##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 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 September 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission file number: 001-33881
 MEDASSETS, INC.
 (Exact name of registrant as specified in its charter)
 DELAWARE
    
    51-0391128(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 100 North Point Center East, Suite 200
Alpharetta, Georgia
    
    30022(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (678) 323-2500
 (Former name, former address and former fiscal year, if changed since last report)
 þ o
 o o
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
(Do not check if a smaller reporting company)Smaller Reporting Company 
o
 o þ




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##### 



PART I. FINANCIAL INFORMATION
    
    
    3Item 1. Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Balance Sheets at September 30, 2009 and December 31, 2008
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended September 30,
2009 and 2008
    
    
    4Condensed Consolidated Statement of Stockholders Equity for the nine months ended September 30, 2009
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    28Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    48Item 4. Controls and Procedures
    
    
    49PART II. OTHER INFORMATION
    
    
    49Item 1. Legal Proceedings
    
    
    49Item 1A. Risk Factors
    
    
    50Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    50Item 3. Defaults Upon Senior Securities
    
    
    50Item 4. Submission of Matters to a Vote of Security Holders
    
    
    50Item 5. Other Information
    
    
    50Item 6. Exhibits
    
    
    50Signatures
    
    
    50EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEO AND CFOEX-31.1EX-31.2EX-32.1
  2




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##### Table of Contents



Part I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 
 MedAssets, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
 September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)ASSETSCurrentCash and cash
equivalents (Note 1)
    
    $
    4,675
    
    
    $
    5,429Accounts receivable, net of allowances of $1,898 and $2,247 as of September 30, 2009 and
December 31, 2008, respectively
    
    
    55,638
    
    
    
    55,048Deferred tax asset, current
    
    
    13,780
    
    
    
    13,780Prepaid expenses and other current assets
    
    
    7,476
    
    
    
    5,997Total current assets
    
    
    81,569
    
    
    
    80,254Property and equipment, net
    
    
    53,123
    
    
    
    42,417Other long term assetsGoodwill
    
    
    511,861
    
    
    
    508,748Intangible assets, net
    
    
    102,756
    
    
    
    124,340Other
    
    
    19,586
    
    
    
    18,101Other long term assets
    
    
    634,203
    
    
    
    651,189Total assets
    
    $
    768,895
    
    
    $
    773,860LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    6,954
    
    
    $
    6,725Accrued revenue share obligation and rebates
    
    
    24,700
    
    
    
    29,698Accrued payroll and benefits
    
    
    17,851
    
    
    
    21,837Other accrued expenses
    
    
    7,846
    
    
    
    6,981Deferred revenue, current portion
    
    
    25,886
    
    
    
    24,280Deferred purchase consideration (Note 3)
    
    
    
    
    
    
    19,361Current portion of notes payable
    
    
    2,499
    
    
    
    30,277Current portion of finance obligation
    
    
    159
    
    
    
    149Total current liabilities
    
    
    85,895
    
    
    
    139,308Notes payable, less current portion
    
    
    228,287
    
    
    
    215,349Finance obligation, less current portion
    
    
    9,737
    
    
    
    9,860Deferred revenue, less current portion
    
    
    5,483
    
    
    
    6,411Deferred tax liability
    
    
    13,834
    
    
    
    15,817Other long term liabilities
    
    
    5,296
    
    
    
    4,176Total liabilities
    
    
    348,532
    
    
    
    390,921Commitments and contingenciesStockholders equityCommon stock, $0.01 par value, 150,000,000 shares authorized; 56,488,000 and 53,917,000shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively
    
    
    565
    
    
    
    539Additional paid in capital
    
    
    632,631
    
    
    
    605,340Accumulated other comprehensive loss (Note 11)
    
    
    (1,957
    )
    
    
    (2,088
    )Accumulated deficit
    
    
    (210,876
    )
    
    
    (220,852
    )Total stockholders equity
    
    
    420,363
    
    
    
    382,939Total liabilities and stockholders equity
    
    $
    768,895
    
    
    $
    773,860
  3




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##### Table of Contents



MedAssets, Inc.
 
 Condensed Consolidated Statements of Operations
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(In thousands, except per share amounts)Revenue:Administrative fees, net
    
    $
    25,631
    
    
    $
    25,663
    
    
    $
    78,495
    
    
    $
    78,355Other service fees
    
    
    56,762
    
    
    
    50,309
    
    
    
    167,091
    
    
    
    117,610Total net revenue
    
    
    82,393
    
    
    
    75,972
    
    
    
    245,586
    
    
    
    195,965Operating expenses:Cost of revenue (inclusive of certain amortization expense)
    
    
    21,472
    
    
    
    17,101
    
    
    
    55,830
    
    
    
    36,252Product development expenses
    
    
    4,156
    
    
    
    4,719
    
    
    
    15,424
    
    
    
    11,027Selling and marketing expenses
    
    
    10,038
    
    
    
    9,641
    
    
    
    36,529
    
    
    
    32,096General and administrative expenses
    
    
    23,039
    
    
    
    22,779
    
    
    
    77,971
    
    
    
    66,054Depreciation
    
    
    3,125
    
    
    
    2,581
    
    
    
    9,020
    
    
    
    7,051Amortization of intangibles
    
    
    7,018
    
    
    
    7,324
    
    
    
    21,029
    
    
    
    16,117Impairment of intangibles (Note 3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,079Total operating expenses
    
    
    68,848
    
    
    
    64,145
    
    
    
    215,803
    
    
    
    170,676Operating income
    
    
    13,545
    
    
    
    11,827
    
    
    
    29,783
    
    
    
    25,289Other income
(expense):Interest (expense)
    
    
    (4,259
    )
    
    
    (5,803
    )
    
    
    (14,015
    )
    
    
    (15,120
    )Other income (expense)
    
    
    223
    
    
    
    228
    
    
    
    404
    
    
    
    (2,101
    )Income before income taxes
    
    
    9,509
    
    
    
    6,252
    
    
    
    16,172
    
    
    
    8,068Income tax expense
    
    
    3,613
    
    
    
    2,566
    
    
    
    6,196
    
    
    
    3,259Net income
    
    $
    5,896
    
    
    $
    3,686
    
    
    $
    9,976
    
    
    $
    4,809Basic and diluted income per share:Basic net income
    
    $
    0.11
    
    
    $
    0.07
    
    
    $
    0.18
    
    
    $
    0.10Diluted net income
    
    $
    0.10
    
    
    $
    0.07
    
    
    $
    0.17
    
    
    $
    0.09Weighted average shares  basic
    
    
    54,792
    
    
    
    53,715
    
    
    
    54,589
    
    
    
    48,493Weighted average shares  diluted
    
    
    57,855
    
    
    
    56,136
    
    
    
    57,223
    
    
    
    51,035
  4




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MedAssets, Inc.
 
