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MModal files for Chapter 11 Bankruptcy | March 20, 2014

MModal files for Chapter 11 Bankruptcy | March 20, 2014

logo_mmodal_fluencyMModal Holdings, Inc. and thirteen of its domestic affiliates filed for Chapter 11 Bankruptcy on March 20, 2014 in the Southern District of New York under lead Case No. 14-10701.

David Woodworth is the Chief Financial Officer of MModal Holdings, Inc. (“Holdings”), a Delaware corporation, which is the parent company of the Debtors and discusses the bankruptcy filing:

“I have been employed by the Debtors since November, 2011. I joined the Company as VP of Finance and was promoted to CFO in October 2013 after being promoted to the acting Chief Financial Officer role in June 2013.  As CFO, I am currently responsible for, among other things, financial planning, oversight of financial reporting, operational reporting, treasury, and tax. Furthermore, when I took on the CFO role, my previous role as VP of Finance was not filled, and therefore I have continued to be heavily involved in the finance function, particularly Financial Planning and Analysis (“FP&A”) activities. My background and experience in FP&A and my more recent experience as CFO have allowed me to become familiar with the Company’s business and financial affairs.  If called to testify, I would attest to the facts described herein. ….

THE DEBTORS’ BUSINESS, CAPITAL STRUCTURE, AND CIRCUMSTANCES LEADING TO THE FILING

The Debtors’ Corporate Structure

“The Debtors are comprised of fourteen separate entities.  Holdings, the ultimate parent company of the Debtors, holds 100% of the equity in Legend Parent, Inc.  Legend Parent, Inc. holds 100% of the equity in MModal Inc., which in turn directly or indirectly owns all of the equity interests of the rest of the Debtors and their non-Debtor affiliates.

“The Debtors in these cases along with the last four digits of their federal tax identification number are: Legend Parent, Inc. (8624); MModal Holdings, Inc. (7380); MModal Inc. (6666); Multimodal Technologies, LLC (2076); MModal CB Inc. (5948); Poiesis Informatics, Inc. (0978); MModal MQ Inc. (1298); MModal Systems & Services Inc. (3443); Mirrus Systems Inc. (5862); MedQuist of Delaware, Inc. (3311); MModal IP LLC (0512); MModal Services, Ltd. (0433); MedQuist CM LLC (5362); and All Type Medical Transcription Services, Inc. (0722). The Debtors’ corporate headquarters is located at 5000 Meridian Boulevard, Suite 200, Franklin, TN 37067.  There are fourteen Debtor entities, as well as nine foreign subsidiaries of MModal Inc. that are not Debtors in these cases: MModal Global Services Pvt. Ltd. (India), CBay Holdings Ltd. (Mauritius), MModal Australia Pty Ltd. (Australia), MModal Global Services Inc. (Philippines), Cbay Infotech Ventures Pvt. Ltd. (India), M*Modal N.V. (Belgium), MModal Canada Co. (Canada), MModal Limited (U.K.), and MModal Services Canwest ULC (Canada).

Corporate Organizational Structure | Chart

“The Debtors are all privately owned, and no debt or equity securities of any Debtor are currently listed or traded on any public securities exchange or market. Affiliates of One Equity Partners, a private equity investment fund, own the majority of Holdings’ equity interests and all of its preferred stock.  The equity structure of Holdings is comprised of: (i) Series A Preferred Stock, all of which is owned by One Equity Partners V, L.P. (“OEP”); (ii) Class L Common Stock, a voting stock, of which 51.36% is owned by Aisling Capital III, L.P., 42.02% is owned by W Capital Legend, L.P., and 6.62% is owned by OEP II Partners Co-Invest, L.P.; and (iii) Class A Common Stock, a voting stock, of which 96.36% is owned by OEP, and the remaining 3.64% is owned by various members of the Company’s management.

The Debtors’ Business

“The Company, which is headquartered in Franklin, Tennessee, is a leading provider of clinical documentation solutions for the U.S. healthcare industry and provides a comprehensive suite of products and services to its customers, including clinical narrative capture services, Speech and Language Understanding™ technology, and clinical documentation workflow solutions.  The Company’s cloud-based, end-to-end technology-enabled solutions convert physicians’ dictation into a comprehensive patient story through high-quality clinical documentation with rich context that can be leveraged across a healthcare enterprise for reimbursement, clinical decision support, business intelligence, and distribution.

“The Company has operations in six countries and employs more than 9,900 employees, most of whom are Medical Transcriptionists or Medical Editors. As of the Petition Date, the Debtors’ workforce consisted of approximately 4,200 employees (largely home-based) with employees in all 50 states.

