) in other liabilities
|
2,818 | (6,272 | ) | |||||
|
Net cash provided by operating activities
|
25,377 | 27,389 | ||||||
|
Cash flows from investing activities:
|
||||||||
|
Acquisitions, net of cash acquired
|
(1,850 | ) | – | |||||
|
Return of purchase price from escrow
|
– | 2,991 | ||||||
|
Proceeds from sale of property and equipment
|
13 | 3 | ||||||
|
Purchase of property and equipment
|
(194 | ) | (439 | ) | ||||
|
Capitalized software and website development costs
|
(6,045 | ) | (4,015 | ) | ||||
|
Net cash used in investing activities
|
(8,076 | ) | (1,460 | ) | ||||
|
Cash flows from financing activities:
|
||||||||
|
Proceeds from senior term loan
|
177,300 | – | ||||||
|
Payments on senior term loan
|
(129,500 | ) | (1,050 | ) | ||||
|
Payments on senior subordinated notes, related party
|
(42,624 | ) | – | |||||
|
Premium on early payments on senior subordinated notes, related
party
|
(1,705 | ) | – | |||||
|
Debt issue costs
|
(4,651 | ) | – | |||||
|
Tax benefit related to escrow release
|
321 | – | ||||||
|
Net cash used in financing activities
|
(859 | ) | (1,050 | ) | ||||
|
Net increase in cash and cash equivalents
|
16,442 | 24,879 | ||||||
|
Cash and cash equivalents at beginning of period
|
31,703 | 31,488 | ||||||
|
Cash and cash equivalents at end of period
|
$ | 48,145 | $ | 56,367 | ||||
|
Supplemental disclosures of cash flow information:
|
||||||||
|
Income taxes paid/(refunded)
|
$ | 711 | $ | (13,542 | ) | |||
|
Interest paid
|
$ | 12,990 | $ | 17,218 | ||||
The accompanying notes are an
integral part of these condensed consolidated financial
statements.
86
Broadlane
Intermediate Holdings, Inc. notes to condensed consolidated
financial statements (unaudited)
| (1) | Nature of operations |
Unless the context otherwise requires, the use of the terms
“Broadlane”, “Company”, “we”,
“us” and “our” in the following refers to
Broadlane Intermediate Holdings, Inc. and its consolidated
subsidiaries. Broadlane Intermediate Holdings, Inc. is a holding
company whose sole wholly owned subsidiary is The Broadlane
Group, Inc. (formerly known as Broadlane, Inc.). All of
Broadlane Intermediate Holdings, Inc. operations are conducted
through its subsidiary The Broadlane Group, Inc. and its
consolidated subsidiaries.
Broadlane is a leading
end-to-end
cost management partner that delivers supply chain management
and procurement services to healthcare providers. In addition to
our core group purchasing services, we leverage our procurement
management expertise and apply technology and scaled solutions
to allow our customers to maintain focus on their core business
while realizing additional cost savings. We reduce costs and
create operational efficiencies for thousands of acute care
hospitals, ambulatory care facilities, physician practices and
other healthcare providers in the U.S. We operate under one
reportable segment.
Broadlane is headquartered in Dallas, Texas and has offices in
California, Florida, Michigan, New York, Ohio, Tennessee
and Texas.
| (2) | Summary of significant accounting policies |
(a) Basis of
presentation
The accompanying unaudited interim condensed consolidated
financial statements of Xxxxxxxxx have been prepared in
accordance with accounting principles generally accepted in the
United States of America (“GAAP”) and should be read
in conjunction with the audited consolidated financial
statements and notes thereto contained in our Annual Report for
the year ended December 31, 2009. In our opinion, all
adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and the
results of operations for the interim periods presented have
been reflected herein. The results of operations for interim
periods are not necessarily indicative of the results to be
expected for the full year. Notes to the financial statements
which would substantially duplicate the disclosures contained in
the audited financial statements for the year ended
December 31, 2009 have been omitted.
