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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

þ                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
o                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-187931
 
Truven Holding Corp.
(Exact name of registrant parent guarantor as specified in its charter)
Delaware
7374
45-5164353
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)
 
Truven Health Analytics Inc.
(Exact name of registrant issuer as specified in its charter)
Delaware
7374
06-1467923
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)
777 E. Eisenhower Parkway
Ann Arbor, Michigan 48108
(Address of registrants' principal executive offices)

(734) 913-3000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No ¨ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ      No ¨ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨    Accelerated Filer ¨         Non-accelerated filer þ     smaller reporting company ¨
(do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨      No þ 

As of August 13, 2015, there was one outstanding share of each of the registrants.
                                                                                 




TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
 
 
 
 
Unaudited Interim Condensed Consolidated Balance Sheets - As of June 30, 2015 and December 31, 2014
 
 
 
 
Unaudited Interim Condensed Consolidated Statements of Comprehensive Loss - For the three and six months ended June 30, 2015 and June 30, 2014
 
 
 
 
Unaudited Interim Condensed Consolidated Statements of Cash Flows - For the six months ended June 30, 2015 and June 30, 2014
 
 
 
 
Unaudited Interim Condensed Consolidated Statement of Equity (Deficit) - For the six months ended June 30, 2015
 
 
 
 
Notes to Unaudited Interim Condensed Consolidated Financial Statements
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II - OTHER INFORMATION
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 5.
Other Information
Item 6.
Exhibits
 
 
 
Signatures
 
 
 
 






i



Definition of Terms
Unless otherwise indicated or the context otherwise requires, references in this report to:
the term “Holdings LLC” refers to VCPH Holdings LLC, a Delaware limited liability company;
the terms “Company”, "we", "us", and "our" refer to Truven Holding Corp. and Truven Health Analytics Inc., together with their subsidiaries;
the terms “Truven Holding” and "Parent" refer to Truven Holding Corp., a Delaware corporation that is directly owned by Holdings LLC and that is the direct parent of Truven;
the term “TRHI” refers to Thomson Reuters (Healthcare) Inc., a Delaware corporation, which, upon consummation of the Merger, became a direct wholly-owned subsidiary of VCPH Holding Corp. (now known as Truven Holding) and subsequently changed its name to Truven Health Analytics Inc.;
the term “Thomson Reuters Healthcare” refers to TRHI, together with certain other assets and liabilities of the Thomson Reuters Healthcare business prior to and including the date of the closing of the Prior Acquisition on June 6, 2012;
the terms “Truven” and the “Issuer” refer to Truven Health Analytics Inc., a Delaware corporation and a direct wholly-owned subsidiary of Truven Holding, and its subsidiaries;
the term “Prior Acquisition” refers to the acquisition by Wolverine of 100% of the equity interests of TRHI and certain assets and liabilities of the Thomson Reuters Healthcare business, pursuant to the Stock and Asset Purchase Agreement, dated as of April 23, 2012, which VCPH Holding Corp. (now known as Truven Holding) entered into with Thomson Reuters U.S. Inc. and Thomson Reuters Global Resources and subsequently assigned to Wolverine on May 24, 2012, and which closed on June 6, 2012;
the term “Wolverine” refers to Wolverine Healthcare Analytics, Inc., a Delaware corporation and an affiliate of The Veritas Capital Fund IV, L.P., a private equity fund managed by Veritas Capital, which was formed on May 16, 2012 as a direct wholly-owned subsidiary of VCPH Holding Corp. (now known as Truven Holding) and, upon consummation of the Prior Acquisition, merged with and into TRHI, with TRHI surviving the Merger as a direct wholly-owned subsidiary of VCPH Holding Corp. (now known as Truven Holding) and subsequently changed its name to Truven Health Analytics Inc.;
the term “Merger” refers to the merger upon the closing of the Prior Acquisition, whereby Wolverine (which was formed solely for the purpose of completing the Prior Acquisition) merged with and into TRHI, with TRHI surviving the Merger as a direct wholly-owned subsidiary of VCPH Holding Corp. (now known as Truven Holding) and subsequently changing its name to Truven Health Analytics Inc.;
the terms “Sponsor” and “Veritas Capital” refers to Veritas Capital Fund Management, L.L.C.;
the term “Thomson Reuters” refers to Thomson Reuters Corporation;
the term “Stock and Asset Purchase Agreement” refers to the Stock and Asset Purchase Agreement among VCPH Holding Corp., Thomson Reuters U.S. Inc. and Thomson Reuters Global Resources, dated as of April 23, 2012, which VCPH Holding Corp. assigned to Wolverine on May 24, 2012;
the term "Notes" refers to the 10.625% Senior Notes;
the term Senior Credit Agreement, dated as of June 6, 2012, among Truven Holding, Truven Health Analytics Inc., the several lenders from time to time parties thereto, Morgan Stanley Senior Funding, Inc. and UBS Securities LLC, as co-documentation agents, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as syndication agent, and JPMorgan Chase Bank, N.A., as administrative agent, as amended from time to time;
the term "Senior Credit Facility" refers to the Term Loan Facility and Revolving Credit Facility under the senior credit agreement;
the term "Old Notes" refers to the 10.625% Senior Notes, Series A, issued in a private offering under an indenture, dated June 6, 2012, and which were exchanged for the Exchange Notes (as defined below);
the term "Exchange Notes" refers to the 10.625% Senior Notes, Series B, registered under the U.S. Securities Act of 1933, as amended;
the term "Additional Notes" refers to the 10.625% Senior Notes, Series A, that were issued on November 12, 2014;
the term "Simpler" refers to Simpler Consulting, LLC. and certain of its affiliated entities and persons, which was acquired by certain wholly-owned subsidiaries of the Company on April 11, 2014;
the term "JWA" refers to Joan Wellman and Associates, Inc. which was acquired by the Company on October 31, 2014 and

ii



the term "HBE" refers to HBE Solutions, LLC which was acquired by certain wholly-owned subsidiaries of the Company on November 12, 2014.

iii



Part I - FINANCIAL INFORMATION

Item 1. Financial Information

Truven Holding Corp.
Unaudited Interim Condensed Consolidated Balance Sheets
June 30, 2015 and December 31, 2014
(with the exception of common stock, in thousands of dollars, unless otherwise indicated)
 
June 30,
2015
 
December 31,
2014
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
16,366

 
$
12,604

Trade and other receivables (less allowances of $1,222 and $1,244, respectively)
91,609

 
120,214

Prepaid expenses and other current assets
28,526

 
30,251

Deferred tax assets
267

 
621

Total current assets
136,768

 
163,690

Computer hardware and other property, net
29,929

 
37,435

Developed technology and content, net
124,452

 
134,078

Goodwill
498,820

 
498,820

Other identifiable intangible assets, net
357,289

 
382,879

Other noncurrent assets
18,072

 
16,187

Total assets
$
1,165,330

 
$
1,233,089

Liabilities and Equity


 
 
Current liabilities
 
 
 
Accounts payable and accrued expenses
$
66,939

 
$
67,228

Deferred revenue
116,112

 
129,129

Current portion of long-term debt
6,360

 
6,360

Capital lease obligation
682

 
664

Current taxes payable
138

 
173

Total current liabilities
190,231

 
203,554

Deferred revenue
3,880

 
5,456

Capital lease obligation
1,029

 
1,374

Long-term debt
969,799

 
971,362

Deferred tax liabilities
267

 
621

Other noncurrent liabilities
3,422

 
3,599

Total liabilities
1,168,628

 
1,185,966

Equity (deficit)
 
 
 
Common stock—$ 0.01 par value; 1,000 shares authorized, 1 share issued and
    outstanding at June 30, 2015 and December 31, 2014

 

Additional paid-in capital
484,206

 
483,550

Accumulated deficit
(487,257
)
 
(436,123
)
Foreign currency translation adjustment
(247
)
 
(304
)
Total equity (deficit)
(3,298
)
 
47,123

Total liabilities and equity (deficit)
$
1,165,330

 
$
1,233,089

See the notes to these unaudited condensed consolidated financial statements.

1



Truven Holding Corp.
Unaudited Interim Condensed Consolidated Statements of Comprehensive Loss
(in thousands of dollars, unless otherwise indicated)
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Revenue, net
$
153,181

 
$
136,424

 
$
296,354

 
$
254,687

Operating costs and expenses
Cost of revenue, excluding depreciation and amortization
(83,411
)
 
(75,720
)
 
(167,240
)
 
(146,009
)
Selling and marketing, excluding depreciation and amortization
(17,715
)
 
(15,812
)
 
(33,649
)
 
(29,536
)
General and administrative, excluding depreciation and amortization
(16,400
)
 
(13,413
)
 
(33,282
)
 
(24,697
)
Depreciation
(5,362
)
 
(5,924
)
 
(10,497
)
 
(12,517
)
Amortization of developed technology and content
(11,172
)
 
(9,673
)
 
(21,981
)
 
(18,869
)
Amortization of other identifiable intangible assets
(12,565
)
 
(12,268
)
 
(25,590
)
 
(20,883
)
Other operating expenses
(6,480
)
 
(4,846
)
 
(16,818
)
 
(11,375
)
Total operating costs and expenses
(153,105
)
 
(137,656
)
 
(309,057
)
 
(263,886
)
Operating income (loss)
76

 
(1,232
)
 
(12,703
)
 
(9,199
)
    Net interest expense
(18,510
)
 
(17,415
)
 
(36,982
)
 
(33,689
)
  Other finance costs
(559
)
 
(260
)
 
(1,028
)
 
(336
)
Loss before income taxes
(18,993
)
 
(18,907
)
 
(50,713
)
 
(43,224
)
Benefit from (provision for) income taxes
(131
)
 
10,107

 
(421
)
 
15,167

Net loss
$
(19,124
)
 
$
(8,800
)
 
$
(51,134
)
 
$
(28,057
)
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
   Foreign currency translation adjustments
$
(247
)
 
$
55

 
$
57

 
$
(85
)
Total comprehensive loss
$
(19,371
)
 
$
(8,745
)
 
$
(51,077
)
 
$
(28,142
)
See the notes to these unaudited condensed consolidated financial statements.

2



Truven Holding Corp.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands of dollars, unless otherwise indicated)


Six months ended June 30,

2015
 
2014
Operating activities
 
 
 
Net loss
$
(51,134
)
 
$
(28,057
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation
10,497

 
12,517

Amortization of developed technology and content
21,981

 
18,869

Amortization of other identifiable intangible assets
25,590

 
20,883

Amortization of debt issue costs
1,463

 
1,252

Amortization of debt discount
1,616

 
1,558

Asset write-off
6,000

 
4,706

Deferred income tax benefit

 
(15,532
)
    Share-based compensation expense
656

 
639

Changes in operating assets and liabilities:
 
 
 
        Trade and other receivables
28,701

 
30,585

Prepaid expenses and other current assets
(4,486
)
 
(9,717
)
Accounts payable and accrued expenses
4,906

 
8,052

Deferred revenue
(14,685
)
 
(20,815
)
Income taxes
146

 
212

Other
(3,522
)
 
420

Net cash provided by operating activities
27,729

 
25,572

Investing activities
 
 
 
Acquisitions, net of cash acquired
(405
)
 
(76,270
)
Capital expenditures
(20,111
)
 
(13,646
)
Net cash used in investing activities
(20,516
)
 
(89,916
)
Financing activities
 
 
 
Principal repayment of senior term loan
(3,180
)
 
(2,927
)
Repayment of revolving credit facility

 
(30,000
)
Proceeds from senior term loan related to refinancing

 
100,000

Payment of debt issuance costs

 
(2,895
)
Payment of capital lease obligation
(328
)
 
(1,340
)
Net cash provided by (used in) financing activities
(3,508
)
 
62,838

Effect of exchange rate changes in cash and cash equivalents
57

 
(84
)
Net increase (decrease) in cash and cash equivalents
3,762

 
(1,590
)
Cash and cash equivalents
 
 
 
Beginning of period
12,604

 
10,255

End of period
$
16,366

 
$
8,665

Supplemental cash flow disclosures
 
 
 
Interest paid
$
33,863

 
$
30,726

Income taxes paid
306

 
203

See the notes to these unaudited condensed consolidated financial statements.

3



Truven Holding Corp.
Unaudited Interim Condensed Consolidated Statement of Equity (Deficit)
Six months ended June 30, 2015
(in thousands of dollars, unless otherwise indicated)
 
Common stock
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total equity (deficit)
Balance at December 31, 2014
$

$
483,550

$
(436,123
)
$
(304
)
$
47,123

Share-based compensation expense

656



656

Foreign currency translation adjustment



57

57

Net loss


(51,134
)

(51,134
)
Balance at June 30, 2015
$

$
484,206

$
(487,257
)
$
(247
)
$
(3,298
)
See the notes to these unaudited condensed consolidated financial statements.


4



Truven Holding Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands of dollars, unless otherwise indicated)
1.
Description of Business and Basis of Presentation
Description of the Business
Truven Holding was formed on April 20, 2012 by Veritas Capital for the purpose of consummating the Prior Acquisition and has had no operations from inception other than its investment in Truven and its subsidiaries.
Truven provides analytic solutions and service offerings across the full spectrum of healthcare constituents, including large companies, hospitals and health systems, health plans, federal agencies and state governments in the U.S. and increasingly globally. Truven operates and manages its business under two reportable segments: Commercial and Government.
Basis of Presentation
These unaudited interim condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim reporting and are consistent with the accounting policies and methods used in preparation of the Company's consolidated financial statements as of December 31, 2014. The preparation of interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the interim condensed consolidated financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events and actions that the Company may undertake in the future, actual results could differ from those estimates. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. In the opinion of management, all adjustments (consisting only of normal and recurring adjustments) necessary for a fair statement for the periods presented have been recorded. The results of operations for the three and six months ended June 30, 2015, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2015. These financial statements should be read in conjunction with, and have been prepared in conformity with, the accounting principles reflected in the Company’s financial statements and the notes thereto for the year ended December 31, 2014 included in the Company’s Annual Report on Form10-K/A as filed with the Securities and Exchange Commission ("SEC") on June 23, 2015.

2.     Recent Accounting Pronouncements
On April 7, 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. For public business entities, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The new guidance will be applied on a retrospective basis. The Company will adopt the guidance starting on January 1, 2016 on a retrospective basis.
In May 2014, as part of its ongoing efforts to assist in the convergence of GAAP and International Financial Reporting Standards, the FASB issued a new standard related to revenue recognition. Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard, as currently issued will be effective beginning January 1, 2017. On July 9, 2015, the FASB delayed the effective date of the new revenue standard by one year, but permits entities to adopt the standard as of the original effective date. The FASB decided, based on its outreach to various stakeholders and the forthcoming amendments to the new revenue standard, that a deferral is necessary to provide adequate time to effectively implement the new revenue standard. The new standard allows for two methods of adoption: (a) full retrospective adoption, meaning the standard

5



is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognized as an adjustment to the opening retained earnings balance. The Company will adopt the new revenue guidance beginning in its 2018 interim and annual financial statements and is still in the process of determining the adoption method as well as the effects the adoption will have on its consolidated financial statements.

3.     Acquisitions
Simpler Acquisition
On April 11, 2014, we acquired Simpler (the "Simpler Transaction"). Simpler provides "Lean" enterprise transformation consulting services, which is a business process intended to maximize customer value with fewer resources and waste. This strategic acquisition combines the Company’s market-leading cost and quality analytics in the commercial segment with Simpler’s performance management consulting capabilities to deliver performance improvement solutions to healthcare and commercial customers. Pursuant to the Simpler purchase agreement, the Company indirectly acquired all of the outstanding equity of Simpler for a purchase price of $81.1 million, including a working capital adjustment of $1.1 million, and the issuance of equity interests by Holdings LLC, the direct parent of the Company, of $3.7 million to Simpler. The related acquisition costs amounted to $3.6 million. The Company financed the acquisition and related costs and expenses through an increase in the Tranche B Term Loans (the "Supplemental Tranche B Term Loans") (see Note 6). The Company and its affiliates did not assume any indebtedness in connection with the Simpler Transaction.
The following is a summary of the allocation of the purchase price of the Simpler Transaction to the estimated fair values of assets acquired and liabilities assumed in the Simpler Transaction. The allocation of the purchase price is based on management's judgment after evaluating several factors, including a valuation assessment prepared by a third party valuation firm:
 
Values recognized at acquisition date
Trade and other receivables
$
7,560

Prepaid assets and other current assets
425

Computer hardware and other property
181

Other identifiable intangible assets
47,500

Current liabilities
(2,575
)
Deferred revenue
(600
)
Net assets acquired
52,491

Goodwill on acquisition
28,571

Net consideration
$
81,062

Accounts receivable, accounts payable, and liabilities were stated at historical carrying values, given their short-term nature.
 