 Condensed Consolidated Statement of Stockholders Equity (Unaudited)
Nine Months Ended September 30, 2009
 AccumulatedAdditional
    
    
    Other
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Comprehensive
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Par Value
    
    
    Capital
    
    
    Income (Loss)
    
    
    Deficit
    
    
    Equity(In thousands)Balances at December 31, 2008
    
    
    53,917
    
    
    $
    539
    
    
    $
    605,340
    
    
    $
    (2,088
    )
    
    $
    (220,852
    )
    
    $
    382,939Issuance of common stock from
stock option exercises
    
    
    1,509
    
    
    
    15
    
    
    
    8,318
    
    
    
    
    
    
    
    
    
    
    
    8,333Issuance of common restricted stock
    
    
    1,062
    
    
    
    11
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    12,911
    
    
    
    
    
    
    
    
    
    
    
    12,911Excess tax benefit from stock option
exercises
    
    
    
    
    
    
    
    
    
    
    6,073
    
    
    
    
    
    
    
    
    
    
    
    6,073Other comprehensive income:Unrealized
gain from hedging activities
(net of a tax expense of $77)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131
    
    
    
    
    
    
    
    131Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,976
    
    
    
    9,976Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131
    
    
    
    9,976
    
    
    
    10,107Balances at September 30, 2009
    
    
    56,488
    
    
    $
    565
    
    
    $
    632,631
    
    
    $
    (1,957
    )
    
    $
    (210,876
    )
    
    $
    420,363
  5




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##### Table of Contents



MedAssets, Inc.
 
 Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Nine Months Ended September 30,2009
    
    
    2008(In thousands)Operating activitiesNet income
    
    $
    9,976
    
    
    $
    4,809Adjustments to reconcile income from continuing operations to net cash provided by
operating activities:Bad debt expense
    
    
    3,823
    
    
    
    1,457Depreciation
    
    
    10,858
    
    
    
    7,359Amortization of intangibles
    
    
    21,585
    
    
    
    16,806Loss (gain) on sale of assets
    
    
    147
    
    
    
    (119
    )Noncash stock compensation expense
    
    
    12,911
    
    
    
    6,591Excess tax benefit from exercise of stock options
    
    
    (6,073
    )
    
    
    (1,697
    )Amortization of debt issuance costs
    
    
    1,382
    
    
    
    895Noncash interest expense, net
    
    
    1,049
    
    
    
    906Impairment of intangibles
    
    
    
    
    
    
    2,079Deferred income tax (benefit) expense
    
    
    (36
    )
    
    
    937Changes in assets and liabilities:Accounts receivable
    
    
    (4,536
    )
    
    
    (5,356
    )Prepaid expenses and other assets
    
    
    (1,480
    )
    
    
    (819
    )Other long-term assets
    
    
    (3,580
    )
    
    
    (1,850
    )Accounts payable
    
    
    5,110
    
    
    
    785Accrued revenue share obligations and rebates
    
    
    (4,998
    )
    
    
    (9,327
    )Accrued payroll and benefits
    
    
    (4,090
    )
    
    
    1,768Other accrued expenses
    
    
    (2,773
    )
    
    
    949Deferred revenue
    
    
    676
    
    
    
    4,932Cash provided by operating activities
    
    
    39,951
    
    
    
    31,105Investing activitiesPurchases of property, equipment and software
    
    
    (9,233
    )
    
    
    (3,891
    )Capitalized software development costs
    
    
    (12,268
    )
    
    
    (8,378
    )Acquisitions, net of cash acquired (Note 3)
    
    
    (18,275
    )
    
    
    (209,423
    )Cash used in investing activities
    
    
    (39,776
    )
    
    
    (221,692
    )Financing activitiesDecrease in restricted cash
    
    
    
    
    
    
    20Proceeds from notes payable
    
    
    71,797
    
    
    
    142,629Repayment of notes payable and capital lease obligations
    
    
    (86,638
    )
    
    
    (85,615
    )Repayment of finance obligations
    
    
    (494
    )
    
    
    (483
    )Debt issuance costs
    
    
    
    
    
    
    (6,167
    )Excess tax benefit from exercise of stock options
    
    
    6,073
    
    
    
    1,697Interest accrued on note receivable from stockholders
    
    
    
    
    
    
    (18
    )Payment on note receivable from stockholders
    
    
    
    
    
    
    49Issuance of common stock, net of offering costs
    
    
    8,333
    
    
    
    1,523Cash (used in) provided by financing activities
    
    
    (929
    )
    
    
    53,635Net decrease in cash and cash equivalents
    
    
    (754
    )
    
    
    (136,952
    )Cash and cash equivalents, beginning of period
    
    
    5,429
    
    
    
    136,952Cash and cash equivalents, end of period
    
    $
    4,675
    
    
    $
    
  6




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MedAssets, Inc.
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share amounts)
 Unless the context indicates otherwise, references in this Quarterly Report to MedAssets, the
Company, we, our and us mean MedAssets, Inc., and its subsidiaries and predecessor
entities.
 1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
    Cash and Cash Equivalents
  2. RECENT ACCOUNTING PRONOUNCEMENTS
 Accounting Standards Codification
 The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162
 7




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
 Revenue Recognition
  Software
  Accounting for Transfers of Financial Assets
  Consolidation of Variable Interest Entities
  Subsequent Events
  8




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
 Business Combinations
  Fair Value Measurements
  Disclosures about Derivative Instruments and Hedging Activities
  3. ACQUISITION AND RESTRUCTURING ACTIVITIES
 Accuro Acquisition
     9




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
 Accuro Purchase Price Allocation
  PreliminaryPurchase
    
    
    
    
    
    
    FinalPrice
    
    
    
    
    
    
    PurchaseAllocation
    
    
    
    
    
    
    PriceDecember
    
    
    
    
    
    
    Allocation31, 2008
    
    
    Adjustments
    
    
    June 2, 2009Current assets
    
    $
    9,113
    
    
    $
    (124
    )
    
    $
    8,989Property and equipment
    
    
    4,853
    
    
    
    
    
    
    
    4,853Other long term assets
    
    
    169
    
    
    
    
    
    
    
    169Goodwill
    
    
    275,899
    
    
    
    3,113
    
    
    
    279,012Intangible assets
    
    
    87,700
    
    
    
    
    
    
    
    87,700Total assets acquired
    
    
    377,734
    
    
    
    2,989
    
    
    
    380,723Current liabilities
    
    
    14,474
    
    
    
    3,282
    
    
    
    17,756Other long term liabilities
    
    
    5,401
    
    
    
    (69
    )
    
    
    5,332Total liabilities assumed
    
    
    19,875
    
    
    
    3,213
    
    
    
    23,088Total purchase price
    
    $
    357,859
    
    
    $
    (224
    )
    
    $
    357,635
  
    
    a $3,463 increase associated with restructuring activities, consisting of estimated
severance costs, facility lease termination penalties, system migration and standardization
as well as other restructuring costs (as further described below);
    
    a $224 decrease related to adjustments to the final deferred purchase consideration; and
    
    a $126 decrease associated with adjusting assets acquired and liabilities assumed to
fair value.
 Accuro Restructuring Plan
   10




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
  Accrued
    
    
    
    
    
    
    
    
    
    
    Accrued,December 31,
    
    
    Adjustments
    
    
    Cash
    
    
    September 30,2008
    
    
    to Costs
    
    
    Payments
    
    
    2009Accuro Restructuring PlanSeverance
    
    $
    920
    
    
    $
    108
    
    
    $
    (752
    )
    
    $
    276Other
    
    
    709
    
    
    
    3,355
    
    
    
    (582
    )
    
    
    3,482Total Accuro Restructuring Costs
    
    $
    1,629
    
    
    $
    3,463
    
    
    $
    (1,334
    )
    
    $
    3,758
  Unaudited Pro Forma Financial Information
   
    
    $1,317 related to transaction costs Accuro incurred in relation to its potential initial
public offering prior to the Accuro Acquisition;
    