(b) Principles
of consolidation
The condensed consolidated financial statements include the
accounts of Broadlane and its wholly owned subsidiary, The
Broadlane Group, Inc., and its consolidated subsidiaries.
Intercompany accounts and transactions are eliminated in
consolidation.
(c) Reclassifications
Certain reclassifications have been made to the prior year
financial statements in order for them to be in conformity with
the current period presentation.
87
(d) Use of
estimates
The preparation of financial statements in conformity with GAAP
requires us to make estimates and assumptions that affect the
amounts reported in the condensed consolidated financial
statements and accompanying notes. Future results could be
materially affected if actual results were to differ from these
estimates and assumptions.
(e) Recently
issued accounting standards
In October 2009, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”)
2009-13,
which amends ASC Topic 605, Revenue Recognition. Under
this standard, management is no longer required to obtain
vendor-specific objective evidence or third party evidence of
fair value for each deliverable in an arrangement with multiple
elements, and where evidence is not available we may now
estimate the proportion of the selling price attributable to
each deliverable. The adoption of ASU
2009-13 is
not expected to have a material impact on our consolidated
financial condition or results of operations.
In January 2010, the FASB issued ASU
2010-6,
Improving Disclosures About Fair Value Measurements,
which requires reporting entities to make new disclosures about
recurring or non-recurring fair value measurements, including
significant transfers into and out of Level 1 and
Level 2 fair value measurements and information on
purchases, sales, issuances, and settlements on a gross basis in
the reconciliation of Level 3 fair value measurements. ASU
2010-6 is
effective for annual reporting periods beginning after
December 15, 2009, except for Level 3 reconciliation
disclosures, which are effective for annual periods beginning
after December 15, 2010. The adoption of ASU
2010-6 is
not expected to have a material impact on our consolidated
financial statements.
| (3) | Acquisitions |
Symbio
solutions
On March 1, 2010, we acquired Symbio Solutions, Inc.
(“Symbio”), a company specializing in workforce
scheduling management, for consideration of $0.7 million.
Symbio’s software solutions will further strengthen our
workforce management software platform, helping us to deliver
greater value to our clients and the staffing agencies we serve.
The acquisition did not violate any of the loan covenants under
our Restated Credit Agreement referred to in Note 5,
Debt. This transaction has been accounted for using the
purchase method and the results of the acquired business are
included in our condensed consolidated statements of operations
subsequent to the date of acquisition.
The purchase price for the acquisition was allocated to the
assets we acquired based on their fair values at the acquisition
date. No liabilities were assumed in the acquisition. We
determined the total fair value of the assets to be
$0.9 million, and as a result recognized a
$0.2 million gain on bargain purchase in our condensed
consolidated statements of operations. We were able to obtain
Symbio at a bargain price due to Xxxxxx’s impending
bankruptcy at the time of the acquisition. As the acquisition is
not considered significant, pro forma financial information and
purchase price allocation are not presented.
88
Health equipment
logistics and planning
On April 30, 2010, we acquired 100% of Health Equipment
Logistics and Planning, Inc. (“HELP”), a company
specializing in equipment planning, procurement and equipment
services for healthcare organizations, for consideration of
$1.2 million. HELP’s offerings complement our strategy
of helping clients to reduce costs and improve operating
efficiencies and serve to further differentiate us from our
competitors. The acquisition did not violate any of the loan
covenants under our Restated Credit Agreement referred to in
Note 5, Debt. This transaction has been accounted
for using the purchase method and the results of the acquired
business have been included in our condensed consolidated
financial statements from April 30, 2010 onward.