The Company engaged a third party valuation firm to assist in determining the fair values of other identifiable assets and liabilities acquired, including trademarks and trade names, customer relationships, backlogs, non-compete agreements, and deferred revenue.
Computer hardware and other property have been valued at historical carrying values as management estimated that its replacement costs would not significantly differ from its carrying values.
Trademarks and trade names have been valued using the relief from royalty method under the income approach to estimate the cost savings that accrue to the Company which would otherwise have gone to pay royalties or license fees on revenues earned through the use of the asset. Using this approach, trademarks and trade names were valued at $8.0 million, with estimated useful lives of 13 years.

6



Customer relationships were determined using an income approach, taking into account the expected revenue growth and attrition rates of the customers and the estimated capital charges for the use of other net tangible and identifiable net intangible assets. Using this approach, customer relationships were assigned a value of $21.4 million, with estimated useful lives of 3 to 9 years.
Backlog was determined using an income approach based on projected backlog as of the acquisition date. Using this approach, backlog was assigned a value of $13.7 million, with an estimated useful life of 1 to 2 years.
Non-compete agreements were determined using an income approach based on projected lost revenue. Using this approach, non-compete agreements were assigned a value of $4.4 million, with estimated useful lives of 2 to 3 years.
Deferred revenue has been valued using a cost build-up approach and is calculated as the cost to fulfill the legal performance obligation plus a reasonable profit margin.
The goodwill recognized upon closing of the Simpler acquisition is attributable mainly to the skill of the acquired work force and Simpler’s position as a provider of services to key constituents of the U.S. market. The total goodwill relating to the Simpler Transaction is tax deductible.

Simpler's revenue and net loss for the three months and six months ended June 30, 2015, amounted to $15.4 million and $1.0 million, respectively, and $29.2 million and $2.5 million , respectively.

The following unaudited pro forma financial data summarizes the impact of Simpler’s results of operations for the three and six months ended June 30, 2014 had the acquisition of Simpler occurred as of January 1, 2013:

 
Three months ended June 30, 2014
 
Six months ended June 30, 2014
 
(Unaudited)
Revenue, net
$
12,860

 
$
25,523

Net loss
(1,032
)
 
(2,249
)


JWA Acquisition
On October 31, 2014, we acquired JWA (the "JWA Transaction"), a company that provides "Lean" organizational transformation consulting services. The Company acquired all of the outstanding equity of JWA for a cash purchase price of $15.3 million, including a $1.2 million working capital adjustment and $0.1 million holdback payment. Truven also agreed to pay $1.9 million in three annual payments as compensation to a former major shareholder of JWA who became Truven's employee, as long as the former major shareholder remained with Truven for the next three years. The related acquisition costs amounted to $0.6 million. The Company and its affiliates did not assume any indebtedness in connection with the JWA Transaction. We financed the acquisition and related costs and expenses through the issuance of the Additional Notes.
The following is a summary of the allocation of the purchase price of the JWA Transaction to the estimated fair values of assets acquired and liabilities assumed in the JWA Transaction. The allocation of the purchase price is based on management's judgment after evaluating several factors, including a valuation assessment prepared by a third party valuation firm:

7



 
Values recognized at acquisition date
Trade and other receivables
$
1,462

Prepaid assets and other current assets
41

Computer hardware and other property
17

Other identifiable intangible assets
7,489

Current liabilities
(607
)
Deferred revenue
(126
)
Net assets acquired
8,276

Goodwill on acquisition
7,020

Net consideration
$
15,296

Accounts receivable, accounts payable, liabilities and deferred revenue were stated at historical carrying values, given their short-term nature.
 
The Company engaged a third party valuation firm to assist in determining the fair values of other identifiable assets and liabilities acquired, including trademarks and trade names, customer relationships and backlogs.
Computer hardware and other property have been valued at historical carrying values as management estimated that its replacement costs would not significantly differ from its carrying values.
Trademarks and trade names have been valued using the relief from royalty method under the income approach to estimate the cost savings that accrue to the Company, which would otherwise have gone to pay royalties or license fees on revenue earned through the use of the asset. Using this approach, trademarks and trade names were valued at $0.3 million, with estimated useful lives of 3 to 5 years.
Customer relationships were determined using an income approach, taking into account the expected revenue growth and attrition rates of the customers and the estimated capital charges for the use of other net tangible and identifiable net intangible assets. Using this approach, customer relationships were assigned a value of $6.1 million, with estimated useful lives of 10 to 11 years.
Backlog was determined using an income approach based on projected backlog as of the acquisition date. Using this approach, backlog was assigned a value of $1.0 million, with an estimated useful life of 1 year.
The goodwill recognized upon closing of the acquisition is attributable mainly to the skill of the acquired work force and JWA’s position as a provider of services to key constituents of the U.S. market. The total goodwill relating to the JWA Transaction is tax deductible.
JWA's revenue and net income for the three months and six months ended June 30, 2015, amounted to $2.9 million and $0.1 million respectively, and $6.1 million and $0.3 million, respectively.
The following unaudited pro forma financial data summarizes the impact of JWA's results of operations for the three and six months ended June 30, 2014 had the acquisition of JWA occurred as of January 1, 2013:

 
 
Three months ended June 30, 2014
 
Six months ended June 30, 2014
 
(Unaudited)
Revenue, net
$
3,222

 
$
6,053

Net Income
323

 
496


8



HBE Acquisition
On November 12, 2014, Truven consummated the acquisition of HBE, a leading provider of stakeholder information that is essential for life sciences companies to gain drug approval, reimbursement, and adoption, for a cash purchase price of $17.2 million, including negative working capital adjustment of $2.8 million (the "HBE Transaction"). The related acquisition costs amounted to $1.2 million.
The Company financed the acquisition and related costs and expenses through the issuance of the Additional Notes (see Note 6). The Company and its affiliates did not assume any indebtedness in connection with the HBE Transaction.
The following is a summary of the allocation of the purchase price of the HBE Transaction to the estimated fair values of assets acquired and liabilities assumed in the HBE Transaction. The allocation of the purchase price is based on management's judgment after evaluating several factors, including a valuation assessment prepared by a third party valuation firm:

 
Values recognized at acquisition date
Trade and other receivables
$
7,670

Prepaid assets and other current assets
768

Computer hardware and other property
140

Developed technology and content
4,621

Other identifiable intangible assets
11,278

Other noncurrent assets
67

Current liabilities
(8,604
)
Deferred revenue
(4,249
)
Net assets acquired
11,691

Goodwill on acquisition
5,552

Net consideration
$
17,243

An adjustment recorded during the six month period reduced current assets by $0.3 million and increased total liabilities by $0.1 million, as a result of the final working capital adjustment.
Accounts receivable, accounts payable, and liabilities were stated at historical carrying values, given their short-term nature.
 
The Company engaged a third party valuation firm to assist in determining the fair values of other identifiable assets and liabilities acquired, including trademarks and trade names, customer relationships, non-compete agreements, and deferred revenue.
Computer hardware and other property have been valued at historical carrying values as management estimated that its replacement costs would not significantly differ from its carrying values.
Trademarks and trade names have been valued using the relief from royalty method under the income approach to estimate the cost savings that accrue to the Company which would otherwise have gone to pay royalties or license fees on revenue earned through the use of the asset. Using this approach, trademarks and trade names were valued at $2.5 million, with estimated useful lives of 12 to 14 years.
Customer relationships were determined using an income approach, taking into account the expected revenue growth and attrition rates of the customers and the estimated capital charges for the use of other net tangible and identifiable net intangible assets. Using this approach, customer relationships were assigned a value of $8.8 million, with estimated useful lives of 9 to 11 years.

9



Deferred revenue has been valued using a cost build-up approach and is calculated as the cost to fulfill the legal performance obligation plus a reasonable profit margin.
The goodwill recognized upon closing of the acquisition is attributable mainly to the skill of the acquired work force and HBE’s position as a provider of services to key constituents of the global life sciences market. The total goodwill relating to the HBE Transaction is tax deductible.
HBE's revenue and net income/loss for the three months ended and six months ended June 30, 2015, amounted to $4.3 million and $0.1 million respectively, and $7.1 million and ($1.7 million), respectively.
The following unaudited pro forma financial data summarizes the impact of HBE’s results of operations for the three and six months ended June 30, 2014 had the acquisition of HBE occurred as of January 1, 2013:


 
Three months ended June 30, 2014
 
Six months ended June 30, 2014
 
(Unaudited)
Revenues, net
$
7,475

 
$
12,919

Net income
2,122

 
3,114




4.
Goodwill
The changes in the carrying amount of goodwill by reportable segment during the three and six months ended June 30, 2015, were as follows:


 
Commercial
 
Government
 
Total
 
 
 
 
 
 
Balance as of June 30, 2015, March 31, 2015 and December 31, 2014
$
774,184

 
$
91,298

 
$
865,482

Accumulated impairment:
 
 
 
 
 
Balance as of June 30, 2015, March 31, 2015 and December 31, 2014
(321,064
)
 
(45,598
)
 
(366,662
)
Net book value as of June 30, 2015, March 31, 2015 and December 31, 2014
$
453,120

 
$
45,700

 
$
498,820



 

 




5.
Other Identifiable Intangible Assets
Other identifiable intangible assets, net, consisted of the following:


10



 
As of June 30, 2015
 
Average life (years)
 
Cost
 
Accumulated amortization
 
Net
Customer relationships
11.0
 
$
366,085

 
$
(92,151
)
 
$
273,934

Trademarks and trade names
15.0
 
97,024

 
(18,543
)
 
78,481

Backlog
1.0
 
14,732

 
(12,152
)
 
2,580

Non-Compete
3.0
 
4,426

 
(2,132
)
 
2,294

 
 
 
$
482,267

 
$
(124,978
)
 
$
357,289

 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
Average life (years)
 
Cost
 
Accumulated amortization
 
Net
Customer relationships
11.0
 
$
366,085

 
$
(75,756
)
 
$
290,329

Trademarks and trade names
15.0
 
97,024

 
(15,224
)
 
81,800

Backlog
1.0
 
14,732

 
(7,160
)
 
7,572

Non-Compete
3.0
 
4,426

 
(1,248
)
 
3,178

 
 
 
$
482,267


$
(99,388
)

$
382,879


Amortization expense for each of the next five twelve-month periods beginning July 1, 2015, is expected to be approximately $43.8 million for 2016, $39.9 million for 2017, $39.3 million for 2018, $39.0 million for 2019, and $38.9 million for 2020.

6.
Long-Term Debt

The Company's long-term debt consists of the following:

 
 
June 30, 2015
 
December 31, 2014
Senior Credit Facility
 
 
 
 
Term Loan Facility (net of $12,443 and $14,035 discount, respectively)
$
609,257

 
$
610,845

10.625% Senior Notes ("the Notes") (net of $1,321 and $1,455 discount, respectively)
325,829

 
325,695

10.625% Additional Senior Notes ("the Additional Notes") (including $1,073 and $1,182 premium, respectively)
41,073

 
41,182

 
976,159

 
977,722

Less: current portion of long-term debt
6,360

 
6,360

Long-term debt
$
969,799

 
$
971,362

In connection with the Prior Acquisition, on June 6, 2012, Truven entered into the Senior Credit Facility and issued the Old Notes. On November 12, 2014, in connection with the JWA Transaction and the HBE Transaction, Truven issued $40 million aggregate principal amount of Additional Notes. Truven financed the Simpler Transaction and related costs and expenses through a $100.0 million increase in the Tranche B Term Loans under the Senior Credit Facility. Except as otherwise indicated by the context, the Old Notes, the Exchange Notes and the Additional Notes are collectively and individually defined as the "Notes".



11



Senior Credit Facility
The Senior Credit Facility, as amended on April 11, 2014, is with a syndicate of banks and other financial institutions and provides financing of up to $679.7 million, consisting of the $629.7 million Term Loan Facility with a maturity date of June 6, 2019 and the $50.0 million Revolving Credit Facility with a maturity date of June 6, 2017. As of June 30, 2015, the Company has no outstanding revolving loan and has outstanding letters of credit amounting to $7.5 million, which, while not drawn, reduce the available line of credit under the Revolving Credit Facility to $42.5 million.

Borrowings under the Senior Credit Facility, other than swing line loans, bear interest at a rate per annum equal to an applicable margin plus, at Truven’s option, either (a) a base rate determined by reference to the highest of (1) the prime rate of JPMorgan Chase Bank, N.A., (2) the federal funds effective rate plus 0.50% and (3) the one month Eurodollar rate plus 1.00%; provided, that the base rate for the Term Loan Facility at any time shall not be less than 2.25%, or (b) a Eurodollar rate adjusted for statutory reserve requirements for a one, two, three or six month period (or a nine or twelve month interest period if agreed to by all applicable lenders); provided that the Eurodollar base rate used to calculate the Eurodollar rate for the Term Loan Facility at any time shall not be less than 1.25%. Swing line loans will bear interest at the interest rate applicable to base rate loans, plus an applicable margin. In addition to paying interest on outstanding principal under the Senior Credit Facility, we are required to pay a commitment fee to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder at a rate equal to 0.50% (subject to reduction upon attainment of certain leverage ratios). We will also pay customary letter of credit fees and certain other agency fees. Truven may voluntarily repay outstanding loans under the Senior Credit Facility at any time without premium or penalty, other than customary “breakage” costs with respect to adjusted LIBOR loans. Following the Third Amendment (the "Third Amendment") to the Senior Credit Agreement to increase the Tranche B Term Loans by $100 million as discussed below, we are required to repay $1.6 million of the Term Loan Facility quarterly, through March 31, 2019, with any remaining balance due June 6, 2019.

All obligations under the Senior Credit Facility are guaranteed by Truven Holding and each of Truven's existing and future wholly-owned domestic subsidiaries. During 2014, all domestic subsidiaries acquired by the Company became guarantors under the Senior Credit Facility (see Note 14). All obligations under the Senior Credit Facility and the guarantees of those obligations are collateralized by first priority security interests in substantially all of Truven's assets as well as those of each guarantor (subject to certain limited exceptions).
 
The Senior Credit Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, Truven’s ability and the ability of each of any restricted subsidiaries to sell assets; incur additional indebtedness; prepay other indebtedness (including the Notes); pay dividends and distributions or repurchase its capital stock; create liens on assets; make investments; make certain acquisitions; engage in mergers or consolidations; engage in certain transactions with affiliates; amend certain charter documents and material agreements governing subordinated indebtedness, change the business conducted by it and its subsidiaries; and enter into agreements that restrict dividends from subsidiaries.

In addition, the Senior Credit Facility requires Truven to comply with a quarterly maximum consolidated senior secured leverage ratio in accordance with the debt covenants as long as the commitments under the Revolving Credit Facility remain outstanding (subject to certain limited exceptions). The Senior Credit Facility also contains certain customary representations and warranties, affirmative covenants and events of default. As of June 30, 2015, the Company is in compliance with all of these credit facility covenants.