    $1,462 related to one-time contractual severance payments made to certain employees as
part of the purchase agreement;
    
    $2,222 related to one-time change of control payments made to certain employees as part
of the purchase agreement; and
    
    $2,184 related to the one-time acceleration of unvested Accuro stock options that were
repurchased as part of the purchase agreement.
  Nine Months Ended September 30,2009
    
    2008(Unaudited, in thousands, except per share data)Net revenue
    
    $
    245,586
    
    
    $
    224,505Net income (loss)
    
    $
    9,976
    
    
    $
    (1,226
    )Basic net income (loss) per share
    
    $
    0.18
    
    
    $
    (0.02
    )Diluted net income (loss) per share
    
    $
    0.17
    
    
    $
    (0.02
    )
 4. DEFERRED REVENUE
  11




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
  September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)Software and implementation fees
    
    $
    11,831
    
    
    $
    13,839Service fees
    
    
    17,763
    
    
    
    14,206Administrative fees
    
    
    1,674
    
    
    
    1,313Other fees
    
    
    101
    
    
    
    1,333Deferred revenue, total
    
    
    31,369
    
    
    
    30,691Less: Deferred revenue, current portion
    
    
    (25,886
    )
    
    
    (24,280
    )Deferred revenue, non-current portion
    
    $
    5,483
    
    
    $
    6,411
  5. NOTES PAYABLE
  September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)Notes payable  senior
    
    $
    230,786
    
    
    $
    245,176Other
    
    
    
    
    
    
    450Total notes payable
    
    
    230,786
    
    
    
    245,626Less: current portion
    
    
    (2,499
    )
    
    
    (30,277
    )Total long-term notes payable
    
    $
    228,287
    
    
    $
    215,349
    12




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
   Amount(Unaudited)2009
    
    $
    6252010
    
    
    2,4992011
    
    
    17,4992012
    
    
    2,4992013
    
    
    207,664Thereafter
    
    
    Total notes payable
    
    $
    230,786
 6. COMMITMENTS AND CONTINGENCIES
 Performance Targets
  Legal Proceedings
 Med-Data Med-Data
  7. STOCKHOLDERS EQUITY AND SHARE-BASED COMPENSATION
 Common Stock
     13




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
     Share-Based Compensation
     Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited)Cost of revenue
    
    $
    778
    
    
    $
    498
    
    
    $
    2,407
    
    
    $
    1,603Product development
    
    
    90
    
    
    
    231
    
    
    
    695
    
    
    
    488Selling and marketing
    
    
    680
    
    
    
    499
    
    
    
    2,242
    
    
    
    1,487General and administrative
    
    
    2,403
    
    
    
    1,224
    
    
    
    7,567
    
    
    
    3,013Total share-based compensation expense
    
    $
    3,951
    
    
    $
    2,452
    
    
    $
    12,911
    
    
    $
    6,591
 Management Equity Award Grant
  14




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
   Number of Equity AwardsJanuary 5,
    
    August 26,Award Type
    
    2009
    
    2009
    
    TotalRestricted common stock  service based vesting
    
    
    340,000
    
    
    
    7,000
    
    
    
    347,000Restricted common stock  performance based vesting
    
    
    675,000
    
    
    
    14,000
    
    
    
    689,000Restricted common stock awards
    
    
    1,015,000
    
    
    
    21,000
    
    
    
    1,036,000SSARs  service based vesting
    
    
    1,200,000
    
    
    
    50,000
    
    
    
    1,250,000SSARs  performance based based vesting
    
    
    1,369,000
    
    
    
    26,000
    
    
    
    1,395,000SSARs awards
    
    
    2,569,000
    
    
    
    76,000
    
    
    
    2,645,000Total management equity awards granted
    
    
    3,584,000
    
    
    
    97,000
    
    
    
    3,681,000
  Performance-Based Equity Awards
   
    
    50% vesting based on achievement of a 15% compounded annual growth rate of Cash EPS for
the three-year period ending December 31, 2011;
    
    Pro rata vesting of between 50% and 100% based on achievement of a compounded annual
growth rate of Cash EPS between 15% and 25% for the three-year period ending December 31,
2011; and
    
    100% vesting based on achievement of a 25% compounded annual growth rate of Cash EPS for
the three-year period ending December 31, 2011.
   15




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##### Table of Contents



MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
   Service-Based Equity Awards
     Board Equity Award Grant
    16




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##### Table of Contents



MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
 Common Stock Option Awards
      WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingExercise
    
    
    Contractual
    
    AggregateShares
    
    
    Price
    
    
    Term
    
    Intrinsic ValueOptions outstanding as of January 1, 2009
    
    
    7,995,000
    
    
    $
    8.63
    
    
    7 years
    
    $
    50,918Granted
    
    
    402,000
    
    
    
    19.15Exercised
    
    
    (1,509,000
    )
    
    
    5.52Forfeited
    
    
    (181,000
    )
    
    
    13.41Options outstanding as of September 30, 2009
    
    
    6,707,000
    
    
    $
    9.84
    
    
    7 years
    
    $
    85,529Options exercisable as of September 30, 2009
    
    
    2,513,000
    
    
    $
    7.86
    
    
    7 years
    
    $
    36,975
    17




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##### Table of Contents



MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
 September 30,
    
    September 30,2009
    
    2008Range of exercise prices
    
    $
    0.63 - $23.11
    
    
    $
    0.63 - $17.86Number of options outstanding
    
    
    6,707,000
    
    
    
    7,997,000Weighted average exercise price
    
    $
    9.84
    
    
    $
    8.58Weighted average remaining contractual life
    
    6.9 years
    
    
    7.9 years
 Equity Award Valuation
   Nine Months Ended September 30,2009
    
    2008Range of calculated volatility
    
    
    31.21% - 34.73
    %
    
    
    32.1% - 36.0
    %Dividend yield
    
    
    0
    %
    
    
    0
    %Range of risk free interest rate
    
    
    1.36% - 2.46
    %
    
    
    3.00% - 3.56
    %Range of expected term
    
    4.0 - 5.0 years
    
    5.4 - 6.5 years
 Share-based Payment
 8. INCOME TAXES
  9. INCOME PER SHARE
 .
 18




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##### Table of Contents



MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
  Three Months Ended September 30,2009
    
    
    2008(Unaudited)Numerator for Basic and Diluted Income Per Share:Net income
    
    $
    5,896
    
    
    $
    3,686Denominator for basic income per share weighted average shares
    
    
    54,792,000
    
    
    
    53,715,000Effect of dilutive securities:Stock options
    
    
    2,384,000
    
    
    
    2,386,000Stock settled stock appreciation rights
    
    
    287,000
    
    
    
    Restricted stock and stock warrants
    
    
    392,000
    
    
    
    35,000Denominator for diluted income per share  adjusted weighted
average shares and assumed conversions
    
    
    57,855,000
    
    
    
    56,136,000Basic income per share:Basic net income per common share
    
    $
    0.11
    
    
    $
    0.07Diluted net income per share:Diluted net income per common share
    
    $
    0.10
    
    
    $
    0.07
 Nine Months Ended September 30,2009
    
    
    2008(Unaudited)Numerator for Basic and Diluted Income Per Share:Net income
    
    $
    9,976
    
    
    $
    4,809Denominator
for basic income per share weighted average shares
    
    
    54,589,000
    
    
    