The purchase price for the acquisition was allocated to the
assets acquired and liabilities assumed based on their fair
values at the acquisition date. Included in this acquisition is
goodwill of approximately $1.0 million. As the acquisition
is not considered significant, pro forma and purchase price
allocation financial information are not presented.
| (4) | Related party transactions |
As a result of the Transaction discussed in Note 3,
Mergers and Acquisitions, in our Annual Report for the
year ended December 31, 2009, TowerBrook Capital Partners
(“TowerBrook”) owns approximately 85% of Broadlane
Holdings, LLC’s (our “Parent Company”)
outstanding equity units, and as a result, is considered a
related party. On August 15, 2008 we entered into a
six-year subordinated note agreement with TowerBrook. Refer to
Note 5, Debt, for more information about the
subordinated notes. On February 5, 2010 the subordinated
notes and related accrued interest were repaid in full as a
result of the refinancing referred to in Note 5,
Debt.
| (5) | Debt |
Senior term
loan
On August 15, 2008, we entered into a five-year term credit
agreement with Jefferies Finance LLC (administrative agent) and
a syndicate of commercial banks to borrow up to
$140.0 million under a senior term loan and
$13.0 million under a revolving line of credit. The senior
term loan and the revolving line of credit were obtained to
finance the Transaction discussed in Note 3, Mergers and
Acquisitions, in our Annual Report for the year ended
December 31, 2009, and are secured by essentially all of
our assets. The costs related to the issuance of the senior term
loan and revolving line of credit were $7.1 million. These
costs were recorded as deferred financing costs and amortized
over the life of the loan. As discussed below, the senior term
loan was refinanced on February 5, 2010. For the nine
months ended September 30, 2010, we recognized
approximately $0.1 million related to amortization of the
abovementioned deferred financing costs. For the three and nine
months ended September 30, 2009, we recognized
approximately $0.4 million and $1.1 million,
respectively, related to amortization of these deferred
financing costs.
Senior
subordinated notes
On August 15, 2008, we entered into a six-year senior
subordinated note agreement with TowerBrook (administrative
agent and related party) to borrow up to $62.5 million. The
senior
89
subordinated notes were also obtained to finance the
Transaction. The notes are guaranteed by us and each of our
subsidiaries. The discount on the senior subordinated notes was
$5.0 million and was recorded as a reduction to the
carrying amount of the senior subordinated notes. The costs
related to the issuance of the notes were $1.5 million. The
issuance costs were recorded as deferred financing costs and
amortized over the life of the note agreement. As discussed
below, we repaid the subordinated notes on February 5,
2010. For the nine months ended September 30, 2010, we
recognized approximately $45 thousand related to amortization of
the debt discount and $14 thousand related to the amortization
of deferred financing costs. For the three and nine months ended
September 30, 2009, we recognized approximately
$0.2 million and $0.6 million related to amortization
of the debt discount and $0.1 million and $0.2 million
related to the amortization of deferred financing costs,
respectively.
Refinancing
On February 5, 2010, we entered into a Restated Credit
Agreement under our senior term loan, which among other things,
(1) provided $51.4 million in new proceeds for a total
senior term loan of $180.0 million, (2) increased the
capacity of the revolving
line-of-credit
by $2.0 million to $15.0 million, (3) lowered the
interest rate from the higher of LIBOR or 3.25% plus an
applicable margin of 5.25% to the higher of LIBOR or 2% plus an
applicable margin of 4% and (4) extended the scheduled
maturity of the credit agreement to February 5, 2015. The
applicable interest rate on outstanding borrowings under the
Restated Credit Agreement was 6.0% at September 30, 2010.
We used $44.7 million of the new proceeds to extinguish our
senior subordinated notes, of which $0.4 million and
$1.7 million, respectively, was applied to accrued interest
and a 4% prepayment premium. We recorded a non-cash charge of
approximately $3.2 million related to the write-off of the
unamortized discount and unamortized debt issuance costs. The
$1.7 million prepayment premium and $3.2 million
unamortized discount and debt issuance costs are shown as a loss
on extinguishment of debt in the condensed consolidated
statements of operations for the nine months ended
September 30, 2010.