On April 11, 2014, certain wholly-owned subsidiaries of the Company entered into the Purchase Agreement with Simpler (see Note 3). In connection with the Purchase Agreement, Truven entered into the Third Amendment to our Senior Credit Agreement. The Third Amendment provided for a $100.0 million increase in the Tranche B Term Loans, and increased the total amount available under the Senior Credit Facility to $679.7 million, consisting of a $629.7 million Term Loan Facility and a $50.0 million Revolving Credit Facility (which remained unchanged).
On April 11, 2014, the Company borrowed the entire $100.0 million principal amount of the Supplemental Tranche B Term Loans to finance the acquisition of Simpler, repay outstanding loans under its Revolving Credit Facility and pay fees and expenses relating to the acquisition of Simpler. Under the terms of the Third Amendment, the Company must

12



repay the principal amount of the Tranche B Term Loans in twenty consecutive quarterly installments beginning on June 30, 2014 and continuing through March 31, 2019 in the amount of $1.6 million each, and a final installment on June 6, 2019 in the amount of $597.8 million. The terms and conditions that apply to the new Supplemental Tranche B Term Loans are substantially the same as the terms and conditions that apply to the existing Tranche B Term Loans under the Senior Credit Agreement. In addition, the Consolidated Senior Secured Leverage Ratio applicable to the Company was increased for certain periods from 2014 to 2016. During 2014, all domestic subsidiaries acquired by the Company became guarantors under the Senior Credit Facility (see Note 14).

10.625% Senior Notes due 2020

Old Notes and Exchange Notes

The Notes, which were issued under an indenture, dated June 6, 2012 ( the “Indenture”, as supplemented by the First Supplemental Indenture whereby Truven became a party to the Indenture as successor in interest to Wolverine and the Second Supplemental Indenture referred to below, the “Second Supplemental Indenture”), with The Bank of New York Mellon Trust Company, N.A. as trustee, bear interest at a rate of 10.625% per annum, are payable on June 1 and December 1 of each year (commencing on December 1, 2012), and have a maturity date of June 1, 2020.
 
The Notes are general unsecured senior obligations of Truven, fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by Truven Holding Corp. and each of Truven’s existing and future wholly-owned domestic restricted subsidiaries that is a borrower under or that guarantees the obligations under the Senior Credit Facility or any other indebtedness of Truven or any other guarantor.

Truven may redeem some or all of the Notes at any time prior to June 1, 2016 at 100% of the principal amount thereof plus the applicable premium pursuant to the Indenture as of the applicable redemption date, plus accrued and unpaid interest and any additional interest to, but excluding, the applicable redemption date. Truven may redeem some or all of the Notes at any time on or after June 1, 2016 at 105.313% of the principal amount thereof, declining ratably to 100% of the principal amount thereof on or after June 1, 2018, plus, in each case, accrued and unpaid interest and any additional interest to, but excluding, the applicable redemption date. In addition, at any time prior to June 1, 2015, Truven (subject to certain conditions) may redeem up to 35% of the aggregate principal amount of the Notes using net cash proceeds from certain equity offerings at 110.625% of the aggregate principal amount of the Notes plus accrued and unpaid interest and any additional interest, to, but excluding, the applicable redemption date. If Truven experiences a change of control (as defined in the Indenture), it will be required to make an offer to repurchase the Notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, and any additional interest, to, but excluding, the date of purchase.

The Indenture contains covenants limiting Truven and its wholly-owned restricted subsidiaries with respect to other indebtedness, investments, liens, dividends, purchases or redemptions of stock, transactions with affiliates and mergers and sales of assets. The Indenture also contains covenants limiting the ability of wholly-owned restricted subsidiaries to guarantee payment of any indebtedness of Truven or any subsidiary guarantor and limiting the Company's business and operations. Following our series of acquisitions in 2014, all the domestic subsidiaries we acquired became guarantors of the Notes as a result of the guarantees of the Senior Credit Facility provided by such subsidiaries. The guarantees were entered into pursuant to the Third, Fourth and Sixth Supplemental Indentures. We were in compliance with all of these covenants as of June 30, 2015.

On June 5, 2013, we entered into the Second Supplemental Indenture, whereby the guarantee release provision in Section 10.2(d)(1)(B) of the Indenture, which allows guarantors to be released from their obligations under the Indenture upon the release or discharge of such guarantor’s guarantee of the Senior Credit Facility or the guarantee which resulted in the creation of the guarantee under the Indenture (subject to certain limitations), was amended to apply only to subsidiary guarantors and not to Truven Holding.

Pursuant to a registration rights agreement dated June 6, 2012 (the "Registration Rights Agreement"), we exchanged the Old Notes (and related guarantees) for the Exchange Notes.

13



Additional Notes

The Additional Notes were issued pursuant to the Indenture dated June 6, 2012 governing the Old Notes and, together with the Additional Notes (the "Notes"), as supplemented by the Fifth Supplemental Indenture, dated as of November 12, 2014 (the "Fifth Supplemental Indenture") by and among the Company, the Guarantors and the Trustee. The Additional Notes form a single series with the Old Notes and have the same terms as the Old Notes and rank equal in right of payment.
Pursuant to the Registration Rights Agreement relating to the Additional Notes, the Company and the Guarantors agreed to use their commercially reasonable efforts to file with the SEC and cause to become effective by May 11, 2015 a registration statement relating to an offer to issue new notes having terms substantially identical to the Additional Notes in exchange for outstanding Additional Notes.
As of June 30, 2015, principal maturities of long-term debt for the next five years and thereafter consist of:

For the period ending June 30,
 
2016
$
6,360

2017
6,360

2018
6,360

2019
6,360

2020
950,719

 
$
976,159


7.
Other Operating Expenses
The components of other operating expenses include the following:
 
Three months ended June 30,
Six months ended June 30,
 
2015
 
2014
2015
 
2014
 
 
 
 
 
Severance and retention bonuses
$
727

 
$
419

$
1,305

 
$
981

Acquisition-related costs and other non-recurring charges
4,711

 
3,827

7,490

 
4,446

Asset Write-off (see Note 12)

 

6,000

 
4,706

Sponsor fee (see Note 10)
1,042

 
600

2,023

 
1,242

Total other operating expenses
$
6,480

 
$
4,846

$
16,818

 
$
11,375


Severance expense in 2015 and 2014 primarily relates to compensation for certain positions that were eliminated as part of the change in the Company's operating segment structure and continuous streamlining of other positions within the organization to improve our business decision-making process. Retention bonuses relate to incentive compensation agreements to retain key employees of the businesses acquired in 2014.

Acquisition-related costs and non-recurring charges in 2015 mainly represent professional fees as a result of integrating the acquired businesses to the Company and $0.9 million of accrual related to settlement of a legal case in the normal course of business. Acquisition-related costs and non-recurring charges in 2014 included legal costs related to the acquisition of Simpler in April 2014 (see Note 3) and other professional fees incurred related to business improvement processes.



14



8.    Segment Information
The determination of reportable segments was based on the discrete financial information provided to the Chief Operating Decision Maker (the "CODM"). The Chief Executive Officer has the authority for resource allocation and assessment of the Company’s performance and is, therefore, the CODM. The Company’s segment structure enables us to more effectively focus on business and market facing opportunities and to simplify our business decision-making process. The Company's reportable segments are as follows:
Commercial

The Commercial segment provides analytics solutions and services to improve the cost, quality, and effectiveness of healthcare for commercial organizations across the healthcare industry including, for example, providers, integrated delivery networks, insurers, professional services organizations, healthcare exchanges, corporations and life sciences companies.
Government

The Government segment provides integrated analytic solutions and services to improve the cost, quality, and effectiveness of healthcare for federal and state agencies including, for example, the Centers for Medicare & Medicaid Services and state Medicaid agencies and federally owned and operated healthcare facilities. Our sales and client services are tailored to meet the specific procurement, sales and support requirements of the government market.

The CODM evaluates the performance of our segments based on segment operating income (loss), which is calculated internally as net sales, less cost of operations (including allocation of technology costs), selling and marketing, and general and administrative expenses, excluding depreciation and amortization.
Center/shared services consist of items that are not directly attributable to reportable segments, such as corporate administrative costs and elimination of intercompany transactions.
Corporate expenses may include other non-recurring or non-operational activity that the CODM excludes in assessing operating segment performance. These expenses, along with depreciation and amortization, other operating income/expense and other non-operating activity such as interest expense/income, are not considered in the measure of the segments’ operating performance, but are shown herein as reconciling items to the Company’s consolidated loss before income taxes.
The accounting policies for the reportable segments are the same as those for the consolidated Company. The Company’s operations and customers are based primarily in the United States.
Segment information for the three months ended June 30, 2015 and 2014 is as follows:

 
Three months ended June 30,
 
2015
 
2014
 
Revenue
 
Segment operating income
 
Revenue
 
Segment operating income
Commercial
$
125,582

 
$
41,952

 
$
113,500

 
$
38,210

Government
27,940

 
1,305

 
22,924

 
(12
)
Segment totals
153,522

 
43,257

 
136,424

 
38,198

Center/Shared services
(341
)
 
(7,602
)
 

 
(6,719
)
Segment operating income
$
153,181

 
$
35,655

 
$
136,424

 
$
31,479

Segment operating margin percentage
 
 
23
%
 
 
 
23
%

15



The following table reconciles unaudited condensed segment operating income per the reportable segment information to loss before income taxes per the unaudited interim condensed consolidated statements of comprehensive loss.
 
Three months ended June 30,
 
2015
 
2014
 
 
 
 
Segment operating income
$
35,655

 
$
31,479

Depreciation
(5,362
)
 
(5,924)

Amortization of developed technology and content
(11,172
)
 
(9,673)

Amortization of other identifiable intangible assets
(12,565
)
 
(12,268)

Other operating expenses
(6,480
)
 
(4,846
)
Operating income (loss)
76

 
(1,232
)
Net interest expense
(18,510
)
 
(17,415
)
Other finance costs
(559
)
 
(260
)
Loss before income taxes
$
(18,993
)
 
$
(18,907
)

Segment information for the six months ended June 30, 2015 and June 30, 2014 is as follows:

 
Six months ended June 30,
 
2015
 
2014
 
Revenue
 
Segment operating income
 
Revenue
 
Segment operating income
Commercial
$
243,962

 
$
77,488

 
$
209,851

 
$
68,170

Government
53,075

 
28

 
44,836

 
(650
)
Segment totals
297,037

 
77,516

 
254,687

 
67,520

Center/Shared services
(683
)
 
(15,333
)
 

 
(13,075
)
Segment operating income
$
296,354

 
$
62,183

 
$
254,687

 
$
54,445

Segment operating margin percentage
 
 
21
%
 
 
 
21
%

The following table reconciles unaudited condensed segment operating income per the reportable segment information to loss before income taxes per the unaudited interim condensed consolidated statements of comprehensive loss.
 
Six months ended June 30,
 
2015
 
2014
 
 
 
 
Segment operating income
$
62,183

 
$
54,445

Depreciation
(10,497
)
 
(12,517)

Amortization of developed technology and content
(21,981
)
 
(18,869)

Amortization of other identifiable intangible assets
(25,590
)
 
(20,883)

Other operating expenses
(16,818
)
 
(11,375
)
Operating loss
(12,703
)
 
(9,199
)
Net interest expense
(36,982
)
 
(33,689
)
Other finance costs
(1,028
)
 
(336
)
Loss before income taxes
$
(50,713
)
 
$
(43,224
)


16





Reportable segment asset information is not disclosed because it is not reviewed by the CODM for purposes of evaluating performance and allocating resources.

9.     Share-based Compensation

In October 2012, the Company’s immediate parent, Holdings LLC, established a compensation award in accordance with the Operating Agreement to provide Class B Membership Interests in Holdings LLC to certain employees, executive officers of the Company, or non-employee directors of Holdings LLC, not to exceed 6.25% in the aggregate. On April 11, 2014, Holdings LLC amended the Operating Agreement to provide Class B-1 Membership Interests in Holdings LLC to Simpler executives. Class B and B-1 membership interests ("Membership Interests") will both vest 20% on each of the first five anniversaries, subject to certain conditions. In addition, 100% of Membership Interests may vest in certain circumstances in connection with a change in control as defined in the Operating Agreement. Each Membership Interest has the right to receive a percentage of the distribution made by Holdings LLC when the distribution is actually made if such distributions exceed specified internal rates of return thresholds.

There are transfer restrictions on the Membership Interests and the unvested interest would be forfeited upon termination of employment or board membership. A summary of the Membership Interests is as follows:

 
Class B
 
Class B-1
 
Ownership interest (%)
 
Fair value at grant date
 
Ownership interest (%)
 
Fair value at grant date
Total outstanding balance at December 31, 2014
4.4

 
$
6,100

 
0.9

 
$
1,067

Granted

 

 
0.85

 
869

Balance at June 30, 2015
4.4

 
$
6,100

 
1.75

 
$
1,936

Total outstanding and vested as of June 30, 2015
2.4

 
$
3,339

 
0.2

 
$
213


The fair value at the date of grant was based upon the value of the Membership Interests of Holdings LLC less a marketability discount since there is no active market to trade Membership Interests. The marketability discount was determined using a geometric average rate put option model and a Black-Scholes put option model using the expected term, risk-free rate, and volatility for liquidity terms. The value was determined as of the grant date based upon a number of factors, including the amount of investment made in exchange for Membership Interests of Holdings LLC by Veritas Capital and certain members of management of the Company.

The Company recognized compensation expense, net of estimated forfeiture rate of 10% against additional paid in capital of $345 and $399, for the three months ended June 30, 2015 and 2014, respectively, and $656 and $639 for the six months ended June 30, 2015 and 2014 respectively, which is recorded in general and administrative expense in the Company’s unaudited interim condensed consolidated statements of comprehensive loss.

The total unrecognized compensation cost related to nonvested Membership Interests expected to be recognized over the next 5.0 years is $3.7 million.

As of June 30, 2015, 2.6% of Class B and B-1 Membership Interests have vested with an estimated fair value of $2.6 million.

10.
Related Party Transactions
The Company entered into an advisory agreement with the Sponsor, under which the Sponsor provided certain advisory services to the Company. As compensation for the services, the Company paid a transaction fee at the closing of the

17



Prior Acquisition and will continue to pay the Sponsor an annual advisory fee in an aggregate amount equal to the greater of (i) $2.5 million or (ii) 2.0% of consolidated EBITDA (as defined in the Senior Credit Agreement), as well as transaction fees on future acquisitions, divestitures, financings and liquidity events, which will be determined based upon aggregate equity investments at the time of such future events or on the value of the transaction. For the three and six months ended June 30, 2015 the Company recorded an expense for the Sponsor fee of $1.0 million and $2.0 million, respectively. For the three and six months ended June 30, 2014, the company recorded an expense for the Sponsor fee of $0.6 million and $1.2 million, respectively. The Sponsor advisory fee is presented within other operating expenses in the Company's unaudited interim condensed consolidated statements of comprehensive loss. As of June 30, 2015, the Company had sponsor fee payable of $0.4 million included in the accounts payable and accrued expenses account in the balance sheet.
The Company has a sublease arrangement with Thomson Reuters U.S. Inc. as part of the reverse transitional services agreement entered into in connection with the Prior Acquisition which ended on March 31, 2015. There was no sublease income for the three months ended June 30, 2015. The sublease income recognized for the six months ended June 30, 2015 totaled $0.1 million. The sublease income recognized for the three and six months ended June 30, 2014 totaled $0.1 million and $0.2 million, respectively. These were recorded as a reduction to general and administrative expense in the Company's unaudited interim condensed consolidated statements of comprehensive loss.

As part of the Simpler Transaction (see Note 3), the issuance by Holdings LLC of $3.7 million of equity interests to Simpler has been accounted for as additional capital contribution.

On October 11, 2013, the Company received a note receivable of $0.3 million from Holdings LLC, the direct parent company of the Company. The note receivable bears interest at a rate per annum of 1.9%. Interest is payable in arrears on each October 15, commencing on October 15, 2014. In lieu of paying in cash for the interest payments, any accrued but unpaid interest shall be capitalized and added as of such interest payment date to the principal amount of the note receivable. At any time, Holdings LLC may redeem all or any part of the note receivable at a redemption price equal to 100% of the principal amount redeemed plus all interest accrued and unpaid through the redemption date. The note receivable is included in trade and other receivables account in the balance sheet as of June 30, 2015.
11.
Income Taxes
Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. The Company’s intention is to permanently reinvest its foreign earnings outside of the United States. As a result, the effective tax rates in the periods presented are largely based upon the projected annual pre-tax earnings by jurisdiction and the allocation of certain expenses in various taxing jurisdictions where the Company conducts its business. These taxing jurisdictions apply a broad range of statutory income tax rates.