    48,493,000Effect of dilutive securities:Stock options
    
    
    2,275,000
    
    
    
    2,507,000Stock settled stock appreciation rights
    
    
    21,000
    
    
    
    Restricted stock and stock warrants
    
    
    338,000
    
    
    
    35,000Denominator for diluted income per share  adjusted weighted
average shares and assumed conversions
    
    
    57,223,000
    
    
    
    51,035,000Basic income per share:Basic net income per common share
    
    $
    0.18
    
    
    $
    0.10Diluted net income per share:Diluted net income per common share
    
    $
    0.17
    
    
    $
    0.09
  19




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2009
    
    2008
    
    2009
    
    2008(Unaudited)Stock options
    
    
    69,000
    
    
    
    366,000
    
    
    
    133,000
    
    
    
    396,000Stock settled stock appreciation rights
    
    
    20,000
    
    
    
    
    
    
    
    39,000
    
    
    
    Restricted stock and stock warrants
    
    
    1,000
    
    
    
    
    
    
    
    4,000
    
    
    
    Total potentially dilutive securities
    
    
    90,000
    
    
    
    366,000
    
    
    
    176,000
    
    
    
    396,000
 10. SEGMENT INFORMATION
  
    
    Revenue Cycle Management.Our Revenue Cycle Management segment provides a
comprehensive suite of software and services spanning the hospital revenue cycle workflow
  from patient admission, charge capture, case management and health information
management through claims processing and accounts receivable management. Our workflow
solutions, together with our data management and business intelligence tools, increase
revenue capture and cash collections, reduce accounts receivable balances and increase
regulatory compliance.
    
    Spend Management.Our Spend Management segment provides a comprehensive suite of
technology-enabled services that help our customers manage their non-labor expense
categories. Our solutions lower supply and medical device pricing and utilization by
managing the procurement process through our group purchasing organization portfolio of
contracts, consulting services and business intelligence tools.
     20




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##### Table of Contents



MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
 Three Months Ended September 30, 2009RCM
    
    
    SM
    
    
    Corporate
    
    
    Total(Unaudited, in thousands)Results of Operations:Revenue:Gross administrative fees(1)
    
    $
    
    
    
    $
    39,222
    
    
    $
    
    
    
    $
    39,222Revenue share obligation(1)
    
    
    
    
    
    
    (13,591
    )
    
    
    
    
    
    
    (13,591
    )Other service fees
    
    
    51,635
    
    
    
    5,127
    
    
    
    
    
    
    
    56,762Total net revenue
    
    
    51,635
    
    
    
    30,758
    
    
    
    
    
    
    
    82,393Total operating expenses
    
    
    44,067
    
    
    
    17,500
    
    
    
    7,281
    
    
    
    68,848Operating income (loss)
    
    
    7,568
    
    
    
    13,258
    
    
    
    (7,281
    )
    
    
    13,545Interest expense
    
    
    
    
    
    
    
    
    
    
    (4,259
    )
    
    
    (4,259
    )Other income
    
    
    21
    
    
    
    57
    
    
    
    145
    
    
    
    223Income (loss) before income taxes
    
    $
    7,589
    
    
    $
    13,315
    
    
    $
    (11,395
    )
    
    $
    9,509Income tax expense (benefit)
    
    
    2,883
    
    
    
    4,986
    
    
    
    (4,256
    )
    
    
    3,613Net income (loss)
    
    
    4,706
    
    
    
    8,329
    
    
    
    (7,139
    )
    
    
    5,896Segment Adjusted EBITDA
    
    $
    17,964
    
    
    $
    15,710
    
    
    $
    (5,126
    )
    
    $
    28,548
 
 (1)
    
    These are non-GAAP measures. See Use of Non-GAAP Financial Measures section under Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations, for additional information. As of September 30, 2009RCM
    
    
    SM
    
    
    Corporate
    
    
    Total(Unaudited, in thousands)Financial Position:Accounts receivable, net
    
    $
    44,678
    
    
    $
    31,651
    
    
    $
    (20,691
    )
    
    $
    55,638Other assets
    
    
    570,916
    
    
    
    91,967
    
    
    
    50,374
    
    
    
    713,257Total assets
    
    
    615,594
    
    
    
    123,618
    
    
    
    29,683
    
    
    
    768,895Accrued revenue share obligation
    
    
    
    
    
    
    24,700
    
    
    
    
    
    
    
    24,700Deferred revenue
    
    
    26,856
    
    
    
    4,513
    
    
    
    
    
    
    
    31,369Other liabilities
    
    
    36,043
    
    
    
    28,841
    
    
    
    227,579
    
    
    
    292,463Total liabilities
    
    $
    62,899
    
    
    $
    58,054
    
    
    $
    227,579
    
    
    $
    348,532
 Three Months Ended September 30, 2008RCM
    
    
    SM
    
    
    Corporate
    
    
    Total(Unaudited, in thousands)Results of Operations:Revenue:Gross administrative fees(1)
    
    $
    
    
    
    $
    39,867
    
    
    $
    
    
    
    $
    39,867Revenue share obligation(1)
    
    
    
    
    
    
    (14,204
    )
    
    
    
    
    
    
    (14,204
    )Other service fees
    
    
    45,791
    
    
    
    4,518
    
    
    
    
    
    
    
    50,309Total net revenue
    
    
    45,791
    
    
    
    30,181
    
    
    
    
    
    
    
    75,972Total operating expenses
    
    
    41,702
    
    
    
    17,217
    
    
    
    5,226
    
    
    
    64,145Operating income (loss)
    
    
    4,089
    
    
    
    12,964
    
    
    
    (5,226
    )
    
    
    11,827Interest expense
    
    
    
    
    
    
    
    
    
    
    (5,803
    )
    
    
    (5,803
    )Other income (expense)
    
    
    12
    
    
    
    (26
    )
    
    
    242
    
    
    
    228Income (loss) before income taxes
    
    $
    4,101
    
    
    $
    12,938
    
    
    $
    (10,787
    )
    
    $
    6,252Income tax expense (benefit)
    
    
    1,577
    
    
    
    5,642
    
    
    
    (4,653
    )
    
    
    2,566Net income (loss)
    
    
    2,524
    
    
    
    7,296
    
    
    
    (6,134
    )
    
    
    3,686Segment Adjusted EBITDA
    
    $
    14,003
    
    
    $
    15,207
    
    
    $
    (4,009
    )
    
    $
    25,201
 
 (1)
    
    These are non-GAAP measures. See Use of Non-GAAP Financial Measures section  under Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations, for additional information. 21




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
 Nine Months Ended September 30, 2009RCM
    
    
    SM
    
    
    Corporate
    
    
    Total(Unaudited, in thousands)Results of Operations:Revenue:Gross administrative fees(1)
    
    $
    
    
    
    $
    119,498
    
    
    $
    
    
    
    $
    119,498Revenue share obligation(1)
    
    
    
    
    
    
    (41,003
    )
    
    
    
    
    
    
    (41,003
    )Other service fees
    
    
    149,425
    
    
    
    17,666
    
    
    
    
    
    
    
    167,091Total net revenue
    
    
    149,425
    
    
    
    96,161
    
    
    
    
    
    
    
    245,586Total operating expenses
    
    
    136,205
    
    
    
    57,443
    
    
    