The remaining $4.0 million in new proceeds and
$3.2 million in operating cash were used to pay related
fees and expenses and $2.4 million in accrued interest on
the term loan. Approximately $1.9 million of those fees and
expenses were deferred and are being amortized over the life of
the agreement. In recording the total borrowings outstanding
under the Restated Credit Agreement at fair value, we recorded a
discount on the term loan of $2.7 million, which is
reflected as a reduction to the carrying amount of the term
loan. For the three and nine months ended September 30,
2010, we recognized approximately $0.1 million and
$0.4 million related to the amortization of the debt
discount and $0.1 million and $0.4 million related to
amortization of the deferred financing costs, respectively.
As the changes to the credit agreement resulted in a substantial
modification as defined by FASB
ASC 000-00-00,
we recorded a charge of approximately $6.8 million during
the nine months ended September 30, 2010 related to fees
and the write-off of the unamortized debt issuance costs,
approximately $4.5 million of which is non-cash. The
$6.8 million in fees and unamortized debt issuance costs
are shown as a loss on extinguishment of debt in the condensed
consolidated statements of operations for the nine months ended
September 30, 2010.
90
The Restated Credit Agreement requires mandatory principal
payments of $0.5 million to be made every March 31st, June
30th, September 30th, and December 31st, beginning June 30,
2010. An excess cash flow based principal payment will be paid
125 days after the end of each calendar year, starting with
the year ending December 31, 2010. As of September 30,
2010 we estimate this payment to be $8.4 million. As a
result, an additional $8.4 million of the senior term loan
balance has been classified as short-term in our condensed
consolidated balance sheet as of September 30, 2010. Any
remaining outstanding principal amount is due on the maturity
date. The interest payments on the senior term loan are made
every February 5th, May 5th, August 5th and November 5th of each
year for the life of the loan.
Loan
covenants
The 2010 Restated Credit Agreement contains affirmative,
negative and financial covenants, which among other requirements
prohibits (i) certain types of investments and
(ii) the payment of more than $2.0 million of
dividends per year.
Financial ratios
and default provisions
We are required to satisfy certain financial requirements as
long as the senior term loan and revolving line of credit are
outstanding:
(a) Our total leverage ratio, which is defined as the ratio
of consolidated indebtedness to consolidated earnings before
interest, taxes, depreciation and amortization
(“EBITDA”), must not be more than 4.5 to 1.0 for the
period from February 5, 2010 to September 30, 2010.
The maximum total leverage ratio decreases incrementally every
six months after the initial test period noted above until
maturity in 2015. During the final test period, April 1,
2014 to maturity, our total leverage ratio must not be more than
2.0 to 1.0.
(b) Our fixed charge ratio, which is defined as the ratio
of EBITDA minus (i) capital expenditures, (ii) cash
payment of taxes, and (iii) cash dividends to holdings, to
consolidated fixed charges, which is defined as the sum of cash
interest expense and payment of indebtedness, must not be less
than 1.25 to 1.00 for the period from February 5, 2010 to
December 31, 2010. The minimum fixed charge ratio increases
incrementally each year after the initial test period noted
above until maturity in 2015. During the final test period,
January 1, 2014 to maturity, our fixed charge ratio must
not be less than 2.0 to 1.0.
(c) Our capital expenditures must not be more than
$11.5 million for the year ended December 31, 2010.
The limitation on our capital expenditures increases
incrementally each year until maturity.
Additionally, the senior term loan and revolving line of credit
are subject to certain default provisions, including non-payment
of principal, interest, or fees when due, failure to comply with
certain covenants, or the occurrence of a material adverse
change in operations, business, properties, liabilities, or
condition (financial or otherwise). In the event of default, the
remedies include acceleration of unpaid principal, accrued
interest, and other unpaid fees.