Income tax provision for the three and six months ended June 30, 2015 had an effective tax rate of (0.7)% and (0.8)%, respectively, and income tax benefit for the three and six months ended June 30, 2014 had an effective tax rate of 53.5% and 35.1%, respectively. Income tax benefit in 2015 is different from the amount derived by applying the federal statutory tax rate of 35%, mainly due to the valuation allowance of $8.9 million and $16.9 million for the three and six months ended June 30, 2015, respectively, recorded against the Company's net deferred tax asset as it is not more likely than not that the net deferred tax asset will be realized. Income tax benefit for the three and six months period ended June 30, 2014 is different from the amount derived by applying the federal statutory tax rate of 35%, mainly due to the impact of certain state income taxes partially offset by the impact of nondeductible expenses. The Company and its subsidiaries are subject to U.S. federal income tax as well as income taxes of multiple states and foreign jurisdictions.


18



12.     Commitment and Contingencies
Security and Guarantee Agreements
The Company has entered into guarantee and security arrangements in respect of its indebtedness as described in Note 6.
Contractual Commitments
Revenue Sharing Agreement
Effective January 1, 2013, the Company modified its agreement with a supplier under which it markets and licenses to its customers a private label version of the supplier's platform solution in conjunction with the Company's health information applications. The agreement contains a revenue share arrangement based on net revenue targets. The supplier's revenue share percentage is guaranteed by the Company in the minimum amounts of $2.0 million, $4.0 million and $6.0 million, for the calendar years 2013, 2014 and 2015, respectively. The guaranteed revenue share is paid in advance by the Company on March 1st of each calendar year and is applied against the revenue share of the supplier earned through March 1st of the following calendar year. The agreement provides a grace period for the Company of up to August 31st of the following calendar year in the event that the supplier's revenue share earned does not reach the prepayment amount. After the grace period, if the revenue share earned does not meet the minimum target then the entire prepayment amount is deemed earned by the supplier. During the first quarters of 2015 and 2014, the Company wrote off $6.0 million and $4.7 million of the prepaid balance, respectively, as it was determined that the estimated revenue share of the supplier will not be met within the grace period. As of June 30, 2015, there are no prepaid revenue share balances on the Company's balance sheet.
Litigation and Legal Proceedings
Truven has been named as a defendant in 225 separate pharmaceutical tort lawsuits relating to the use of Reglan or its generic version, the first of which was filed by June 2010 and the rest of which were filed in March 2012. All of these actions are pending in the Court of Common Pleas in Philadelphia County, Pennsylvania. In these matters, the plaintiffs allege that they sustained various injuries (including neurological disorders) as a result of their ingestion of Reglan. While a host of drug manufacturers and pharmacies are named as defendants in each of the suits, claims have also been asserted against so-called “Patient Education Monograph” (“PEM”) defendants, including us. It is generally alleged in all of the actions that certain PEM defendants provided Reglan patient drug information to pharmacies which, in turn, provided that drug information to the pharmacies' customers, the plaintiffs in these actions. Plaintiffs further allege that the PEM defendants' patient drug information did not provide adequate warning information about the use of Reglan. Other PEM defendants have also been named in these and other similar actions. In general, the lawsuits have been procedurally consolidated in Philadelphia as mass tort actions. To date, none of the actions against Truven specifically identifies Truven as the author of a PEM that was supplied to a plaintiff. Instead, plaintiffs in these cases allege only that they read an unnamed PEM and, in effect, that it must have been published by at least one of the PEM defendants named in the action.

Along with other PEM defendants, Truven made one dispositive motion to dismiss all the actions. While that motion to dismiss has been denied, it was without prejudice, permitting Truven to renew at a later stage in the litigation.

Appeals by the co-defendant generic drug company defendants have been exhausted as of May 18, 2015, and there has been no active discovery involving Truven. At this time, we believe that we have meritorious defenses to the claims in each of these actions.

Pacific Alliance Medical Center (“PAMC”) claimed in 2007 that we failed to properly submit some of PAMC’s data, resulting in denial of Medicare reimbursement to PAMC in the approximate amount of $600,000. PAMC was denied relief by administrative agencies and appealed to the U.S. District Court in the Central District of California for judicial review, which was denied. PAMC later appealed to the United States Court of Appeals for the Ninth Circuit which affirmed the District Court's decision. The parties have entered into a tolling agreement pending the outcome of PAMC’s appeals. If a claim is filed against us, we expect to defend it.

19




Truven filed U.S. trademark applications for the trademarks Truven Health Analytics and Truven Health Unify.  In May 2013 and March 2014, respectively, Truveris, Inc. (“Truveris”) filed notices of opposition against these applications in the Trademark Trial and Appeal Board of the United States Patent and Trademark Office alleging that the Truven Health Analytics and Truven Health Unify applications create a likelihood of confusion with Truveris’s alleged common law trademark Truveris as well as its registered trademarks Trubid, Truguard, Trubuy, Trureport and Trurxpay.  Truveris has also alleged that Truven’s use of the Truven alleged mark is likely to cause confusion with Truveris’s alleged trademark. While the parties have engaged in settlement discussions, there can be no assurance that they will conclude successfully, in which event the Company plans to vigorously defend these claims.

The Company is involved in other litigation proceedings arising from the normal course of its operations. Related reserves are recorded when it is probable that liabilities exist and where reasonable estimates of such liabilities can be made.

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

13.     Fair Value Measurement

Fair value is defined under the Fair Value Measurements and Disclosures Topic of the Codification, FASB ASC 820, as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under FASB ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard established a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

• Level 1—Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.

• Level 2—Inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. These are typically obtained from readily-available pricing sources for comparable instruments.

• Level 3—Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own assumptions of the data that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.

Under the Financial Instruments Topic of the Codification, ASC 825, entities are permitted to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value measurement option under ASC 825 for any of its financial assets or liabilities.

The Company has determined that the fair value of accounts receivable and accounts payable approximates carrying value at June 30, 2015 and December 31, 2014 due to short term maturity dates.
 
At June 30, 2015, the carrying amounts and fair values of the Senior Credit Facility and 10.625% Senior Notes were as follows:
 
 
 
Fair values
 
Carrying amounts
 
Level 1
Level 2
Level 3
Senior Term Loan
$
609,257

 
$

$
623,254

$

10.625% Senior Notes
366,902

 

384,590



20



At December 31, 2014, the carrying amounts and fair values of the Senior Credit facility and 10.625% Senior Notes were as follows:
 
 
 
Fair values
 
Carrying amounts
 
Level 1
Level 2
Level 3
Senior Term Loan
$
610,845

 
$

$
603,009

$

10.625% Senior Notes
366,877

 

357,971



Our level 2 inputs are determined based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves.

14.     Supplemental Guarantor Financial Information

Truven has issued the Notes as further described in Note 6. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by Truven Holding Corp. and each of Truven’s existing and future 100% owned domestic restricted subsidiaries that is a borrower under or that guarantees the obligations under the Senior Credit Facility or any other indebtedness of Truven or any other guarantor. All obligations under the Senior Credit Facility are also guaranteed by Truven Holding Corp. and each of Truven’s 100% owned domestic subsidiaries. All obligations under the Senior Credit Facility and the guarantees of those obligations are secured by first priority security interests in substantially all of Truven’s assets, as well as those of each guarantor (subject to certain limited exceptions).

Prior to the series of acquisitions in 2014, the separate financial statements and the condensed consolidating and combining financial information about the comprehensive loss, financial position and cash flows of the Parent, the Issuer, the Guarantors, the non-Guarantors, and eliminations were not presented due to the following:

Truven (the Issuer) is 100% owned by Truven Holding Corp. (the parent company guarantor).
The guarantee by Truven Holding Corp. is full and unconditional and there were no subsidiary guarantors.
Truven Holding Corp. has no independent assets or operations.
The transaction costs related to the Prior Acquisition of $26,734 were incurred and paid for by Wolverine, which was merged with and into TRHI, with TRHI surviving the Merger upon closing of the Prior Acquisition as a 100% owned direct subsidiary of Truven Holding Corp. and subsequently changing its name to Truven Health Analytics Inc.
The subsidiaries of Truven Holding Corp. other than Truven were minor (as defined in Section 3-10(h)(6) of Regulation S-X of the U.S. Securities Act of 1933, as amended (the “Securities Act”), having total assets, stockholders’ equity, revenue, operating income (before income taxes) and cash flows from operating activities of less than 3% of the Company’s corresponding consolidated amounts.

After the series of acquisitions, certain acquired 100% owned domestic subsidiaries became guarantors of the obligations of Truven under the Senior Credit Facility and the Notes starting in second quarter of 2014. In accordance with Section 3-10 of Regulation S-X of the Securities Act, the following condensed consolidating financial statements are provided prospectively to present the statement of comprehensive income (loss), financial position and cash flows of:

(1) Truven Holding Corp., the Parent;
(2) Truven Health Analytics, Inc., the Subsidiary Issuer;
(3) Simpler North America LLC, Simpler Consulting LLC, JWA, and HBE, the Guarantor subsidiaries;
(4) All foreign non-Guarantor subsidiaries; and
(5) eliminations to arrive at the information for Truven Holding Corp. on a consolidated basis.

Separate financial statements and other disclosures concerning the Guarantors are not presented because management does not believe such information is material.

21



Truven Holding Corp.
Unaudited Interim Condensed Consolidated Balance Sheets As of June 30, 2015
 
Parent
Issuer
Guarantor subsidiaries
Non-Guarantor subsidiaries
Eliminations
Consolidated
Assets
 
 
 
 
 
 
Cash and cash equivalents
$

$
10,569

$
4,042

$
1,755

$

$
16,366

Trade and other receivables, net of allowances

77,749

11,885

1,975


91,609

Prepaid expenses and other current assets

26,998

977

551


28,526

Deferred tax asset

267




267

Intercompany receivable

27,595

30,743

52,761

(111,099
)

Total current assets

143,178

47,647

57,042

(111,099
)
136,768

Investment in subsidiaries

106,231



(106,231
)

Computer hardware and other property, net

29,146

151

632


29,929

Developed technology and content, net

117,550

6,902



124,452

Goodwill

457,677

41,143



498,820

Other identifiable intangible assets, net

310,324

46,965



357,289

Other noncurrent assets

17,639


433


18,072

Total assets
$

$
1,181,745

$
142,808

$
58,107

$
(217,330
)
$
1,165,330

Liabilities and Net Equity (Deficit)
 
 
 
 
 
 
Accounts payable and accrued expenses
$

$
55,944

$
8,187

$
2,808

$

$
66,939

Deferred revenue

109,062

6,788

262


116,112

Current portion of long-term debt

6,360




6,360

Capital lease obligation

682




682

Deferred tax liability






Current taxes payable


8

130


138

Intercompany payable

34,744

23,294

53,061

(111,099
)

Total current liabilities

206,792

38,277

56,261

(111,099
)
190,231

Deferred revenue

3,753

127



3,880

Capital lease obligation - noncurrent

1,029




1,029

Long-term debt

969,799




969,799

Accumulated losses of unconsolidated companies in excess of investment
3,298


87


(3,385
)

Deferred tax liabilities

267




267

Other noncurrent liabilities

3,403

19



3,422

Total liabilities
3,298

1,185,043

38,510

56,261

(114,484
)
1,168,628

Equity (deficit)
 
 
 
 
 
 
Common stock






Additional paid-in capital
484,206

484,206

114,090

(69
)
(598,227
)
484,206

Accumulated equity (deficit)
(487,257
)
(487,257
)
(9,754
)
2,297

494,714

(487,257
)
Foreign currency translation adjustment
(247
)
(247
)
(38
)
(382
)
667

(247
)
Total equity (deficit)
(3,298
)
(3,298
)
104,298

1,846

(102,846
)
(3,298
)
Total liabilities and net equity (deficit)
$

$
1,181,745

$
142,808

$
58,107

$
(217,330
)
$
1,165,330


22



Truven Holding Corp.
Consolidated Balance Sheets
As of December 31, 2014
 
Parent
Issuer
Guarantor subsidiaries
Non-Guarantor subsidiaries
Eliminations
Consolidated
Assets
 
 
 
 
 
 
Cash and cash equivalents
$

$
8,243

$
3,264

$
1,097

$

$
12,604

Trade and other receivables, net of allowances

106,181

12,765

1,268


120,214

Prepaid expenses and other current assets

28,574

817

860


30,251

Deferred tax asset

621




621

Intercompany receivable

23,297

39,194

46,799

(109,290
)

Total current assets

166,916

56,040

50,024

(109,290
)
163,690

Investment in subsidiaries
47,123

109,851

(192
)

(156,782
)

Computer hardware and other property, net

36,459

207

769


37,435

Developed technology and content, net

128,917

5,161



134,078

Goodwill

457,677

41,143



498,820

Other identifiable intangible assets, net

327,554

55,325



382,879

Other noncurrent assets

15,951


236


16,187

Total assets
$
47,123

$
1,243,325

$
157,684

$
51,029

$
(266,072
)
$
1,233,089

Liabilities and Net Equity
 
 
 
 
 
 
Accounts payable and accrued expenses
$

$
58,777

$
5,931

$
2,520

$

$
67,228

Deferred revenue

121,903

6,802

424


129,129

Current portion of long-term debt

6,360




6,360

Capital lease obligation

664




664

Deferred tax liability






Current taxes payable



173


173

Intercompany payable

26,086

35,784

47,420

(109,290
)

Total current liabilities

213,790

48,517

50,537

(109,290
)
203,554

Deferred revenue

5,456




5,456

Capital lease obligation - noncurrent

1,374




1,374

Long-term debt

971,362




971,362

Deferred tax liabilities

621




621

Other noncurrent liabilities

3,599




3,599

Total liabilities

1,196,202

48,517

50,537

(109,290
)
1,185,966

Equity
 
 
 
 
 
 
Common stock






Additional paid-in capital
483,550

483,550

114,483

(125
)
(597,908
)
483,550

Accumulated equity (deficit)
(436,123
)
(436,123
)
(5,275
)
1,130

440,268

(436,123
)
Foreign currency translation adjustment
(304
)
(304
)
(41
)
(513
)
858

(304
)
Total
47,123

47,123

109,167

492

(156,782
)
47,123

Total liabilities and net equity
$
47,123

$
1,243,325

$
157,684

$
51,029

$
(266,072
)
$
1,233,089



23



Truven Holding Corp.
Unaudited Interim Condensed Consolidated Statements of Comprehensive Loss
For the Three Months Ended June 30, 2015

 
Parent
Issuer
Guarantor subsidiaries
Non-Guarantor subsidiaries
Eliminations
Consolidated
Revenue, net
$

$
130,644

$
19,878

$
5,401

$
(2,742
)
$
153,181

Operating costs and expenses
Cost of revenue, excluding depreciation and amortization

(73,640
)
(11,103
)
(1,066
)
2,398

(83,411
)
Selling and marketing, excluding depreciation and amortization

(14,217
)
(1,761
)
(1,737
)

(17,715
)
General and administrative, excluding depreciation and amortization

(11,183
)
(3,268
)
(1,949
)

(16,400
)
Depreciation

(5,239
)
(25
)
(98
)

(5,362
)
Amortization of developed technology and content

(10,876
)
(296
)


(11,172
)
Amortization of other identifiable intangible assets

(8,615
)
(3,950
)


(12,565
)
Other operating expenses

(6,491
)
(333
)

344

(6,480
)
Total operating costs and expenses

(130,261
)
(20,736
)
(4,850
)
2,742

(153,105
)
Operating income (loss)

383

(858
)
551


76

    Net interest expense

(18,511
)

1


(18,510
)
  Other finance costs

(485
)
(66
)
(8
)

(559
)
Equity in net income (loss) of subsidiaries
(19,124
)
(511
)
(35
)

19,670


Income (loss) before income taxes
(19,124
)
(19,124
)
(959
)
544

19,670

(18,993
)
Provision for income taxes


(13
)
(118
)