    22,155
    
    
    
    215,803Operating income (loss)
    
    
    13,220
    
    
    
    38,718
    
    
    
    (22,155
    )
    
    
    29,783Interest expense
    
    
    (1
    )
    
    
    
    
    
    
    (14,014
    )
    
    
    (14,015
    )Other (expense) income
    
    
    (125
    )
    
    
    141
    
    
    
    388
    
    
    
    404Income (loss) before income taxes
    
    $
    13,094
    
    
    $
    38,859
    
    
    $
    (35,781
    )
    
    $
    16,172Income tax expense (benefit)
    
    
    5,017
    
    
    
    14,890
    
    
    
    (13,711
    )
    
    
    6,196Net income (loss)
    
    
    8,077
    
    
    
    23,969
    
    
    
    (22,070
    )
    
    
    9,976Segment Adjusted EBITDA
    
    $
    44,785
    
    
    $
    46,135
    
    
    $
    (15,529
    )
    
    $
    75,391
 
 (1)
    
    These are non-GAAP measures. See Use of Non-GAAP Financial Measures section  under Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations, for additional information. Nine Months Ended September 30, 2008RCM
    
    
    SM
    
    
    Corporate
    
    
    Total(Unaudited, in thousands)Results of Operations:Revenue:Gross administrative fees(1)
    
    $
    
    
    
    $
    117,634
    
    
    $
    
    
    
    $
    117,634Revenue share obligation(1)
    
    
    
    
    
    
    (39,279
    )
    
    
    
    
    
    
    (39,279
    )Other service fees
    
    
    102,218
    
    
    
    15,392
    
    
    
    
    
    
    
    117,610Total net revenue
    
    
    102,218
    
    
    
    93,747
    
    
    
    
    
    
    
    195,965Total operating expenses
    
    
    100,704
    
    
    
    54,289
    
    
    
    15,683
    
    
    
    170,676Operating income (loss)
    
    
    1,514
    
    
    
    39,458
    
    
    
    (15,683
    )
    
    
    25,289Interest expense
    
    
    (3
    )
    
    
    (1
    )
    
    
    (15,116
    )
    
    
    (15,120
    )Other income (expense)
    
    
    41
    
    
    
    (59
    )
    
    
    (2,083
    )
    
    
    (2,101
    )Income (loss) before income taxes
    
    $
    1,552
    
    
    $
    39,398
    
    
    $
    (32,882
    )
    
    $
    8,068Income tax expense (benefit)
    
    
    604
    
    
    
    15,251
    
    
    
    (12,596
    )
    
    
    3,259Net income (loss)
    
    
    948
    
    
    
    24,147
    
    
    
    (20,286
    )
    
    
    4,809Segment Adjusted EBITDA
    
    $
    26,043
    
    
    $
    46,547
    
    
    $
    (12,323
    )
    
    $
    60,267
 
 (1)
    
    These are non-GAAP measures. See Use of Non-GAAP Financial Measures section  under Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations, for additional information.  22




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited, in thousands)
    
    
    (Unaudited, in thousands)RCM Adjusted EBITDA
    
    $
    17,964
    
    
    $
    14,003
    
    
    $
    44,785
    
    
    $
    26,043SM Adjusted EBITDA
    
    
    15,710
    
    
    
    15,207
    
    
    
    46,135
    
    
    
    46,547Total reportable Segment Adjusted EBITDA
    
    
    33,674
    
    
    
    29,210
    
    
    
    90,920
    
    
    
    72,590Depreciation
    
    
    (2,552
    )
    
    
    (2,165
    )
    
    
    (7,455
    )
    
    
    (5,841
    )Amortization of intangibles
    
    
    (7,018
    )
    
    
    (7,324
    )
    
    
    (21,029
    )
    
    
    (16,117
    )Amortization of intangibles (included in
cost of revenue)
    
    
    (801
    )
    
    
    (233
    )
    
    
    (2,391
    )
    
    
    (995
    )Interest expense, net of interest income(1)
    
    
    2
    
    
    
    13
    
    
    
    12
    
    
    
    15Income tax
    
    
    (7,869
    )
    
    
    (7,219
    )
    
    
    (19,907
    )
    
    
    (15,855
    )Impairment of intangibles(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,916
    )Share-based compensation expense(3)
    
    
    (2,402
    )
    
    
    (1,755
    )
    
    
    (7,901
    )
    
    
    (4,720
    )Accuro & XactiMed purchase accounting
adjustments(4)
    
    
    1
    
    
    
    (707
    )
    
    
    (203
    )
    
    
    (2,066
    )Total reportable segment net income
    
    
    13,035
    
    
    
    9,820
    
    
    
    32,046
    
    
    
    25,095Corporate net (loss)
    
    
    (7,139
    )
    
    
    (6,134
    )
    
    
    (22,070
    )
    
    
    (20,286
    )Consolidated net income
    
    $
    5,896
    
    
    $
    3,686
    
    
    $
    9,976
    
    
    $
    4,809
 
 (1)
    
    Interest income is included in other income (expense) and is not netted against
interest expense in our Condensed Consolidated Statements of Operations.(2)
    
    Impairment of intangibles during the nine months ended September 30, 2008
primarily related to acquired developed technology from prior acquisitions, revenue cycle
management tradename and internally developed software products, mainly resulting from the acquired Accuro technology.(3)
    
    Represents non-cash share-based compensation to both employees and directors. We
believe excluding this non-cash expense allows us to compare our operating performance
without regard to the impact of share-based compensation, which varies from period to
period based on amount and timing of grants.(4)
    
    These adjustments include the effect on revenue of adjusting acquired deferred revenue
balances, net of any reduction in associated deferred costs, to fair value as of the
respective acquisition dates for Accuro and XactiMed, Inc. (or XactiMed). The reduction
of the deferred revenue balances materially affects period-to-period financial performance
comparability and revenue and earnings growth in future periods subsequent to each acquisition and is not indicative of changes in underlying results of operations. 11. DERIVATIVE FINANCIAL INSTRUMENTS
  Interest rate swap
  23




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
    Interest rate collar
     Par forward contracts
  24




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
    Interest rate swap termination
   Asset Derivatives
    
    
    Liability DerivativesSeptember 30,
    
    
    September 30,2009
    
    
    2009Derivatives designated as hedging instruments under
    
    Balance Sheet
    
    
    
    
    
    
    Balance Sheetgenerally accepted accounting principles
    
    Location
    
    
    Fair Value
    
    
    Location
    
    
    Fair Value(Unaudited)
    
    
    (Unaudited)Interest rate contracts
    
    
    
    
    
    $
    
    
    
    Other long term liabilities
    
    $
    3,155Foreign exchange contracts
    
    Other long term assets
    
    
    7
    
    
    
    
    
    
    
    Total derivatives designated as hedging instruments
    
    
    
    
    
    $
    7
    
    
    
    
    
    
    $
    3,155
 25




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##### Table of Contents



MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
 The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
for the Three Month Period Ended September 30, 2009
 Amount of Gain or (Loss)
    
    
    Location of Gain or (Loss)
    
    
    Amount of Gain or (Loss)Recognized in OCI on
    
    
    Reclassified from
    
    
    Reclassified fromDerivatives in
    
    Derivative (Effective
    
    
    Accumulated OCI into
    
    
    Accumulated OCI intoCash Flow Hedging
    
    Portion)
    