91
The table below summarizes the debt agreements (dollars in
thousands):
|
Outstanding at |
Outstanding at |
|||||||||||||
|
September 30, |
December 31, |
Maturity dates |
||||||||||||
| 2010 | 2009 | (fiscal year) | Interest rates | |||||||||||
|
Senior term loan (Restated Credit Agreement; net of $2,340
discount at September 30, 2010)
|
$ | 176,760 | $ | – | 2015 | Higher of LIBOR(1)or 2.00% plus applicable margin of 4.00% | ||||||||
|
Senior term loan
|
– | 128,600 | 2013 | Higher of LIBOR or 3.25% plus applicable margin(2) | ||||||||||
|
Senior subordinated notes (net of $2,520 discount at
December 31, 2009)
|
– | 40,021 | 2014 | (i) Basic interest rate - 12% on principal amount | ||||||||||
| (ii) PIK(3) interest rate - 2% on | ||||||||||||||
| principal amount | ||||||||||||||
|
Revolving line of credit (Restated Credit Agreement)
|
– | – | 2015 | Higher of LIBOR(1) or 2.00% plus | ||||||||||
| applicable margin of 4.00% | ||||||||||||||
|
Revolving line of credit
|
– | – | 2013 | Higher of LIBOR or 3.25% plus | ||||||||||
| applicable margin(2) | ||||||||||||||
| (1) | The greater of London Interbank Offered Rate (“LIBOR”) or 2.00%. As of September 30, 2010 the applicable rate is 2.00%. | |
| (2) | Applicable margin is based on total leverage ratio. If the total leverage ratio is greater than or equal to 3.5 to 1.0, the applicable margin used for the next quarterly interest payment is 5.25%. If the total leverage ratio is less than 3.5 to 1.0, the applicable margin used for the next quarterly interest payment is 4.75%. | |
| (3) | Paid-in-kind interest rate (“PIK”) |
| (6) | Derivative financial instruments |
Interest rate
swap
We entered into a
floating-to-fixed
rate LIBOR-based interest rate swap, effective November 15,
2008, for a notional amount of $100 million of the senior
term loan debt, with a maturity date of November 15, 2011,
to manage risk associated with the variable rate of that debt.
We receive three-month floating LIBOR interest payments from our
creditor counterparty. Settlement payments are then made
quarterly between us and the counterparty for the differences
between the three-month floating LIBOR rates and our contracted
fixed rates. The swap does not hedge the applicable margin that
the counterparty charges on our indebtedness in addition to
LIBOR (4.00% as of September 30, 2010).
The fair value of the swap was recorded as a liability of
$3.0 million and $3.3 million on September 30,
2010 and December 31, 2009, respectively. The corresponding
changes in the fair value were recorded as a gain on interest
rate swap of $0.2 million and $0.3 million in our
condensed consolidated statements of operations for the three
and nine months ended September 30, 2010. For the three and
nine months ended September 30, 2009, the corresponding
changes in the fair value were recorded as a loss of
$0.5 million and a gain of $0.5 million, respectively.
Interest rate
cap
In anticipation of future increases in interest rates, we
entered into a LIBOR-based rate cap agreement on April 30,
2010 for a notional amount of $100 million of the senior
term loan debt. The effective date of the rate cap is set for
November 15, 2011 and will expire February 15,
92
2013. The effective date of November 15, 2011 coincides
with the maturity of our interest rate swap. The cap strike is
set at 4% and we paid a premium of $0.4 million.
The fair value of the cap was recorded as an asset of $25
thousand on September 30, 2010. The corresponding changes
in the fair value were recorded as a loss on interest rate cap
of $0.1 million and $0.4 million in our condensed
consolidated statements of operations for the three and nine
months ended September 30, 2010, respectively.
| (7) | Fair value measurements |
Effective January 1, 2008, we adopted FASB ASC 820,
Fair Value Measurements and Disclosures, which among
other things, requires enhanced disclosures about assets and
liabilities carried at fair value. Fair value is the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date. FASB ASC 820 describes three
approaches to measuring the fair value of assets and
liabilities: the market approach, the income approach and the
cost approach, each of which include multiple valuation
techniques. The market approach uses prices and other relevant
information generated by market transactions involving identical
or comparable assets or liabilities. The income approach uses
valuation techniques to measure fair value by converting future
amounts, such as cash flows or earnings, into a single present
value amount using current market expectations about those
future amounts. The cost approach is based on the amount that
would currently be required to replace the service capacity of
an asset.