(131
)
Net income (loss)
$
(19,124
)
$
(19,124
)
$
(972
)
$
426

$
19,670

$
(19,124
)
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation adjustments
(247
)
(247
)
(38
)
(382
)
667

(247
)
Total comprehensive income (loss)
$
(19,371
)
$
(19,371
)
$
(1,010
)
$
44

$
20,337

$
(19,371
)






24



Truven Holding Corp.
Unaudited Interim Condensed Consolidated Statements of Comprehensive Loss
For the Three Months Ended June 30, 2014

 
Parent
Issuer
Guarantor subsidiaries
Non-Guarantor subsidiaries
Eliminations
Consolidated
Revenue, net
$

$
125,515

$
9,399

$
4,316

$
(2,806
)
$
136,424

Operating costs and expenses
Cost of revenue, excluding depreciation and amortization

(71,830
)
(4,150
)
(2,546
)
2,806

(75,720
)
Selling and marketing, excluding depreciation and amortization

(14,506
)
(413
)
(893
)

(15,812
)
General and administrative, excluding depreciation and amortization

(10,500
)
(2,523
)
(390
)

(13,413
)
Depreciation

(5,811
)
(12
)
(101
)

(5,924
)
Amortization of developed technology and content

(9,673
)



(9,673
)
Amortization of other identifiable intangible assets

(8,615
)
(3,653
)


(12,268
)
Other operating expenses

(4,816
)
(30
)


(4,846
)
Total operating costs and expenses

(125,751
)
(10,781
)
(3,930
)
2,806

(137,656
)
Operating loss (income)

(236
)
(1,382
)
386


(1,232
)
    Net interest expense

(17,415
)



(17,415
)
  Other finance costs

(88
)

(172
)

(260
)
Equity in net income (loss) of subsidiaries
(8,800
)
(672
)
12


9,460


Income (loss) before income taxes
(8,800
)
(18,411
)
(1,370
)
214

9,460

(18,907
)
Benefit from (provision for) income taxes

9,611

541

(45
)

10,107

Net income (loss)
$
(8,800
)
$
(8,800
)
$
(829
)
$
169

$
9,460

$
(8,800
)
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation adjustments
55

55

7

47

(109
)
55

Total comprehensive income (loss)
$
(8,745
)
$
(8,745
)
$
(822
)
$
216

$
9,351

$
(8,745
)



Truven Holding Corp.
Unaudited Interim Condensed Consolidated Statements of Comprehensive Loss
For the Six Months Ended June 30, 2015


25



 
Parent
Issuer
Guarantor subsidiaries
Non-Guarantor subsidiaries
Eliminations
Consolidated
Revenue, net
$

$
253,948

$
36,541

$
11,339

$
(5,474
)
$
296,354

Operating costs and expenses
Cost of revenue, excluding depreciation and amortization

(148,579
)
(20,577
)
(2,873
)
4,789

(167,240
)
Selling and marketing, excluding depreciation and amortization

(26,937
)
(3,233
)
(3,479
)

(33,649
)
General and administrative, excluding depreciation and amortization

(22,555
)
(7,523
)
(3,204
)

(33,282
)
Depreciation

(10,245
)
(54
)
(198
)

(10,497
)
Amortization of developed technology and content

(21,439
)
(542
)


(21,981
)
Amortization of other identifiable intangible assets

(17,230
)
(8,360
)


(25,590
)
Other operating expenses

(17,079
)
(424
)

685

(16,818
)
Total operating costs and expenses

(264,064
)
(40,713
)
(9,754
)
5,474

(309,057
)
Operating income (loss)

(10,116
)
(4,172
)
1,585


(12,703
)
    Net interest expense

(36,980
)
1

(3
)

(36,982
)
  Other finance costs

(755
)
(182
)
(91
)

(1,028
)
Equity in net income (loss) of subsidiaries
(51,134
)
(3,283
)
(29
)

54,446


Income (loss) before income taxes
(51,134
)
(51,134
)
(4,382
)
1,491

54,446

(50,713
)
Provision for income taxes


(97
)
(324
)

(421
)
Net income (loss)
$
(51,134
)
$
(51,134
)
$
(4,479
)
$
1,167

$
54,446

$
(51,134
)
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation adjustments
57

57

3

131

(191
)
57

Total comprehensive income (loss)
$
(51,077
)
$
(51,077
)
$
(4,476
)
$
1,298

$
54,255

$
(51,077
)


26








Truven Holding Corp.
Unaudited Interim Condensed Consolidated Statements of Comprehensive Loss
For the Six Months Ended June 30, 2014

 
Parent
Issuer
Guarantor subsidiaries
Non-Guarantor subsidiaries
Eliminations
Consolidated
Revenue, net
$

$
243,005

$
9,399

$
8,354

$
(6,071
)
$
254,687

Operating costs and expenses
Cost of revenue, excluding depreciation and amortization

(143,770
)
(4,150
)
(4,160
)
6,071

(146,009
)
Selling and marketing, excluding depreciation and amortization

(27,288
)
(413
)
(1,835
)

(29,536
)
General and administrative, excluding depreciation and amortization

(21,450
)
(2,523
)
(724
)

(24,697
)
Depreciation

(12,319
)
(12
)
(186
)

(12,517
)
Amortization of developed technology and content

(18,869
)



(18,869
)
Amortization of other identifiable intangible assets

(17,230
)
(3,653
)


(20,883
)
Other operating expenses

(11,345
)
(30
)


(11,375
)
Total operating costs and expenses

(252,271
)
(10,781
)
(6,905
)
6,071

(263,886
)
Operating loss (income)

(9,266
)
(1,382
)
1,449


(9,199
)
    Net interest expense

(33,693
)

4


(33,689
)
  Other finance costs

(232
)

(104
)

(336
)
 Equity in net income (loss) of subsidiaries
(28,057
)
431

12


27,614


Income (loss) before income taxes
(28,057
)
(42,760
)
(1,370
)
1,349

27,614

(43,224
)
Benefit from (provision for) income taxes

14,703

541

(77
)

15,167

Net income (loss)
$
(28,057
)
$
(28,057
)
$
(829
)
$
1,272

$
27,614

$
(28,057
)
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation adjustments
(85
)
(85
)
7

(91
)
169

(85
)
Total comprehensive income (loss)
$
(28,142
)
$
(28,142
)
$
(822
)
$
1,181

$
27,783

$
(28,142
)


27











Truven Holding Corp.
Unaudited Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2015


 
Parent
Issuer
Guarantor subsidiaries
Non-Guarantor subsidiaries
Eliminations
Consolidated
Operating activities
 
 
 
 
 
 
Net income (loss)
$
(51,134
)
$
(51,134
)
$
(4,479
)
$
1,167

$
54,446

$
(51,134
)
Non-cash adjustments
51,134

61,932

8,985

198

(54,446
)
67,803

Changes in operating assets and liabilities

8,849

2,724

(513
)

11,060

Net cash provided by operating activities

19,647

7,230

852


27,729

Investing activities
 
 
 
 
 
 
Acquisitions, net of cash acquired

(405
)



(405
)
Capital expenditures

(17,767
)
(2,282
)
(62
)

(20,111
)
Net cash used in investing activities

(18,172
)
(2,282
)
(62
)

(20,516
)
Financing activities
 
 
 
 
 
 
Principal repayment of senior term loan

(3,180
)



(3,180
)
 Intercompany transaction

4,359

(4,038
)
(321
)


Payment of capital lease obligation

(328
)



(328
)
        Additional paid in capital


(57
)
57



Net cash provided by (used in) financing activities

851

(4,095
)
(264
)

(3,508
)
Effect of exchange rate changes in cash and cash equivalents


(75
)
132


57

Increase in cash and cash equivalents

2,326

778

658


3,762

Cash and cash equivalents
 
 
 
 
 
 
     Beginning of period

8,243

3,264

1,097


12,604

     End of period
$

$
10,569

$
4,042

$
1,755

$

$
16,366



28



Truven Holding Corp.
Unaudited Condensed Consolidated Statements of Cash Flows
For the Six months Ended June 30, 2014


 
Parent
Issuer
Guarantor subsidiaries
Non-Guarantor subsidiaries
Eliminations
Consolidated
Operating activities
 
 
 
 
 
 
Net income (loss)
$
(28,057
)
$
(28,057
)
$
(829
)
$
1,272

$
27,614

$
(28,057
)
Non-cash adjustments
28,057

41,261

3,110

77

(27,614
)
44,891

Changes in operating assets and liabilities

6,329

1,730

679


8,738

Net cash provided by operating activities

19,533

4,011

2,028


25,572

Investing activities
 
 
 
 
 
 
Acquisitions, net of cash acquired

(76,270
)



(76,270
)
Capital expenditures

(13,463
)
(14
)
(169
)

(13,646
)
Net cash used in investing activities

(89,733
)
(14
)
(169
)

(89,916
)
Financing activities
 
 
 
 
 
 
Repayment of revolving credit facility

(30,000
)



(30,000
)
Proceeds from senior term loan related to refinancing

100,000




100,000

Principal repayment of senior term loan

(2,927
)



(2,927
)
 Intercompany transaction
 
4,577

(3,290
)
(1,287
)
 

Payment of debt issuance costs

(2,895
)



(2,895
)
Payment of capital lease obligation

(1,340
)



(1,340
)
Net cash provided by (used in) financing activities

67,415

(3,290
)
(1,287
)

62,838

Effect of exchange rate changes in cash and cash equivalents


7

(91
)

(84
)
Increase (decrease) in cash and cash equivalents

(2,785
)
714

481


(1,590
)
Cash and cash equivalents
 
 
 
 
 
 
     Beginning of period

9,573


682


10,255

     End of period
$

$
6,788

$
714

$
1,163

$

$
8,665


29








Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations covers the three and six months ended June 30, 2015 and June 30, 2014. You should read the following discussion and analysis in conjunction with our unaudited interim condensed consolidated financial statements as of June 30, 2015, and the related notes thereto included elsewhere in this quarterly report. The unaudited interim condensed consolidated financial statements for the period ended June 30, 2015 represent the consolidated financial statements of Truven Holding and its subsidiaries.

Note to Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” (as defined in Section 27A of the Securities Act, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that reflect our expectations regarding our future growth, results of operations, performance and business prospects and opportunities. Words such as “anticipates,” “believes,” “plans,” “expects,” “intends,” “estimates,” “projects,” “targets,” “can,” “could,” “may,” “should,” “will,” “would,” and similar expressions have been used to identify these forward-looking statements, but are not the exclusive means of identifying these statements. For purposes of this Quarterly Report on Form 10-Q, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements reflect our current beliefs and expectations and are based on information currently available to us. As such, no assurance can be given that our future growth, results of operations, performance and business prospects and opportunities covered by such forward-looking statements will be achieved. We have no intention or obligation to update or revise these forward-looking statements to reflect new events, information or circumstances.
In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part II, "Item 1A. Risk Factors" and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2014, and those described from time to time in our future reports filed with the SEC.

Overview
We are a leading healthcare analytics solutions and services business focused on quality improvement and cost reduction. We provide analytic solutions and service offerings across the full spectrum of healthcare constituents including state and federal government agencies, hospitals, health systems, employers, health plans, life sciences companies and consumers. We enable such clients to formulate strategy, improve operational, clinical and financial performance, enhance patient outcomes, manage risk and increase transparency.



30





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

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

2014 Acquisitions

Simpler Acquisition
On April 11, 2014, we acquired Simpler, which provides "Lean" enterprise transformation consulting services. This strategic acquisition combines the Company's market-leading cost and quality analytics in the Commercial segment with Simpler's performance management consulting capabilities to deliver performance improvement solutions to healthcare and commercial customers. We acquired all of the outstanding equity of Simpler for a purchase price of $81.1 million, including a working capital adjustment of $1.1 million, and the issuance of equity interests by Holdings LLC, the direct parent of the Company, of $3.7 million to Simpler. The related acquisition costs amounted to $3.6 million. We financed the acquisition and related costs and expenses through an increase in the Tranche B Term Loans under the Senior Credit Facility. We did not assume any indebtedness in connection with the Simpler Transaction.
JWA Acquisition
On October 31, 2014, we acquired JWA, a company that provides "Lean" transformation consulting services to healthcare businesses. We acquired all of the outstanding equity of JWA for a cash purchase price of $15.3 million, including a $1.2 million working capital adjustment and $0.1 million holdback payment. Truven also agreed to pay $1.9 million in three annual payments to a former major shareholder of JWA who became Truven's employee, as long as the former major shareholder remained with Truven for the next three years. The related acquisition costs amounted to $0.6 million. We did not assume any indebtedness in connection with the JWA Transaction. We financed the acquisition and related costs and expenses through the issuance of the Additional Notes.

31





HBE Acquisition
On November 12, 2014, we acquired HBE, a leading provider of global key leader and market access stakeholder information that is essential for life sciences companies to gain drug approval, reimbursement, and adoption, for a cash purchase price of $17.2 million, including negative working capital adjustment of $2.8 million. The related acquisition costs amounted to $1.2 million. We financed the acquisition and related costs and expenses through the issuance of the Additional Notes. We did not assume any indebtedness in connection with the HBE Transaction.
In accordance with the acquisition method of accounting, following the date of each of the foregoing acquisitions, we, with the assistance of a third-party valuation firm, have estimated the fair values of acquired assets and assumed liabilities based on the actual tangible and identifiable intangible assets and liabilities that existed at the date of the acquisitions. These fair values are preliminary and were reflected on our balance sheet on the date of the acquisitions. In this process, we applied certain assumptions as inputs to the valuation calculations. These assumptions represent our best estimates based on historic performance of the respective reporting segments, trends within the market place and our consideration of the potential impact of political, economic and social factors that are considered beyond our control. Significant assumptions included within our discounted cash flow valuation include revenue growth rates, operating profit margins, implied rate of return used and terminal growth rates. Our results of operations, financial position and cash flows are impacted by the effects of the acquisitions, which were financed primarily through borrowings, including transaction-related costs, debt commitment fees and recurring interest costs.


Deferred Revenue: Fair Value Adjustments

Our revenue is derived from the sale of subscription data, and analytics solutions and services. Our revenue from the sale of subscription data and analytics solutions are typically billed annually in advance and recognized on a straight-line basis over the contract term, which is typically one to three years. As a result, cash collections from customers for subscription data and analytic solutions can be greater than the revenue recognized (which only correspond to those revenue associated with services already rendered). In cases of billings in advance or advanced receipt of payments from customers, we record deferred revenue, a liability that is reduced as revenue is recognized. Our revenue from services are invoiced according to the terms of the contract, typically in arrears (after the corresponding services have been rendered), and recognized over the term of the contract. Contracts for services vary in length from a few months to several years. During the acquisition of the healthcare business of Thomson Reuters on June 6, 2012 (referred to as the "Prior Acquisition"), the carrying value of our deferred revenue totaled $138.7 million. With the assistance of a third-party valuation firm, we determined that the fair value of our deferred revenue should be adjusted to $80.2 million. As a result, deferred revenue on certain contracts of $58.5 million was written off. Following the acquisitions of Simpler, HBE and JWA during 2014, the carrying values of deferred revenue from acquired companies totaled $11.7 million, and with the assistance of a third-party valuation firm, it was determined that the fair value of the deferred revenue should be adjusted to $4.8 million. As a result, deferred revenue on certain contracts of $6.9 million was written off. These write-offs on deferred revenue negatively impacted our revenue subsequent to the acquisitions.

During the three and six months ended June 30, 2015, our revenue was negatively impacted by $1.9 million and $3.9 million, respectively. For the three and six months ended June 30, 2014, our revenue was negatively impacted by $0.7 million and $1.4 million, respectively. The write-offs will have a future aggregate negative impact to revenue of $3.3 million in future periods.

Results of Operations

The following section provides a comparative discussion of our results of operations for the three and six months ended June 30, 2015 and 2014, and should be read in conjunction with our unaudited condensed consolidated financial statements for these periods and the related notes thereto, included elsewhere in this quarterly report. Factors that relate primarily to a specific business segment are discussed in more detail within that business segment. For a discussion of

32



critical accounting policies affecting our financial condition and results of operation, see the “Critical Accounting Policies” section herein.