    
    Income
    
    Income (Effective Portion)Relationships
    
    2009
    
    
    (Effective Portion)
    
    
    2009(Unaudited)Interest rate contracts
    
    $
    (281
    )
    
    
    n/a
    
    
    $
    Foreign exchange contracts
    
    
    (72
    )
    
    
    n/a
    
    
    
    Total gain recognized in other
comprehensive income
    
    $
    (353
    )
    
    
    
    
    
    $
    
 The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
for the Nine Month Period Ended September 30, 2009
 Amount of Gain or (Loss)
    
    
    Location of Gain or (Loss)
    
    
    Amount of Gain or (Loss)Recognized in OCI on
    
    
    Reclassified from
    
    
    Reclassified fromDerivatives in
    
    Derivative (Effective
    
    
    Accumulated OCI into
    
    
    Accumulated OCI intoCash Flow Hedging
    
    Portion)
    
    
    Income
    
    
    Income (Effective Portion)Relationships
    
    2009
    
    
    (Effective Portion)
    
    
    2009(Unaudited)Interest rate contracts
    
    $
    317
    
    
    
    n/a
    
    
    $
    Foreign exchange contracts
    
    
    (186
    )
    
    
    n/a
    
    
    
    Total gain recognized in other comprehensive income
    
    $
    131
    
    
    
    
    
    
    $
    
 12. FAIR VALUE MEASUREMENTS
    
    
    Cash and cash equivalents: The carrying value reported in the Condensed Consolidated
Balance Sheets for these items approximates fair value due to the high credit standing of
the financial institutions holding these items and their liquid nature;
 26




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##### Table of Contents



MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)  (continued)
(In thousands, except share and per share amounts)
 
    
    Accounts receivable, net: The carrying value reported in the Condensed Consolidated
Balance Sheets is net of allowances for doubtful accounts which includes a degree of
counterparty non-performance risk;
    
    Accounts payable and current liabilities: The carrying value reported in the Condensed
Consolidated Balance Sheets for these items approximates fair value, which is the likely
amount for which the liability with short settlement periods would be transferred to a
market participant with a similar credit standing as the Company;
    
    Finance obligation: The carrying value of our finance obligation reported in the
Condensed Consolidated Balance Sheets approximates fair value based on current interest rates; and,
    
    Notes payable: The carrying value of our long-term notes payable reported in the
Condensed Consolidated Balance Sheets approximates fair value since they bear interest at
variable rates or fixed rates which contain an element of default risk. Refer to Note 5.
 13. RELATED PARTY TRANSACTION
  14. SUBSEQUENT EVENTS
  27




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 NOTE ON FORWARD-LOOKING STATEMENTS
   Overview
    Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    Change
    
    
    September 30,
    
    
    Change2009
    
    
    2008
    
    
    Amount
    
    
    %
    
    
    2009
    
    
    2008
    
    
    Amount
    
    
    %(In millions, except per share amounts)
    
    
    (In millions, except per share amounts)Gross fees(1)
    
    $
    96.0
    
    
    $
    90.2
    
    
    $
    5.8
    
    
    
    6.4
    %
    
    $
    286.6
    
    
    $
    235.2
    
    
    $
    51.4
    
    
    
    21.9
    %Revenue share obligation(1)
    
    
    (13.6
    )
    
    
    (14.2
    )
    
    
    0.6
    
    
    
    (4.2
    )
    
    
    (41.0
    )
    
    
    (39.2
    )
    
    
    (1.8
    )
    
    
    4.6Total net revenue
    
    
    82.4
    
    
    
    76.0
    
    
    
    6.4
    
    
    
    8.4
    
    
    
    245.6
    
    
    
    196.0
    
    
    
    49.6
    
    
    
    25.3Operating income
    
    
    13.5
    
    
    
    11.8
    
    
    
    1.7
    
    
    
    14.4
    
    
    
    29.8
    
    
    
    25.3
    
    
    
    4.5
    
    
    
    17.8Net income (loss)
    
    $
    5.9
    
    
    $
    3.7
    
    
    $
    2.2
    
    
    
    59.5
    %
    
    $
    10.0
    
    
    $
    4.8
    
    
    $
    5.2
    
    
    
    108.3
    %Adjusted EBITDA(1)
    
    $
    28.5
    
    
    $
    25.2
    
    
    $
    3.3
    
    
    
    13.1
    %
    
    $
    75.4
    
    
    $
    60.3
    
    
    $
    15.1
    
    
    
    25.0
    %Adjusted EBITDA margin(1)
    
    
    34.6
    %
    
    
    33.2
    %
    
    
    
    
    
    
    
    
    
    
    30.7
    %
    
    
    30.8
    %Cash EPS(1)
    
    $
    0.22
    
    
    $
    0.18
    
    
    $
    0.04
    
    
    
    22.2
    %
    
    $
    0.54
    
    
    $
    0.44
    
    
    $
    0.10
    
    
    
    22.7
    %
 
 (1)
    
    These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for additional information.  
    
    organic growth in our Revenue Cycle Management segment due to increased  revenue for our
reimbursement technologies, revenue cycle services and decision support software; and
 
    
    organic growth in our Spend Management segment due to increased demand for our
technology solutions consulting services.
 28




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##### Table of Contents




    
    in the case of operating income, increased share-based compensation expense from the effect of our recent Long Term Performance Incentive Plan;
 
    
    increased cost of revenue attributable to a higher percentage of net revenue being
derived from more service-based engagements within our Revenue Cycle Management segment; and
 
    
    higher operating expenses, exclusive of those mentioned
above, relating to such items as legal expense, new employee
compensation expense and bad debt expense.
   Recent Developments
  Long-Term Performance Incentive Plan
  Segment Structure and Revenue Streams
  Revenue Cycle Management
  29




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##### Table of Contents




    
    Subscription and implementation fees.We earn fixed subscription fees on a
monthly or annual basis on multi-year contracts for customer access to our software as a
service (SaaS) based solutions. We also charge our customers upfront fees for
implementation services. Implementation fees are earned over the subscription period or
estimated customer relationship period, whichever is longer.
 
    
    Transaction fees.For certain revenue cycle management solutions, we earn fees
that vary based on the volume of customer transactions or enrolled members.
 
    
    Software-related fees.We earn license, consulting, maintenance and other
software-related service fees for our business intelligence, decision support and other
software products. We have certain Revenue Cycle Management contracts that are sold in
multiple-element arrangements and include software products. We have considered Rule 5-03
of Regulation S-X for these types of multiple-element arrangements that include software
products and determined the amount is below the threshold that would require separate
disclosure on our statement of operations.
 