FASB ASC 820 does not prescribe which valuation technique
should be used when measuring fair value and does not prioritize
among techniques. FASB ASC 820 establishes a fair value
hierarchy that prioritizes the inputs used in applying the
various valuation techniques. Inputs broadly refer to the
assumptions that market participants use to make pricing
decisions, including assumptions about risk. The hierarchy gives
the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1
measurement) and lowest priority to unobservable inputs
(Level 3 measurements). The three levels of fair value
hierarchy are as follows:
Level 1—Inputs are unadjusted, quoted prices in
active markets for identical assets or liabilities as of the
reporting date. As of September 30, 2010 and
December 31, 2009, we have no Level 1 measurements.
Level 2—Pricing inputs are other than quoted
prices in active markets included in either Level 1, which
are directly or indirectly observable as of the reporting date.
Level 2 includes those financial instruments that are
valued using models or other valuation methodologies. These
models are primarily industry-standard models that consider
various assumptions, including quoted forward prices for
commodities, time value, volatility factors, and current market
and contractual prices for the underlying instruments, as well
as other relevant economic measures. Our derivatives discussed
in Note 6, Derivative Financial Instruments, and our
senior term loan are valued using inputs based on observable
market data and are therefore categorized in Level 2.
Level 3—Pricing inputs include significant
inputs that are generally less observable from objective
sources. These inputs may be used with internally developed
methodologies that result in our best estimate of fair value. As
of September 30, 2010 and December 31, 2009, we have
no Level 3 measurements.
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We use a market approach for our fair value measurements and
endeavor to use the best information available. Accordingly,
valuation techniques that maximize the use of observable impacts
are favored. The following table presents the fair value
hierarchy table for assets and liabilities measured at fair
value, on a recurring basis (in thousands):
| September 30, 2010 | December 31, 2009 | |||||||||||||||
|
Carrying |
Fair value |
Carrying |
Fair value |
|||||||||||||
| value | (Level 2) | value | (Level 2) | |||||||||||||
|
Assets
|
||||||||||||||||
|
Interest rate cap
|
$ | 25 | 25 | – | – | |||||||||||
|
Liabilities
|
||||||||||||||||
|
Interest rate swap
|
3,017 | 3,017 | 3,329 | 3,329 | ||||||||||||
This classification of the above derivative asset and liability
is based on the lowest priority level of input that is
significant to the fair value measurement. The assessment of the
significance of a particular input to the fair value measurement
requires judgment and may affect the placement of assets and
liabilities within the levels of the fair value hierarchy. Both
derivative financial instruments in Level 2 are measured at
fair value with a market approach using third-party pricing
services which have been corroborated with data from active
markets or broker quotes.