The following table summarizes our unaudited interim condensed consolidated results of operations for the three months ended June 30, 2015 and 2014:
(Dollars in thousands)
Three months ended June 30, 2015
 
% of revenue
 
Three months ended June 30, 2014
 
% of revenue
 
Change
 
% change
 
 
 
 
 
 
 
 
 
 
 
 
Revenue, net(a)
$
153,181

 
100
 %
 
$
136,424

 
100
 %
 
$
16,757

 
12
 %
Operating costs and expenses
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue, excluding depreciation and amortization(b)
(83,411
)
 
(54
)%
 
(75,720
)
 
(56
)%
 
(7,691
)
 
10
 %
Selling and marketing, excluding depreciation and amortization(c)
(17,715
)
 
(12
)%
 
(15,812
)
 
(12
)%
 
(1,903
)
 
12
 %
General and administrative, excluding depreciation and amortization(d)
(16,400
)
 
(11
)%
 
(13,413
)
 
(10
)%
 
(2,987
)
 
22
 %
Depreciation(e)
(5,362
)
 
(4
)%
 
(5,924
)
 
(4
)%
 
562

 
(9
)%
Amortization of developed technology and content(f)
(11,172
)
 
(7
)%
 
(9,673
)
 
(7
)%
 
(1,499
)
 
15
 %
Amortization of other identifiable intangible assets(g)
(12,565
)
 
(8
)%
 
(12,268
)
 
(9
)%
 
(297
)
 
2
 %
Other operating expenses(h)
(6,480
)
 
(4
)%
 
(4,846
)
 
(4
)%
 
(1,634
)
 
34
 %
Total operating costs and expenses
(153,105
)
 
(100
)%
 
(137,656
)
 
(101
)%
 
(15,449
)
 
11
 %
Operating income (loss)
76

 
 %
 
(1,232
)
 
(1
)%
 
1,308

 
(106
)%
Net interest expense (i)
(18,510
)
 
(12
)%
 
(17,415
)
 
(13
)%
 
(1,095
)
 
6
 %
Other finance costs
(559
)
 
 %
 
(260
)
 
 %
 
(299
)
 
115
 %
Loss before income taxes
(18,993
)
 
(12
)%
 
(18,907
)
 
(14
)%
 
(86
)
 
 %
Benefit from (provision for) income taxes
(131
)
 
 %
 
10,107

 
7
 %
 
(10,238
)
 
(101
)%
Net loss
$
(19,124
)
 
(12
)%
 
$
(8,800
)
 
(6
)%
 
$
(10,324
)
 
117
 %
 
 
 
 
 
 
 
 
 
 
 
 
(a) Includes (i) subscription revenue from sales of products and services that are delivered under a contract over a period of time, which are recognized on a straight line basis over the term of the subscription, (ii) revenues from implementation and hosting arrangement that included: (1) the design, production, testing and installation of the customer's database (implementation phase); and (2) the provision of ongoing data management and support services in conjunction with the licensed data and subscription of software data or application (on-going service phase, hosting or subscription).
(b)
Includes all personnel and other costs attributable to a revenue stream, including but not limited to, client support, client operations, product management, royalties, allocation of technology support costs relating to market data and professional service costs.
(c)
Includes all personnel and other costs related to sales and marketing, including but not limited to, sales and marketing staff, commissions and marketing events.
(d)
Includes all personnel and other costs related to general administration as well as costs shared across the organization, including but not limited to technology, finance and strategy.
(e) Includes depreciation of computer hardware, furniture, fixture and equipments, and leasehold improvements.
(f) Includes amortization of developed technology and contents used internally and capitalized once a project has progressed beyond a conceptual, preliminary stage to that of application development stage. Costs that qualify for capitalization include both internal and external costs, but are limited to those that are directly related to a specific project.
(g)
Includes amortization of definite-lived trademarks and trade names, backlogs, non-compete agreements and acquired customer relationship assets.

33



(h)
In 2015, other operating expenses included severance expense for certain positions that were eliminated as part of the change in the Company's operating segment structure and continuous streamlining of other positions within the organization to improve our business decision-making process, asset write-offs, acquisition-related costs and non-recurring charges as a result of integrating the acquired businesses to the Company, and a Sponsor fee for Veritas Capital. In 2014, other operating expenses included legal costs related to the acquisition of Simpler in April 2014, asset write-offs and other professional fees incurred related to business improvement processes. See Note 7 to the condensed consolidated financial statements included elsewhere in this quarterly report.
(i)
Interest earned or paid, net of interest income related to third party transactions.

Discussion of three months ended June 30, 2015 and 2014
Revenue, net
Our net revenue was $153.2 million for the three months ended June 30, 2015 as compared to $136.4 million for the three months ended June 30, 2014, an increase of $16.8 million or 12%. The increase was primarily due to the $12.1 million increase in revenue from our Commercial segment and $5.0 million increase in revenue from our Government segment. The increase in revenue from our Commercial segment was primarily due to the $7.2 million of revenue from operations of HBE and JWA, the two businesses we acquired in the fourth quarter of 2014 and an increase of $4.8 million from our Lean enterprise transformation consulting services due to demand from new customers. The increase in revenue from our Government segment was primarily due to new contract revenues from our federal and state channels.
The total impact on revenue related to the deferred revenue adjustment in connection with the Prior Acquisition and acquisitions during 2014 amounted to $1.9 million in 2015 compared to $0.7 million in 2014.
For a more detailed explanation of the variations in revenue for each of our segments, see the individual segment discussions below.
Cost of revenues, excluding depreciation and amortization
Our cost of revenues, excluding depreciation and amortization, was $83.4 million for the three months ended June 30, 2015 as compared to $75.7 million for the three months ended June 30, 2014, an increase of $7.7 million, or 10%. The increase was mainly due to cost of revenues from the operations of our businesses acquired in 2014 of $6.4 million. The remaining increase was a function of higher overall project costs corresponding to the higher revenues mainly due to our Government segment.
Selling and marketing expense, excluding depreciation and amortization
Our selling and marketing expense, excluding depreciation and amortization, was $17.7 million for the three months ended June 30, 2015 as compared to $15.8 million for the three months ended June 30, 2014, an increase of $1.9 million or 12%, which is mainly due to selling and marketing expenses attributable to the operations of our businesses acquired in 2014.
General and administrative expense, excluding depreciation and amortization
Our general and administrative expense, excluding depreciation and amortization, was $16.4 million for the three months ended June 30, 2015 as compared to $13.4 million for the three months ended June 30, 2014, an increase of $3.0 million, or 22%. The increase was primarily due to $1.7 million of additional general and administrative expenses attributable to the operations of our businesses acquired in 2014. The remaining increase relates mainly to incremental salaries and wages expense which increased as a result of the further growth of the Company’s accounting, internal audit, procurement, and human resource departments, as well as from the additional hiring of senior executive management in operations.

34



Depreciation and amortization
Our depreciation and amortization expense was $29.1 million for the three months ended June 30, 2015 as compared to $27.9 million for the three months ended June 30, 2014, an increase of $1.2 million or 4%. This increase was primarily due to the overall increase in developed technology and content as we continue to enhance our products. In addition, developed technology and content also increased as a result of the acquisition of HBE in the fourth quarter of 2014.
Other operating expenses
Our other operating expense was $6.5 million for the three months ended June 30, 2015 as compared to $4.8 million for the three months ended June 30, 2014, an increase of $1.6 million or 34%. The increase was mainly due to the $0.9 million accrual related to a legal settlement, a $0.4 million increase in the Sponsor fee paid to Veritas Capital, and a $0.3 million increase in severance costs as part of our continuous streamlining of certain positions within the organization to improve our business decision-making process.
Operating income (loss)
Our operating income was $0.1 million for the three months ended June 30, 2015 as compared to an operating loss of $1.2 million for the three months ended June 30, 2014, an increase in operating income of $1.3 million, or 106%. The increase in operating income was primarily due to a $16.8 million increase in revenue while total operating expenses increased by $15.4 million, each as discussed above.
Net interest expense
Our net interest expense was $18.5 million for the three months ended June 30, 2015, as compared to $17.4 million for the three months ended June 30, 2014, an increase of $1.1 million, or 6%. The increase was primarily due to the incurrence of $140.0 million of additional debt used to finance the acquisitions in 2014.

Benefit from (provision for) income taxes

Our income tax provision was $0.1 million for the three months ended June 30, 2015, as compared to an income tax benefit of $10.1 million for the three months ended June 30, 2014, an increase of $10.2 million or 101%. Income tax provision for the three months ended June 30, 2015, at an effective tax rate of (0.7)%, is different from the amount derived by applying the federal statutory tax rate of 35%, mainly due to the impact of a valuation allowance of $8.9 million recorded against the Company's net deferred tax asset as it is not more likely than not that the net deferred tax asset will be realized. Income tax benefit for the three months ended June 30, 2014, at an effective tax rate of 53.5%, is different from the amount derived by applying the federal statutory tax rate of 35%, mainly due to the impact of certain state income taxes, partially offset by non-deductible expenses.

Segment Discussion

The following table summarizes our unaudited interim condensed consolidated segment information and discussion of the results of our operations for the three months ended June 30, 2015 and June 30, 2014:

35



(Dollars in thousands)
Three months ended June 30, 2015
 
% of revenue
 
Three months ended June 30, 2014
 
% of revenue
 
Change
 
% change
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
125,582

 
100
%
 
$
113,500

 
100
 %
 
$
12,082

 
11
%
Segment operating income
41,952

 
33
%
 
38,210

 
34
 %
 
3,742

 
10
%
Government
 
 
 
 
 
 
 
 
 
 
 
Revenue
27,940

 
100
%
 
22,924

 
100
 %
 
5,016

 
22
%
Segment operating income (loss)
1,305

 
5
%
 
(12
)
 
 %
 
1,317

 
n.m.


Commercial segment

Revenue
Our Commercial revenue was $125.6 million for the three months ended June 30, 2015 as compared to $113.5 million for the three months ended June 30, 2014, an increase of $12.1 million or 11%. The increase was primarily due to the $7.2 million of revenue from operations of HBE and JWA, the two businesses we acquired in the fourth quarter of 2014. Additionally, revenue increased by $4.8 million primarily from our Lean enterprise transformation consulting services due to demand from new customers.

Operating income
Our Commercial operating income was $42.0 million for the three months ended June 30, 2015 as compared to $38.2 million for the three months ended June 30, 2014, an increase of $3.7 million or 10%. This was partially due to the $1.3 million of incremental operating income from the business operations of HBE and JWA, which were acquired during the fourth quarter of 2014. The remaining increase of $2.4 million in operating income is primarily due to higher revenue as discussed above.

Government segment

Revenue
Our Government revenue was $27.9 million for the three months ended June 30, 2015 as compared to $22.9 million for the three months ended June 30, 2014, an increase of $5.0 million or 22%. This was primarily due to new contract revenues from our federal and state channels of $2.1 million and $2.6 million, respectively.

Operating income (loss)
Our Government operating income was $1.3 million for the three months ended June 30, 2015 as compared to almost break-even for the three months ended June 30, 2014. This was primarily due to the $5.0 million increase in revenue as discussed above, offset by a corresponding increase in project costs on new contracts.



36



The following table summarizes our unaudited interim condensed consolidated results of operations for the six months ended June 30, 2015 and 2014:
(Dollars in thousands)
Six months ended June 30, 2015
 
% of revenue
 
Six months ended June 30, 2014
 
% of revenue
 
Change
 
% change
 
 
 
 
 
 
 
 
 
 
 
 
Revenue, net(a)
$
296,354

 
100
 %
 
$
254,687

 
100
 %
 
$
41,667

 
16
 %
Operating costs and expenses
 
 
 
 
 
 
 
 
 
 

Cost of revenue, excluding depreciation and amortization(b)
(167,240
)
 
(56
)%
 
(146,009
)
 
(57
)%
 
(21,231
)
 
15
 %
Selling and marketing, excluding depreciation and amortization(c)
(33,649
)
 
(11
)%
 
(29,536
)
 
(12
)%
 
(4,113
)
 
14
 %
General and administrative, excluding depreciation and amortization(d)
(33,282
)
 
(11
)%
 
(24,697
)
 
(10
)%
 
(8,585
)
 
35
 %
Depreciation(e)
(10,497
)
 
(4
)%
 
(12,517
)
 
(5
)%
 
2,020

 
(16
)%
Amortization of developed technology and content(f)
(21,981
)
 
(7
)%
 
(18,869
)
 
(7
)%
 
(3,112
)
 
16
 %
Amortization of other identifiable intangible assets(g)
(25,590
)
 
(9
)%
 
(20,883
)
 
(8
)%
 
(4,707
)
 
23
 %
Other operating expenses(h)
(16,818
)
 
(6
)%
 
(11,375
)
 
(4
)%
 
(5,443
)
 
48
 %
Total operating costs and expenses
(309,057
)
 
(104
)%
 
(263,886
)
 
(104
)%
 
(45,171
)
 
17
 %
Operating loss
(12,703
)
 
(4
)%
 
(9,199
)
 
(4
)%
 
(3,504
)
 
38
 %
Net interest expense (i)
(36,982
)
 
(12
)%
 
(33,689
)
 
(13
)%
 
(3,293
)
 
10
 %
Other finance costs
(1,028
)
 
 %
 
(336
)
 
 %
 
(692
)
 
206
 %
Loss before income taxes
(50,713
)
 
(17
)%
 
(43,224
)
 
(17
)%
 
(7,489
)
 
17
 %
Benefit from (provision for) income taxes
(421
)
 
 %
 
15,167

 
6
 %
 
(15,588
)
 
(103
)%
Net loss
$
(51,134
)
 
(17
)%
 
$
(28,057
)
 
(11
)%
 
$
(23,077
)
 
82
 %
(a) Includes (i) subscription revenue from sales of products and services that are delivered under a contract over a period of time, which are recognized on a straight line basis over the term of the subscription, (ii) revenues from implementation and hosting arrangement that included: (1) the design, production, testing and installation of the customer's database (implementation phase); and (2) the provision of ongoing data management and support services in conjunction with the licensed data and subscription of software data or application (on-going service phase, hosting or subscription).
(b)
Includes all personnel and other costs attributable to a revenue stream, including but not limited to, client support, client operations, product management, royalties, allocation of technology support costs relating to market data and professional service costs.
(c)
Includes all personnel and other costs related to sales and marketing, including but not limited to, sales and marketing staff, commissions and marketing events.
(d)
Includes all personnel and other costs related to general administration as well as costs shared across the organization, including but not limited to technology, finance and strategy.
(e) Includes depreciation of computer hardware, furniture, fixture and equipments, and leasehold improvements.
(f) Includes amortization of developed technology and contents used internally and capitalized once a project has progressed beyond a conceptual, preliminary stage to that of application development stage. Costs that qualify for capitalization include both internal and external costs, but are limited to those that are directly related to a specific project.
(g)
Includes amortization of definite‑lived trademarks and trade names, backlogs, non-compete agreements and acquired customer relationship assets.
(h)
In 2015, other operating expenses included severance expense for certain positions that were eliminated as part of the change in the Company's operating segment structure and continuous streamlining of other positions within the organization to improve our business decision-making process, asset write-offs, acquisition-related costs and non-recurring charges as a result of integrating the acquired businesses to the Company, and a Sponsor fee for Veritas Capital. In 2014, other operating expenses included legal costs related to the acquisition of Simpler in April 2014, asset write-offs and other

37



professional fees incurred related to business improvement processes. See Note 7 to the condensed consolidated financial statements included elsewhere in this quarterly report.
(i)
Interest earned or paid, net of interest income related to third party transactions.