    
    Service fees.For certain revenue cycle management solutions, we earn fees based
on a percentage of cash remittances collected, fixed-fee and cost-plus consulting
arrangements. The related revenues are earned as services are rendered.
 Spend Management
  
    
    Administrative fees and revenue share obligation.We earn administrative fees
from manufacturers, distributors and other vendors of products and services with whom we
have contracts under which our group purchasing organization customers may purchase
products and services. Administrative fees represent a percentage, which we refer to as our
administrative fee ratio, typically ranging from 0.25% to 3.00% of the purchases made by
our group purchasing organization customers through contracts with our vendors.
 Our group purchasing organization customers make purchases, and receive shipments, directly
from the vendors. Generally on a monthly or quarterly basis, vendors provide us with a report
describing the purchases made by our customers through our group purchasing organization
vendor contracts, including associated administrative fees. We recognize revenue upon the
receipt of these reports from vendors.
 Some customer contracts require that a portion of our administrative fees are contingent upon
achieving certain financial improvements, such as lower supply costs, which we refer to as
performance targets. Contingent administrative fees are not recognized as revenue until the
customer confirms achievement of those contractual performance targets. Prior to customer
confirmation that a performance target has been achieved, we record contingent administrative
fees as deferred revenue on our consolidated balance sheet. Often, recognition of this
revenue occurs in periods subsequent to the recognition of the associated costs. Should we
fail to meet a performance target, we would be contractually obligated to refund some or all
of the contingent fees.
 Additionally, in many cases, we are contractually obligated to pay a portion of the
administrative fees to our hospital and health system customers. Typically this amount, which
we refer to as our revenue share obligation, is calculated as a percentage of administrative
fees earned on a particular customers purchases from our vendors. Our total net revenue on
our Condensed Consolidated Statements of Operations is shown net of the revenue share
obligation.
 
    
    Other service fees.The following items are included as other service fees in
our Condensed Consolidated Statements of Operations:
 
    
    Consulting fees.We consult with our customers regarding the costs and
utilization of medical devices and implantable physician preference items, or PPI, and
the efficiency and quality of their key clinical service lines. Our consulting projects
are typically fixed fee projects with an average duration of six to nine months, and the
related revenues are earned as services are rendered.
 
    
    Subscription fees.We also offer technology-enabled services that provide
spend management analytics and data services to improve operational efficiency, reduce
supply costs, and increase transparency across spend management processes. We earn fixed
subscription fees on a monthly basis for these Company-hosted SaaS-based solutions.
 30




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##### Table of Contents



Operating Expenses
  
    
    Cost of revenue.Cost of revenue primarily consists of the direct labor costs
incurred to generate our revenue. Direct labor costs consist primarily of salaries,
benefits, and other direct costs and share-based compensation expenses related
to personnel who provide services to implement our solutions for our customers. As the
majority of our services are generated internally, our costs to provide these services
are primarily labor-driven. A less significant portion of our cost of revenue consists of
costs of third-party products and services and client reimbursed out-of-pocket costs.
Cost of revenue does not include allocated amounts for rent, depreciation or
amortization, but does include the amortization for the cost of software to be sold,
leased, or otherwise marketed. As a result of the Accuro Acquisition and related
integration, there may be some reclassifications primarily between cost of revenue and
general and administrative expense classifications resulting from the implementation of our accounting
policies that could affect period over period comparability. In addition, any changes in revenue mix between our Revenue Cycle Management and Spend Management
segments, specifically related to service-type arrangements, may cause significant fluctuations in our cost of revenue and have a favorable or unfavorable impact
on operating income.
 
    
    Product development expenses.Product development expenses primarily consist
of the salaries, benefits, and share-based compensation expense of the technology
professionals who develop, support and maintain our software-related products and
services. Product development expenses are net of capitalized software development costs.
 
    
    Selling and marketing expenses.Selling and marketing expenses consist
primarily of costs related to marketing programs (including trade shows and brand
messaging), personnel-related expenses for sales and marketing employees (including
salaries, benefits, incentive compensation and share-based compensation expense),
certain meeting costs and travel-related expenses.
 
    
    General and administrative expenses.General and administrative expenses
consist primarily of personnel-related expenses for administrative employees (including
salaries, benefits, incentive compensation and share-based compensation expense) and
travel-related expenses, occupancy and other indirect costs, insurance costs,
professional fees, and other general overhead expenses.
 
    
    Depreciation.Depreciation expense consists primarily of depreciation of
fixed assets and the amortization of software, including capitalized costs of software
developed for internal use.
 
    
    Amortization of intangibles.Amortization of intangibles includes the
amortization of all intangible assets (with the exception of software), primarily
resulting from acquisitions.
 Results of Operations
 Consolidated Tables
  31




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Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited, in thousands)Net revenue:Revenue Cycle Management
    
    $
    51,635
    
    
    $
    45,791
    
    
    $
    149,425
    
    
    $
    102,218Spend ManagementGross administrative fees(1)
    
    
    39,222
    
    
    
    39,867
    
    
    
    119,498
    
    
    
    117,634Revenue share obligation(1)
    
    
    (13,591
    )
    
    
    (14,204
    )
    
    
    (41,003
    )
    
    
    (39,279
    )Other service fees
    
    
    5,127
    
    
    
    4,518
    
    
    
    17,666
    
    
    
    15,392Total Spend Management
    
    
    30,758
    
    
    
    30,181
    
    
    
    96,161
    
    
    
    93,747Total net revenue
    
    
    82,393
    
    
    
    75,972
    
    
    
    245,586
    
    
    
    195,965Operating expenses:Revenue Cycle Management
    
    
    44,067
    
    
    
    41,702
    
    
    
    136,205
    
    
    
    100,704Spend Management
    
    
    17,500
    
    
    
    17,217
    
    
    
    57,443
    
    
    
    54,289Total segment operating expenses
    
    
    61,567
    
    
    
    58,919
    
    
    
    193,648
    
    
    
    154,993Operating incomeRevenue Cycle Management
    
    
    7,568
    
    
    
    4,089
    
    
    
    13,220
    
    
    
    1,514Spend Management
    
    
    13,258
    
    
    
    12,964
    
    
    
    38,718
    
    
    
    39,458Total segment operating income
    
    
    20,826
    
    
    
    17,053
    
    
    
    51,938
    
    
    
    40,972Corporate expenses(2)
    
    
    7,281
    
    
    
    5,226
    
    
    
    22,155
    
    
    
    15,683Operating income
    
    
    13,545
    
    
    
    11,827
    
    
    
    29,783
    
    
    
    25,289Other income (expense):Interest expense
    
    
    (4,259
    )
    
    
    (5,803
    )
    
    
    (14,015
    )
    
    
    (15,120
    )Other income (expense)
    
    
    223
    
    
    
    228
    
    
    
    404
    
    
    
    (2,101
    )Income before income taxes
    
    
    9,509
    
    
    
    6,252
    
    
    
    16,172
    
    
    
    8,068Income tax expense
    
    
    3,613
    
    
    
    2,566
    
    
    
    6,196
    
    
    
    3,259Net income
    
    $
    5,896
    
    
    $
    3,686
    
    
    $
    9,976
    
    
    $
    4,809Reportable segment adjusted EBITDA(3):Revenue Cycle Management
    
    
    17,964
    
    
    
    14,003
    
    
    
    44,785
    
    
    
    26,043Spend Management
    
    $
    15,710
    
    
    $
    15,207
    
    
    $
    46,135
    
    
    $
    46,547Reportable segment adjusted EBITDA margin(4):Revenue Cycle Management
    
    
    34.8
    %
    
    
    30.6
    %
    
    
    30.0
    %
    
    
    25.5
    %Spend Management
    
    
    51.1
    %
    
    
    50.4
    %
    
    
    48.0
    %
    
    
    49.7
    %
 
 (1)
    
    These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for
additional information.(2)
    
    Represents the expenses of corporate office operations. Corporate does not represent an
operating segment of the Company.(3)
    
    Managements primary metric of segment profit or loss to
assess segment performance is Segment Adjusted EBITDA. See
Note 10 of the Notes to our Condensed Consolidated Financial Statements.(4)
    