“The Company’s customer base includes over 3,800 hospitals, clinics, and physician practices, and is composed of a wide variety of healthcare providers, including integrated delivery networks, academic centers, and specialty hospitals. The Company has a particularly high presence in the large hospital market. The Company enjoys a high retention rate with its customers, and the average tenure of its top 50 customers has been more than 4 years.

“On a consolidated basis, the Company generated approximately $411 million in revenue and $85.6 million in Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“AEBITDA”) in 2013, representing a decrease from approximately $452.8 million in revenue and $96.9 million in AEBITDA in 2012 and approximately $443.9 million in revenue and $118.1 million in AEBITDA in 2011.

“The Debtors’ workforce primarily consists of regular employees, but also includes temporary employees and independent contractors. None of the Debtors’ employees are members of a union or a collective bargaining unit.

“The Company’s activities can be considered as three separate revenue streams:

  • Core Transcription Outsource Services (“TOS”) – this constitutes transcription outsource labor, speech understanding, and workflow technology.  In 2013, TOS accounted for more than 80% of consolidated revenue.
  • Other Technology & Services – this constitutes “legacy” products and services from past acquisitions. This category includes labor for outsourced medical coding, and third party licensing of products with clinical documentation, speech recognition, and natural language understanding technology.
  • Products – the Company’s third revenue category includes its newer products, which are marketed under the M*Modal Fluency™ and M*Modal Catalyst brands.  Examples of such products include a specialized platform for radiologists for imaging documentation and workflow management, and products that use data-driven analytics to improve clinical documentation, revenue cycle management, and patient care.

“TOS, the Company’s largest source of revenue, involves processing physicians’ dictation through medical transcribers and speech recognition technology.  Over the last twenty years, the clinical documentation industry has evolved from almost exclusively in-house production to outsourced services and from labor-intensive services to technologically-enabled solutions. The outsourced percentage of the market is expected to grow to more than a third of the overall medical transcription market by 2014. The Company operates a scalable global delivery network of transcriptionists across the U.S., India and the Philippines.

“Physicians generally use one of two methods to capture clinical data in a digital format: dictation or templated direct data entry through clinical documentation systems. Dictation allows physicians to use their voice to document patient interactions, which is converted into a text format for insertion into the Electronic Health Record (“EHR”).  Direct data entry directly populates an EHR through templates or drop-down menus, typically with a laptop or other hardware device.  The adoption of direct data entry with EHRs by the Company’s customers has proven to be highly erosive to TOS volumes. The speed and extent to which the Company’s current customers and our target market adopts direct data entry with EHRs is somewhat uncertain within our customer base and our target market. This makes it difficult to assess the erosion the Company will likely experience in the future.

“The Company uses advanced automation technologies, such as automated speech recognition (“ASR”) and workflow platforms, and low-cost offshore resources are available to drive substantial improvements in productivity and cost.  ASR converts the physician narrative into a text form which is available for editing by a medical transcriptionist. Speech automation and an increase in offshore production have substantially decreased the overall cost of production and have further differentiated the Company from many other outsourcing providers. As the industry’s cost of production has declined, the average market price for medical transcription services has also declined.

“The Company’s speech and workflow products are marketed under the M*Modal Fluency™ umbrella brand and include a variety of different products. The M*Modal Fluency™ family of products captures the patient story through front-end speech, voice capture, and transcription services.

“The Company’s speech understanding and decision support products are marketed under the M*Modal Catalyst™ umbrella brand. The M*Modal Catalyst™ family of products enable the Company’s customers and partners to monetize that captured story through coding, analytics, and integration of structured data into the EHR.

Prepetition Capital Structure

“As of the Petition Date, the Debtors are indebted under that certain Credit Agreement, dated as of August 17, 2012, as amended by Amendment No. 1 to the Credit Agreement, dated as of May 15, 2013 (the “Credit Agreement”), by and among MModal Inc., as borrower, Legend Parent Inc., as guarantor, Royal Bank of Canada (the “Administrative Agent”) and other lenders party thereto (as amended, modified, or supplemented from time to time, and together with all security agreements and other documents ancillary thereto, the “Credit Facility”).  The obligations under the Credit Facility are guaranteed by each of the other Debtor entities, except for Holdings.

“The Credit Facility consists of a $75 million revolving facility and a $445 million term loan.  As of the Petition Date, the revolving facility was fully drawn, and approximately $424.6 million in principal amount was outstanding under the term loan.  The revolving commitments mature on August 17, 2017, and the term loan commitments mature on August 17, 2019.