Discussion of six months ended June 30, 2015 and 2014
Revenue, net
Our net revenue was $296.4 million for the six months ended June 30, 2015 as compared to $254.7 million for the six months ended June 30, 2014, an increase of $41.7 million or 16%. The increase was primarily due to the $34.1 million increase in revenue from our Commercial segment and $8.2 million increase in revenue from our Government segment. The increase in revenue from the Commercial segment was due to $13.2 million of revenue from the operations of HBE and JWA, the two businesses we acquired in the fourth quarter of 2014. In addition, our revenue from Lean enterprise transformation consulting services that we acquired on April 11, 2014, is higher by $18.6 million, of which $3.8 million was mainly due to revenue from new customers and $14.8 million was due to the benefit of having 6 months of revenue in 2015 compared to 2.5 months in 2014. The remaining increase in revenue was due to our strategic consulting and outcome research products due to higher demand. The increase in revenue from our Government segment was primarily due to new contract revenues from our federal and state channels.
The total impact on revenue related to the deferred revenue adjustment in connection with the Prior Acquisition and acquisitions during 2014 amounted to $3.9 million in 2015 compared to $1.3 million in 2014.
For a more detailed explanation of the variations in revenue for each of our segments, see the individual segment discussions below.
Cost of revenues, excluding depreciation and amortization
Our cost of revenue, excluding depreciation and amortization, was $167.2 million for the six months ended June 30, 2015 as compared to $146.0 million for the six months ended June 30, 2014, an increase of $21.2 million, or 15%. The increase was mainly due to the cost of revenues from the operations of our businesses acquired in 2014 of $17.1 million. The remaining increase was a function of higher overall project costs corresponding to the higher revenue related to the Government segment.
Selling and marketing expense, excluding depreciation and amortization
Our selling and marketing expense, excluding depreciation and amortization, was $33.6 million for the six months ended June 30, 2015 as compared to $29.5 million for the six months ended June 30, 2014, an increase of $4.1 million, or 14%, which is mainly due to the newly acquired businesses in 2014.
General and administrative expense, excluding depreciation and amortization
Our general and administrative expense, excluding depreciation and amortization, was $33.3 million for the six months ended June 30, 2015 as compared to $24.7 million for the six months ended June 30, 2014, an increase of $8.6 million, or 35%. The increase was primarily due to $6.7 million of incremental general and administration expenses attributable to the businesses acquired in 2014. The remaining increase relates mainly to incremental salaries and wages expense which increased as a result of the further growth of the Company’s accounting, internal audit, procurement, and human resource departments, as well as from the additional hiring of senior executive management in operations.
Depreciation and amortization
Our depreciation and amortization expense was $58.1 million for the six months ended June 30, 2015 as compared to $52.3 million for the six months ended June 30, 2014, an increase of $5.8 million or 11%. This increase was primarily due to $5.3 million of depreciation and amortization from the businesses acquired in 2014.

38



.
Other operating expenses
Our other operating expense was $16.8 million for the six months ended June 30, 2015 as compared to $11.4 million for the six months ended June 30, 2014, an increase of $5.4 million or 48%. The increase was mainly due to the $2.1 million increase in acquisition-related cost and expenses incurred to integrate the acquired businesses, $1.3 million increase in write-off of prepaid revenue share arrangement that will not be recovered, $0.9 million increase in accrual related to settlement of a legal case in the normal course of business, $0.8 million increase in the Sponsor fee from Veritas Capital and $0.3 million increase in severance expense as part of our continuous streamlining of other positions within the organization to improve our business decision-making process.
Operating loss
Our operating loss was $12.7 million for the six months ended June 30, 2015 as compared to $9.2 million for the six months ended June 30, 2014, an increase of $3.5 million, or 38%. The increase in operating loss was primarily due to a $41.7 million increase in revenue while total operating expenses increased by $45.2 million, each as discussed above.
Net interest expense
Our net interest expense was $37.0 million for the six months ended June 30, 2015, as compared to $33.7 million for the six months ended June 30, 2014, an increase of $3.3 million, or 10%. The increase was primarily due to the incurrence of $140.0 million of additional debt used to finance the acquisitions in 2014.

Benefit from (provision for) income taxes

Our income tax expense was $0.4 million for the six months ended June 30, 2015 as compared to a benefit of $15.2 million for the six months ended June 30, 2014, a decrease of $15.6 million or 103%. Income tax benefit for the six months ended June 30, 2015 at an effective tax rate (0.8)%, is different from the amount derived by applying the federal statutory tax rate of 35%, mainly due to the valuation allowance of $16.9 million recorded against the Company's net deferred tax asset as it is not more likely than not that the net deferred tax asset will be realized. Income tax benefit for the six months ended June 30, 2014 at an effective tax rate of 35.1%, is different from the amount derived by applying the federal statutory tax rate of 35%, mainly due to the impact of certain state income taxes, partially offset by non-deductible expenses.

Segment Discussion

The following table summarizes our unaudited interim condensed consolidated segment information and discussion of the results of our operations for the six months ended June 30, 2015 and June 30, 2014:

(Dollars in thousands)
Six months ended June 30, 2015
 
% of revenue
 
Six months ended June 30, 2014
 
% of revenue
 
Change
 
% change
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
243,962

 
100
%
 
$
209,851

 
100
 %
 
$
34,111

 
16
 %
Segment operating income
77,488

 
32
%
 
68,170

 
32
 %
 
9,318

 
14
 %
Government
 
 
 
 
 
 
 
 
 
 
 
Revenue
53,075

 
100
%
 
44,836

 
100
 %
 
8,239

 
18
 %
Segment operating income (loss)
28

 
%
 
(650
)
 
(1
)%
 
678

 
(104
)%


39



Commercial segment

Revenue
Our Commercial revenue was $244.0 million for the six months ended June 30, 2015 as compared to $209.9 million for the six months ended June 30, 2014, an increase of $34.1 million or 16%. Commercial revenue increased by $13.2 million due to revenues from HBE and JWA, which were acquired in the fourth quarter of 2014. In addition, our revenue from Lean enterprise transformation consulting services that we acquired on April 12, 2014, is higher by $18.6 million, of which $3.8 million was due to revenue from new customers and $14.8 million was due to the benefit of having 6 months of revenue in 2015 compared to 2.5 months in 2014. The remaining increase was primarily due to our strategic consulting and outcome research products due to higher demand.

Operating income
Our Commercial operating income was $77.5 million for the six months ended June 30, 2015 as compared to $68.2 million for the six months ended June 30, 2014, an increase of $9.3 million or 14%. This was partially due to the $0.7 million of incremental operating income from the business operations of HBE and JWA, which were acquired during the fourth quarter of 2014. The remaining increase of $8.6 million in operating income is primarily due to higher revenue as discussed above, of which $2.9 million came from our Lean enterprise transformation consulting services.

Government segment

Revenue
Our Government revenue was $53.1 million for the six months ended June 30, 2015 as compared to $44.8 million for the six months ended June 30, 2014, an increase of $8.2 million or 18%. This was primarily due to new contract revenue from our Federal and State channels of $4.6 million and $3.3 million, respectively. The deferred revenue adjustment for the six months ended June 30, 2015 and 2014 was $0.8 million and $0.9 million, respectively.

Operating income (loss)
Our Government operating income was about break-even for the six months ended June 30, 2015 as compared to operating loss of $0.7 million for the six months ended June 30, 2014, a decrease in operating loss of $0.7 million. The decrease in operating loss mostly relates to the revenue related to large new projects that started in 2015.


Non-GAAP Measures

EBITDA and Adjusted EBITDA Calculation
EBITDA is defined as net income before net interest (expense) income, provision for income taxes, and depreciation and amortization, and is used by management to measure the overall operating performance of the business at a consolidated level. Adjusted EBITDA is defined as EBITDA, adjusted to exclude certain items of a significant or unusual nature, including but not limited to acquisition and related costs, acquisition related non-cash adjustments (e.g. deferred revenue fair value adjustments), non-cash compensation expense, restructuring costs, Veritas sponsor fees, gains or losses on the sale of non-strategic assets, asset impairments and write-downs. We also use EBITDA and Adjusted EBITDA as a measure to calculate certain financial covenants related to the Senior Credit Facility and as a factor in our tangible and intangible asset impairment testing.

EBITDA and Adjusted EBITDA are supplemental measures of our overall performance and our ability to service debt that are not required by, or presented in accordance with GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income or other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as measures of our liquidity. In addition, our measurements of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Management believes that the presentation of EBITDA and Adjusted EBITDA and the ratios using EBITDA and Adjusted EBITDA included in this quarterly report provide useful information to investors regarding our results of operations because they assist in analyzing and benchmarking the performance and value of our business.

40



EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP. Some of these limitations are:
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
EBITDA and Adjusted EBITDA do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes;
EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
EBITDA and Adjusted EBITDA do not reflect pension and post-retirement obligations;
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 and Adjusted EBITDA do not reflect any cash requirements for such replacements; and
other companies in our industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as a measure of cash that will be available to us to meet our obligations.

The following table is a reconciliation of our net loss to EBITDA and Adjusted EBITDA for the three and six months ended June 30, 2015 and June 30, 2014 presented:

 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
2015
2014
 
2015
2014
 
 
 
 
 
Net loss
$
(19,124
)
$
(8,800
)
 
$
(51,134
)
$
(28,057
)
Provision for (Benefit from) income tax
131

(10,107
)
 
421

(15,167
)
Net interest expense
18,510

17,415

 
36,982

33,689

Depreciation
5,362

5,924

 
10,497

12,517

Amortization of developed technology and content
11,172

9,673

 
21,981

18,869

Amortization of other identifiable intangible assets
12,565

12,268

 
25,590

20,883

EBITDA
28,616

26,373

 
44,337

42,734

Acquisition related and other nonrecurring charges(1)
5,438

4,245

 
8,795

5,427

     Non-cash stock compensation expense
345

399

 
656

639

Deferred revenue adjustments(2)
1,892

745

 
3,943

1,417

Asset write-off (3)


 
6,000

4,706

Other(4)
1,042

600

 
2,023

1,241

Adjusted EBITDA
$
37,333

$
32,362

 
$
65,754

$
56,164

(1)
Acquisition-related costs and non-recurring charges in 2015 mainly represent costs including professional fees as a result of integrating the acquired businesses to the Company and a loss on a legal settlement. Acquisition-related costs and non-recurring charges in 2014 included legal costs related to the acquisition of Simpler in April 2014 ( see Note 3) and other professional fees incurred related to business improvement processes. See Note 7 to the unaudited condensed consolidated financial statements, included elsewhere in this quarterly report.
(2)
Amount of the reduction in deferred revenue as a result of the Prior Acquisition and acquisitions of businesses in 2014 that negatively impacted our revenue. We wrote down the value of our deferred revenue at acquisition dates based on valuation analysis.
(3)
Represents write-off of prepaid revenue share with a supplier. See Note 12 to the unaudited condensed consolidated financial statements, included elsewhere in this quarterly report).
(4)
Represents Sponsor advisory fees in connection with the Prior Acquisition.

41



Liquidity and Capital Resources
Cash flows
The following table summarizes our cash activities:
(Dollars in thousands)
Six months ended June 30,

2015
 
2014
 
 
 
 
Net cash provided by operating activities
$
27,729

 
$
25,572

Net cash used in investing activities
(20,516
)
 
(89,916
)
Net cash provided by (used in) financing activities
(3,508
)
 
62,838

Operating activities
Cash provided by operating activities for the six months ended June 30, 2015 was $27.7 million as compared to $25.6 million for the six months ended June 30, 2014, an increase of $2.2 million. The net increase was mainly due to $11.2 million of higher cash receipts from customers as a result of improved collection efforts and higher billed revenue, offset by a $3.1 million increase in interest payments as a result of the incurrence of $140.0 million of additional debt to finance acquisitions in 2014 and $6.0 million in higher payments to various suppliers mainly due to timing of cash payments related to new projects.

Investing activities
Cash used in investing activities for the six months ended June 30, 2015 was $20.5 million, as compared to $89.9 million for the six months ended June 30, 2014. The decrease was mainly due to the acquisition of Simpler in 2014. The net cash paid in 2014 amounted to $76.3 million compared to net cash paid of $0.4 million in 2015 related to the net final working capital adjustments. The decrease was offset by $6.5 million of higher capital expenditures related to computer hardware and developed technology and content in the normal course of business.

Financing activities
Cash used in financing activities for the six months ended June 30, 2015 was $3.5 million. This amount consisted of $3.2 million principal repayment of the Senior Term Loan Facility and $0.3 million principal payment of capital lease obligation.
Cash provided by financing activities for the six months ended June 30, 2014 was $62.8 million. This amount consisted of $100.0 million of incremental loan to finance the Simpler Transaction, offset by $30.0 million repayment of Revolving Credit Facility, $2.9 million debt issuance costs, $2.9 million principal repayment of the Senior Term Loan Facility and $1.3 million principal payment of capital lease obligation.
Liquidity and Capital Resources

We believe that our cash flows from operations and our existing available cash, together with our other available external financing sources, will be adequate to meet our future liquidity needs for the next twelve months. Our principal liquidity needs will be to fund capital expenditures, provide working capital, meet debt service requirements and finance our strategic plans, including possible acquisitions. We expect to spend approximately $12.9 million on capital expenditures for the remainder of 2015 (excluding acquisitions and related costs); however, actual capital expenditures may differ. For ongoing liquidity purposes, we primarily intend to utilize our existing cash and cash equivalents, cash generated from operations and borrowings under our Revolving Credit Facility.

Our cash position is impacted by our billings from on-going services and subscription contracts. Typically, a significant portion of the contract revenue is paid upfront and most contracts are renewed during the latter part of the fourth quarter.

42



Many renewals are billed in December and January, and contract revenue from such renewals are normally collected in the first quarter of each calendar year. As such, we have historically experienced a low level of cash every third quarter of each calendar year, but our level of cash during such period and throughout the year may vary depending on any new significant contracts that we may enter into. Such contracts may be driven by state government projects, and are typically entered into concurrent with the start of the state government’s fiscal year.

Indebtedness

As of June 30, 2015, the aggregate principal amount of our outstanding indebtedness was $988.8 million, consisting of $621.7 million under the Term Loan Facility and $367.1 million of Notes.
A discussion of our outstanding indebtedness as of June 30, 2015 is below:
Senior Credit Facility
The Senior Credit Facility, as amended on April 11, 2014, is with a syndicate of banks and other financial institutions and provides financing of up to $679.7 million, consisting of a $629.7 million Term Loan Facility with a maturity date of June 6, 2019 and the $50.0 million Revolving Credit Facility with a maturity date of June 6, 2017. As of June 30, 2015, the Company had outstanding letters of credit of $7.5 million, which, while not drawn, reduce the available line of credit under the Revolving Credit Facility to $42.5 million.
Borrowings under the Senior Credit Facility, other than swing line loans, bear interest at a rate per annum equal to an applicable margin plus, at Truven's option, either (a) a base rate determined by reference to the highest of (1) the prime rate of JPMorgan Chase Bank, N.A., (2) the federal funds effective rate plus 0.50% and (3) the one month Eurodollar rate plus 1.00%; provided, that the base rate for the Term Loan Facility at any time shall not be less than 2.25%, or (b) a Eurodollar rate adjusted for statutory reserve requirements for a one, two, three or six month period (or a nine or twelve month interest period if agreed to by all applicable lenders); provided that the Eurodollar base rate used to calculate the Eurodollar rate for the Term Loan Facility at any time shall not be less than 1.25%. Swing line loans will bear interest at the interest rate applicable to base rate loans, plus an applicable margin. In addition to paying interest on outstanding principal under the Senior Credit Facility, we are required to pay a commitment fee to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder at a rate equal to 0.50% (subject to reduction upon attainment of certain leverage ratios). We will also pay customary letter of credit fees and certain other agency fees. Truven may voluntarily repay outstanding loans under the Senior Credit Facility at any time without premium or penalty, other than customary “breakage” costs with respect to adjusted LIBOR loans. We are required to repay $1.6 million of the Term Loan Facility quarterly, through March 31, 2019, with any remaining balance due June 6, 2019.
All obligations under the Senior Credit Facility are guaranteed by Truven Holding and each of Truven's existing and future wholly-owned domestic subsidiaries. All obligations under the Senior Credit Facility and the guarantees of those obligations are collateralized by first priority security interests in substantially all of Truven's assets as well as those of each guarantor (subject to certain limited exceptions).
The Senior Credit Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, Truven's ability, and the ability of each of any restricted subsidiaries, to: sell assets; incur additional indebtedness; prepay other indebtedness (including the Notes); pay dividends and distributions or repurchase its capital stock; create liens on assets; make investments; make certain acquisitions; engage in mergers or consolidations; engage in certain transactions with affiliates; amend certain charter documents and material agreements governing subordinated indebtedness; change the business conducted by it and its subsidiaries; and enter into agreements that restrict dividends from subsidiaries.
In addition, the Senior Credit Facility requires Truven to maintain a quarterly maximum consolidated senior secured leverage ratio in accordance with the debt covenants as long as the commitments under the Revolving Credit Facility remain outstanding (subject to certain limited exceptions). The Senior Credit Facility also contains certain customary representations and warranties, affirmative covenants and events of default. As of June 30, 2015, the Consolidated Senior Secured Leverage Ratio and the maximum ratio were 3.65 and 4.00, respectively, and we were in compliance with all of the Senior Credit Facility covenants.