The following table presents the estimated carrying and fair
values for financial instruments that are not measured at fair
value on a recurring basis (in thousands):
| September 30, 2010 | December 31, 2009 | |||||||||||||||
|
Carrying |
Fair value |
Carrying |
Fair value |
|||||||||||||
| value | (Level 2) | value | (Level 2) | |||||||||||||
|
Senior term
loan(1)
|
$ | 176,760 | 178,204 | $ | 128,600 | 108,966 | ||||||||||
|
Senior subordinated notes, related
party(2)
|
– | – | 40,021 | 40,021 | ||||||||||||
| (1) | The fair value of our senior term loan is estimated based on the current rates available to us. | |
| (2) | The difference between market interest rate and the rate in existence on our senior subordinated debt at December 31, 2009 is assumed to represent the premium paid for such debt being unsecured plus a size risk premium. As such, the carrying value approximates the fair value. |
| (8) | Employee benefit plans |
2008 senior
executive equity plan
On October 14, 2008, the Parent Company adopted its Senior
Executive Equity Plan (the “Senior Plan”) for senior
executives and directors of The Broadlane Group to provide a
means to motivate, attract and retain the services of such
individuals in order to promote the success of The Broadlane
Group. The Senior Plan reserved 26,671,476 Class A and
Class B Common Units of the Parent Company, Broadlane
Holdings, LLC, in the aggregate for issuance directly as equity
awards. An additional 135,832 Class B Common Units were
subsequently approved for issuance. The Class A Common
Units are voting units and the Class B Common Units have no
voting rights. Through September 30, 2010, the Parent
Company has granted 41,599,243 Class B Common Units to
employees and directors of The Broadlane Group. Compensation
cost related to these awards is reflected in general and
administrative expenses in our condensed consolidated statements
of operations. During 2009 and 2010, 14,791,935 units were
forfeited as a result of
94
employee turnover. At September 30, 2010,
26,807,308 units were outstanding and there were no units
available under the Senior Plan for future issuance. Units
granted under the Senior Plan typically vest one-quarter on the
second, third and fourth anniversary dates of the reference date
specified in the individual grant agreements, with the remaining
one-quarter vesting in the event of a public offering or sale of
the company.
We recorded equity-based compensation expense in connection with
the above plans of $0.1 million and $0.5 million for
the three and nine months ended September 30, 2010 and
$0.1 million and $0.5 million and for the three and
nine months ended September 30, 2009.
The fair value of the equity awards granted under the Senior
Plan has been estimated as of the date of each grant and the
value of the awards is based on the fair value of the underlying
equity. We established the fair value of the underlying equity
by using a Black-Scholes model that incorporates the enterprise
value of Broadlane Holdings, LLC. Within this model, the
aggregate and per-share value of the classes are determined and
allocated to the Class A and Class B Common Units.
|
September 30, |
September 30, |
|||||||
| 2010 | 2009 | |||||||
|
Expected volatility
|
27% | 27% | ||||||
|
Risk-free interest rate
|
1.46% - 2.38% | 1.87% - 2.83% | ||||||
|
Expected life
|
4.5 years | 4.5 years | ||||||
|
Expected dividend yield
|
0% | 0% | ||||||
Since we are privately-held, our historical volatility is not
measurable. As such, volatility is estimated after considering
volatility of publicly traded companies that are believed to be
comparable with us.
| (9) | Claims, lawsuits, and other legal matters |
In the ordinary course of business, we are subject to certain
claims or lawsuits. In our opinion, the outcome of such matters
will not have a material adverse effect on our financial
condition or results of operations.
| (10) | Entry into a material definitive agreement |
On September 14, 2010 Broadlane and Broadlane Holdings, LLC
entered into a stock purchase agreement (the “purchase
agreement”) with MedAssets, Inc. (“MedAssets”).
The purchase agreement contemplates the purchase by MedAssets of
all of the issued and outstanding shares of Broadlane for
consideration of approximately $850 million, of which
$725 million is payable in cash upon the closing and
$125 million is payable in cash on or before
January 4, 2012, subject to adjustment and to certain
limitations.
This transaction is subject to customary closing conditions.
95
| (11) | Subsequent events |
Governmental
clearance of transaction with MedAssets
In connection with the transaction with MedAssets, on
October 14, 2010, we received early clearance of antitrust
concerns under the
Xxxx-Xxxxx-Xxxxxx
Act by the Federal Trade Commission.
Loss of major
customer
On October 1, 2010, one of our major customers notified us
that it has elected to transition its supply chain business to a
competitor. As management considers this loss to be an event
that indicates a potential impairment of goodwill and our
indefinite-lived tradename intangible asset we performed an
impairment evaluation as of October 1, 2010 and determined
no impairment resulted from the loss of our customer.
96