“The obligations under the Credit Facility are secured by a first lien on substantially all assets of the Debtors, including (i) accounts, (ii) equipment, goods, inventory, and fixtures, (iii) documents, instruments, and chattel paper, (iv) letters of credit and letter of credit rights, (v) securities collateral, (vi) investment property, (vii) intellectual property collateral, (viii) certain commercial torts claims, (ix) general intangibles, (x) money and deposit accounts, (xi) supporting obligations, (xii) books and records relating to the foregoing, (xiii) other personal property; and (xiv) all proceeds and products of each of the foregoing and all accessions to, substitutions and replacements for, and rents, profits, and products of, each of the foregoing, any and all proceeds of any insurance, indemnity, warranty, or guaranty payable from time to time with respect to any of the foregoing.

“The Debtors have also pledged either 100% or 65% of the equity interests in their subsidiaries, including certain of their foreign non-Debtor subsidiaries, to the Administrative Agent. The Debtors’ corporate organizational chart …identifies the borrowers and guarantors, as well as which entities have had their equity interests pledged.

“The Debtors are also indebted under that certain Indenture, dated as of August 17, 2012 (the “Indenture”), by and among MModal, Inc., as issuer, Legend Parent, Inc., as guarantor, and U.S. Bank National Association (the “Trustee”), pursuant to which MModal Inc. issued $250 million in senior unsecured notes (the “Notes”).   The Notes bear interest at a rate of 10.75%, payable semi-annually, and become due in 2020. Legend Parent, Inc. and all of the other Debtors, except for Holdings, are guarantors of the obligations under the Indenture. As of the Petition Date, the outstanding principal balance due under the Notes was $250 million.

“Events Leading To The Filing Of The Debtors’ Cases

“In August 2012, the Company was acquired in a $1.14 billion going private transaction (the “Transaction”) by OEP. The Transaction was financed by a combination of debt and equity, including an equity contribution from OEP of approximately $447 million. The Debtors’ prepetition funded indebtedness under the Credit Facility and the Indenture was incurred in connection with the financing for the Transaction.

“Since the Transaction, a number of factors have contributed to a decline in the Debtors’ earnings and liquidity position ultimately making this voluntary petition for relief under the Bankruptcy code a necessary step for the Company to deleverage its balance sheet. These forces included:

  • Higher than planned, industry-wide TOS erosion, primarily from product substitution as clinical documentation is more frequently populated electronically
  • Lower than anticipated market demand for capital purchases of front end speech solutions resulting in a shift in the Company’s go-to-market strategy for its newer products from one-time revenue from capital sales to more stable, recurring revenue from subscription sales.

“This decline in earnings resulted in an increase in its net leverage ratio creating a risk of breaching financial covenants under the Credit Facility, which set declining maximum ratios for total net leverage. The Company announced in April 2013 that it would likely breach the net leverage covenant for the first quarter of 2013, and, in May 2013, the Credit Agreement was amended to provide for relaxed net leverage ratios. As part of the amendment process, OEP also contributed $20 million in an equity cure to pay down part of the debt under the Credit Facility.

“The increasing net leverage ratio was driven by a decline in the volume of its TOS business with a corresponding impact on revenue and AEBITDA. This decline in TOS volume and revenue was attributable to greater than planned industry-wide erosion, including product substitution and competitive pricing pressure. The Company instigated efforts to improve its sales training and sales presence in parallel with the development and sale of software-based products and services with higher margins in addition to its core labor-based transcription services. The Company also implemented cost-saving measures in the second quarter of 2013 that resulted in approximately $7 million in annual savings. While the business’s absolute revenue and adjusted EBITDA were declining, the Company’s efforts resulted in a relatively steady adjusted EBITDA margin near 21%.

“Despite the Company’s efforts to outpace the erosive nature of TOS with high margin product sales paired with proactive cost reductions, it struggled to do so as the customer market faced cost and capital constraints associated with regulatory changes thereby extending the sales cycle and/or reducing the size of capital product sales.  In the face of this market erosion and having identified the need to shift the go-to-market strategy in support of the financial constraints being faced by its current and future customer base, in its third quarter 2013 earnings call, the Company noted it would likely face breach a financial covenant under its secured Credit Facility in the first half of 2014 with the recognition of the Company’s inability to sustain its significant debt obligations under the Credit Facility and the Indenture.

“Anticipating the need to restructure its balance sheet, the Company hired restructuring advisors in the fourth quarter of 2013.  In addition, the Company began negotiating and exploring strategic alternatives with certain holders of Notes and certain lenders under the Credit Facility. These negotiations are on-going.