43




On October 3, 2012, we entered into the First Amendment to the Senior Credit Facility with a syndicate of banks and other financial institutions with no changes in the terms and conditions other than the reduction of the applicable margin by 1.00%.

On April 26, 2013, we entered into the Second Amendment to the Senior Credit Facility ("April 2013 Refinancing") with a syndicate of banks and other financial institutions to (i) increase the aggregate principal amount of the Term Loan Facility from $523.7 million to $535.0 million, (ii) reduce the applicable margin by 1.25%, (iii) with respect to the Term Loan Facility, determine the applicable margin in accordance with a pricing grid based on our consolidated total leverage ratio following delivery of financial statements at the end of each fiscal year or quarter, as applicable, after the second quarter of fiscal year 2013, (iv) revise the quarterly principal payments from $1,319.0 to $1,337.5 starting on June 30, 2013, and (v) extend the 1% repricing call protection from June 6, 2013 to October 26, 2013. There were no other changes to the terms and conditions.

On April 11, 2014, we entered into the Third Amendment (the "Third Amendment") to our Senior Credit Facility for a $100.0 million increase in the Tranche B Term Loans, and increased the total amount available under the Senior Credit Facility to $679.7 million, consisting of a $629.7 million Term Loan Facility and a $50.0 million Revolving Credit Facility (which remained unchanged). The Company borrowed the entire $100.0 million principal amount of the Supplemental Tranche B Term Loans to finance the acquisition of Simpler, repay outstanding loans of $15.0 million in aggregate principal amount under its Revolving Credit Facility and pay fees and expenses relating to the acquisition of Simpler. Under the terms of the Third Amendment, the Company must repay the principal amount of the Tranche B Term Loans in twenty consecutive quarterly installments beginning on June 30, 2014 and continuing through March 31, 2019 in the amount of $1.6 million each, and a final installment on June 6, 2019 in the amount of $597.8 million. The terms and conditions that apply to the Supplemental Tranche B Term Loans under the Third Amendment are substantially the same as the terms and conditions that apply to the existing Tranche B Term Loans under the Senior Credit Facility.

The Third Amendment also amended the Senior Credit Facility to make certain adjustments to the Consolidated Senior Secured Leverage Ratio applicable to the Company by increasing the maximum permitted ratios for certain periods from 2014 to 2016. During 2014, all domestic subsidiaries acquired by the Company became guarantors under the Senior Credit Facility.
10.625% Senior Notes due 2020

Old Notes and Additional Notes

The Old Notes were issued on June 6, 2012, under an indenture (the "Indenture", as supplemented by the First Supplemental Indenture, whereby Truven became a party to the Indenture as successor in interest to Wolverine, and the Second Supplemental Indenture), with The Bank of New York Mellon Trust Company, N.A. as trustee, which bear an interest at a rate of 10.625% per annum, are payable on June 1 and December 1 of each year, and have a maturity date of June 1, 2020.

The Additional Notes were issued pursuant to the Indenture, as supplemented by the Fifth Supplemental Indenture, dated as of November 12, 2014 (the "Fifth Supplemental Indenture") by and among Truven, the Guarantors and the Trustee. The Additional Notes form a single series with the Old Notes and have the same terms as the Old Notes and rank equal in right of payments with the Old Notes.
 
The Notes are general unsecured senior obligations of Truven, fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by Truven Holding and each of Truven’s existing and future wholly-owned domestic restricted subsidiaries that is a borrower under or that guarantees the obligations under the Senior Credit Facility or any other indebtedness of Truven or any other guarantor.
Truven may redeem some or all of the Notes at any time prior to June 1, 2016 at 100% of the principal amount thereof, plus the applicable premium pursuant to the Indenture as of the applicable redemption date, plus accrued and unpaid

44



interest and any additional interest to, but excluding, the applicable redemption date. Truven may redeem some or all of the Notes at any time on or after June 1, 2016 at 105.313% of the principal amount thereof, declining ratably to 100% of the principal amount thereof on or after June 1, 2018, plus, in each case, accrued and unpaid interest and any additional interest to, but excluding, the applicable redemption date. In addition, at any time prior to June 1, 2015, Truven (subject to certain conditions) may redeem up to 35% of the aggregate principal amount of the Notes using net cash proceeds from certain equity offerings at 110.625% of the aggregate principal amount of the Notes plus accrued and unpaid interest and any additional interest, to, but excluding, the applicable redemption date. If Truven experiences a change of control (as defined in the Indenture), it will be required to make an offer to repurchase the Notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, and any additional interest, to, but excluding, the date of purchase.

The Indenture contains covenants limiting Truven and its wholly-owned restricted subsidiaries with respect to other indebtedness, investments, liens, dividends, purchases or redemptions of stock, transactions with affiliates and mergers and sales of assets. The Indenture also contains covenants limiting the ability of wholly-owned restricted subsidiaries to guarantee payment of any indebtedness of Truven or any subsidiary guarantor and limiting the Company's business and operations. Following our series of acquisitions in 2014, all the domestic subsidiaries we acquired became guarantors of the Notes as a result of the guarantees of the Senior Credit Facility provided by such subsidiaries. The guarantees were entered into pursuant to the Third, Fourth and Sixth Supplemental Indentures. We were in compliance with all of these covenants as of June 30, 2015.

On June 5, 2013, we entered into the second supplemental indenture (the “Second Supplemental Indenture”), whereby the guarantee release provision in the Indenture, which allows guarantors to be released from their obligations under the Indenture upon the release or discharge of such guarantor’s guarantee of the Senior Credit Facility or the guarantee which resulted in the creation of the guarantee under the Indenture (subject to certain limitations), was amended to apply only to subsidiary guarantors and not to Truven Holding.

Summary disclosures about contractual obligations and commercial commitments

The following table sets forth our contractual obligations and other commitments as of June 30, 2015:

 
Payments by period
(Dollars in thousands)
Total

 
Less than
1 year

 
1-3 years

 
3-5 years

 
After
5 years

Notes(1)   
$
367,150

 
$

 
$

 
$
367,150

 
$

Other long-term obligations(2)   
621,700

 
6,360

 
12,720

 
602,620

 

Interest on indebtedness(3)   
305,590

 
67,344

 
133,662

 
104,584

 

Operating lease obligations(4)  
60,511

 
11,033

 
17,662

 
14,763

 
17,053

Capital lease obligations(5)  
1,895

 
758

 
1,137

 

 

Total contractual obligation
$
1,356,846

 
$
85,495

 
$
165,181

 
$
1,089,117

 
$
17,053

(1)
Represents the principal amount of indebtedness on the Notes.
(2)
Represents the principal amount of indebtedness under our Senior Credit Facility.
(3)
Total interest payments consist of fixed and floating rate interest obligations and the cash flows associated with the Senior Credit Facility and Notes. The interest rate on the floating rate Senior Credit Facility and fixed rate Notes has been assumed to be the same as the applicable rates during the month of June 2015. The one month LIBOR rate on the Senior Credit Facility during the month of June 2015 was below the floor rates established in accordance with the respective agreements. Interest on the Senior Credit Facility was based on the assumed rate of 4.5%. Interest on the Notes was 10.625%.
(4)
Represents amounts due under existing operating leases related to our offices and other facilities.
(5)
Represents the principal amount of capital lease obligations, including interest.

45




Off-balance sheet arrangements

Effective January 1, 2013, the Company modified its agreement with a supplier under which it markets and licenses to its customers a private label version of the supplier's platform solution in conjunction with the Company's health information applications. The agreement contains a revenue share arrangement based on net revenue targets. The supplier's revenue share percentage is guaranteed by the Company in the minimum amounts of $2.0 million, $4.0 million and $6.0 million, for the calendar years 2013, 2014 and 2015, respectively. The guaranteed revenue share is paid in advance by the Company on March 1st of each calendar year and is applied against the revenue share of the supplier earned through March 1st of the following calendar year. The agreement provides a grace period for the Company of up to August 31st of the following calendar year in the event that the supplier's revenue share earned does not reach the prepayment amount. After the grace period, if the revenue share earned does not meet the minimum target then the entire prepayment amount is deemed earned by the supplier. During the first quarters of 2015 and 2014, the Company wrote off $6.0 million and $4.7 million of the prepaid balance, respectively, as it was determined that the estimated revenue share of the supplier will not be met within the grace period. As of June 30, 2015, there are no prepaid revenue share balances on the Company's balance sheet.

As of June 30, 2015, other than operating leases in the normal course of business and the guaranteed revenue share arrangement discussed above, we had no other off-balance sheet arrangements or obligations.

Emerging Growth Company Status

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”), and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.”

Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for public companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

We will remain an “emerging growth company” until the earliest of: (i) the last day of the fiscal year during which we had total annual gross revenues of $1 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which we are deemed a “large accelerated filer” as defined under the Exchange Act
.

Critical Accounting Policies
The discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of its financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. See Note 2 to the audited financial statements and "Management’s Discussion and Analysis - Critical

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Accounting Policies", for the year ended December 31, 2014, included in our Annual Report on Form 10-K, for further discussion of the Company’s critical accounting estimates and policies.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk

We are subject to interest rate risk in connection with our Term Loan Facility and our Revolving Credit Facility. As of June 30, 2015, we have $621.7 million of outstanding principal under our Term Loan Facility and Revolving Credit Facility, bearing interest at variable rates with an established LIBOR floor of 1.25% per annum. We currently do not hedge this interest rate exposure. The underlying one month LIBOR rate as of June 30, 2015 was 0.18%. Based on a one-year time frame and all other variables remaining constant, a 1% increase or decrease in interest rates would have no impact on the interest expense because the LIBOR floor under our Senior Credit Facility is higher than the prevailing interest rates.

In the future, in order to manage our interest rate risk, we may refinance our existing debt, enter into interest rate swaps, modify any existing interest rate swaps or make changes that may impact our ability to treat our interest rate swaps as a cash flow hedge. However, we do not intend or expect to enter into derivative or interest rate swap transactions for speculative purposes. We have adopted a hedging policy, which is consistent with the covenants under the Senior Credit Facility.
Foreign Currency Exchange Risk
As a result of series of acquisitions, we have established or acquired certain foreign subsidiaries in the United Kingdom, India, Canada, Brazil, and Belgium whose functional currency is the British Pound Sterling, Indian Rupee, Canadian Dollar, Brazilian Real, and Euro, respectively. These subsidiaries were primarily established [or acquired] to function as sales and marketing support to the Parent and are not significant to our operations. We do not believe that changes in the currencies listed above relative to the U.S. dollar will have a significant impact on our financial condition, results of operations or cash flows. As we continue to grow our operations, we may obtain or enter into certain contracts under which payments are made in foreign currency and increase the amount of our sales to foreign clients. Although we do not expect foreign currency exchange risk to have a significant impact on our future operations, we will assess the risk on a case-specific basis. Currently, we do not hedge our exposure to translation gains or losses in respect of our non-dollar functional currency assets or liabilities.


Item 4.    Controls and Procedures

Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, management recognizes that any control and procedure, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship regarding the potential utilization of certain controls and procedures.
As required by Rule 13a-15(b) under the Exchange Act, our management, with the participation of our principal executive officer and principal financial officer, evaluated the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based on such evaluation of our principal executive officer and principal financial officer, our disclosure controls and procedures were not effective at the reasonable assurance level as of June 30, 2015 because of the material weakness related to our resource complement.

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Specifically, the Company does not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of GAAP. This material weakness continues to exist as of June 30, 2015.
The Company has taken corrective actions to remediate the material weakness, which included hiring subject matter experts in the areas of revenue recognition, capitalization of assets and other complex accounting transactions. The Company also hired additional experienced accounting personnel to support general accounting activities at the business unit level. To fully remediate our material weakness related to our finance and accounting resources, management is in process of hiring additional resources to support our acquired businesses and international locations. In addition, management will continue to support and provide training and comprehensive guidance to enhance our process, procedures and controls. By their nature, such actions may require a period of time to implement and become fully effective. We are committed in our remediation plans and implementing the necessary enhancements to remediate this material weakness by December 31, 2015.
Changes in Internal Control over Financial Reporting

During the second quarter of 2015, the Company substantially completed a system migration to Oracle Financials for one business unit, impacting project accounting, billing and revenue reconciliation processes, procedures and controls. This is part of a longer term strategy to migrate disparate legacy systems onto a common enterprise resource planning platform. As a result of this system implementation, various processes and controls surrounding the “order to cash” processes for one business unit have changed to gain efficiencies in transaction processing and enhance effectiveness of the internal controls over financial reporting.

We anticipate that we will continue to have future investments in information systems and related processes and will continue to review the impact of any future changes to our internal controls over financial reporting as these new systems and processes are implemented.




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Part II - OTHER INFORMATION

Item 1. Legal Proceedings
From time to time, we become involved in legal proceedings arising in the ordinary course of our business. We believe that the outcome of these proceedings will not have a material effect on our financial condition, results of operations or cash flows. The legal proceedings described in Note 12 to Part I of this Quarterly Report on Form 10-Q are incorporated herein by reference.

Item 1A. Risk Factors
There have been no material changes in the risk factors as disclosed in our Annual Report on Form 10-K/A filed on June 23, 2015.

Item 5. Other Information
None.


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Item 6. Exhibits

Exhibit Number
Exhibit Description
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
32.2*
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
101*
Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Unaudited Interim Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014, (ii) Unaudited Interim Condensed Consolidated Statements of Comprehensive Loss for the three month period ended June 30, 2015 and June 30, 2014, (iii) Unaudited Interim Condensed Consolidated Statements of Cash Flows for the three month period ended June 30, 2015 and June 30, 2014, (iv) Unaudited Interim Condensed Consolidated Statement of Equity as of June 30, 2015 and (v) Notes to Interim Unaudited Condensed Consolidated Financial Statements.
* Filed herewith.






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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: August 13, 2015
 
 
TRUVEN HEALTH ANALYTICS INC.
 
 
(Registrant)
 
 
 
 
 
By: /s/ MIKE BOSWOOD
 
 
 Mike Boswood, President and Chief Executive Officer
 
 
 
 
 
By: /s/ PHILIP BUCKINGHAM
 
 
Philip Buckingham, Executive Vice President and Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

                                                                  
                                                                                        



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: August 13, 2015
                                                                                                 
 
 
TRUVEN HOLDING CORP.
 
 
(Registrant)
 
 
 
 
 
By: /s/ MIKE BOSWOOD
 
 
 Mike Boswood, President and Chief Executive Officer
 
 
 
 
 
By: /s/ PHILIP BUCKINGHAM
 
 
Philip Buckingham, Executive Vice President and Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




                                                               


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EXHIBIT INDEX

Exhibits

Exhibit Number
Exhibit Description
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
32.2*
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
101*
Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Unaudited Interim Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014, (ii) Unaudited Interim Condensed Consolidated Statements of Comprehensive Loss for the three and six month periods ended June 30, 2015 and June 30, 2014, (iii) Unaudited Interim Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2015 and June 30, 2014, (iv) Unaudited Interim Condensed Consolidated Statement of Equity as of June 30, 2015 and (v) Notes to Interim Unaudited Condensed Consolidated Financial Statements.

* Filed herewith.



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