    Reportable segment Adjusted EBITDA margin represents each reportable segments Adjusted
EBITDA as a percentage of each segments respective net revenue. 32




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Comparison of the Three Months Ended September 30, 2009 and September 30, 2008
 Three Months Ended September 30,2009
    
    
    2008
    
    
    Change% of
    
    
    
    
    
    
    % ofAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    Amount
    
    


    %(Unaudited, in thousands)Net revenue:Revenue Cycle Management
    
    $
    51,635
    
    
    
    62.7
    %
    
    $
    45,791
    
    
    
    60.3
    %
    
    $
    5,844
    
    
    
    12.8
    %Spend ManagementGross administrative fees(1)
    
    
    39,222
    
    
    
    47.6
    
    
    
    39,867
    
    
    
    52.5
    
    
    
    (645
    )
    
    
    (1.6
    )Revenue share obligation(1)
    
    
    (13,591
    )
    
    
    (16.5
    )
    
    
    (14,204
    )
    
    
    (18.7
    )
    
    
    613
    
    
    
    (4.3
    )Other service fees
    
    
    5,127
    
    
    
    6.2
    
    
    
    4,518
    
    
    
    5.9
    
    
    
    609
    
    
    
    13.5Total Spend Management
    
    
    30,758
    
    
    
    37.3
    
    
    
    30,181
    
    
    
    39.7
    
    
    
    577
    
    
    
    1.9Total net revenue
    
    $
    82,393
    
    
    
    100.0
    %
    
    $
    75,972
    
    
    
    100.0
    %
    
    $
    6,421
    
    
    
    8.5
    %
 
 (1)
    
    These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for additional information. Total net revenue .
 Revenue Cycle Management net revenue .
 Spend Management net revenue .
 
    
    Gross administrative fees.Non-GAAP gross administrative fee revenue decreased
by $0.6 million, or 1.6%, as compared to the prior period, due to the following: (i) lower
purchasing volumes by existing customers under our group purchasing organization contracts
with our manufacturer and distributor vendors primarily resulting from lower hospital patient volumes in the first half of the year. This amounted
to a decrease of approximately $0.1 million in non-GAAP gross administrative fees not associated with performance targets for the three months ended September 30, 2009; and (ii)
the relative timing of period over period non-GAAP gross administrative fee deferrals due to performance-based customer contracts, which amounted to a decrease in contingent revenue of approximately
$0.5 million for the three months ended September 30, 2009. We may have fluctuations in our
non-GAAP gross administrative fee revenue in future quarters as the timing of vendor
reporting and customer acknowledgement of achieved performance targets varies and may not
result in discernable trends. In addition, a decrease in customer patient volume and supply
utilization, the impact of continued hospital budget challenges and the current economic
environment may continue to negatively impact non-GAAP gross administrative fee revenue in
the future.
 
    
    Revenue share obligation.Non-GAAP revenue share obligation decreased $0.6
million, or 4.3%, as compared to the prior period.
The decrease in our revenue share ratio was primarily the result of changes in customer revenue mix during the
period and a decrease in non-GAAP gross administrative fees. We analyze the impact of our non-GAAP
revenue share obligation on our results of operations by calculating the ratio of
non-GAAP revenue share obligation to non-GAAP gross administrative fees (or the revenue
share ratio). The revenue share ratio for the three months ended September 30, 2009 was
34.7% as compared to 35.6% for the three months ended September 30, 2008.
 We may also experience fluctuations in our revenue share ratio because of changes
in the timing of vendor reporting and the timing of revenue recognition based on
performance target achievement for certain customers.
 
    
    Other service fees. The $0.6 million or 13.5% increase in other service fees was
primarily attributable to our supply chain consulting growth due to an increase in the
number of consulting engagements from new and existing customers.
 33




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##### Table of Contents



Total Operating Expenses
 Three Months Ended September 30,2009
    
    
    2008
    
    
    Change% of
    
    
    
    
    
    
    % ofAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    Amount
    
    
    %(Unaudited, in thousands)Operating expenses:Cost of revenue
    
    $
    21,472
    
    
    
    26.1
    %
    
    $
    17,101
    
    
    
    22.5
    %
    
    $
    4,371
    
    
    
    25.6
    %Product development expenses
    
    
    4,156
    
    
    
    5.0
    
    
    
    4,719
    
    
    
    6.2
    
    
    
    (563
    )
    
    
    (11.9
    )Selling and marketing expenses
    
    
    10,038
    
    
    
    12.2
    
    
    
    9,641
    
    
    
    12.7
    
    
    
    397
    
    
    
    4.1General and administrative expenses
    
    
    23,039
    
    
    
    28.0
    
    
    
    22,779
    
    
    
    30.0
    
    
    
    260
    
    
    
    1.1Depreciation
    
    
    3,125
    
    
    
    3.8
    
    
    
    2,581
    
    
    
    3.4
    
    
    
    544
    
    
    
    21.1Amortization of intangibles
    
    
    7,018
    
    
    
    8.5
    
    
    
    7,324
    
    
    
    9.6
    
    
    
    (306
    )
    
    
    (4.2
    )Total operating expenses
    
    
    68,848
    
    
    
    83.6
    
    
    
    64,145
    
    
    
    84.4
    
    
    
    4,703
    
    
    
    7.3Operating expenses by segment:Revenue Cycle Management
    
    
    44,067
    
    
    
    53.5
    
    
    
    41,702
    
    
    
    54.9
    
    
    
    2,365
    
    
    
    5.7Spend Management
    
    
    17,500
    
    
    
    21.2
    
    
    
    17,217
    
    
    
    22.7
    
    
    
    283
    
    
    
    1.6Total segment operating expenses
    
    
    61,567
    
    
    
    74.7
    
    
    
    58,919
    
    
    
    77.6
    
    
    
    2,648
    
    
    
    4.5Corporate expenses
    
    
    7,281
    
    
    
    8.8
    
    
    
    5,226
    
    
    
    6.9
    
    
    
    2,055
    
    
    
    39.3Total operating expenses
    
    $
    68,848
    
    
    
    83.6
    %
    
    $
    64,145
    
    
    
    84.4
    %
    
    $
    4,703
    
    
    
    7.3
    %
 Cost of revenue .
  Product development expenses .
  Selling and marketing expenses .
 General and administrative expenses .
  34




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##### Table of Contents



Depreciation .
 Amortization of intangibles .
 Segment Operating Expenses
 Revenue Cycle Management expenses .
   Spend Management expenses .
   Corporate expenses .
 Non-operating Expenses
 Interest expense .
 Other income .
 Income tax expense
 35




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Comparison of the Nine Months Ended September 30, 2009 and September 30, 2008
 Nine Months Ended September 30,2009
    
    
    2008
    
    
    Change% of
    
    
    
    
    
    
    % ofAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    Amount
    
    
    %(Unaudited, in thousands)Net revenue:Revenue Cycle Management
    
    $
    149,425
    
    
    
    60.8
    %
    
    $
    102,218
    
    
    
    52.2
    %
    
    $
    47,207
    
    
    
    46.2
    %Spend ManagementGross administrative fees(1)
    
    
    119,498
    
    
    
    48.7
    
    
    
    117,634
    
    
    
    60.0
    
    
    
    1,864
    
    
    
    1.6Revenue share obligation(1)
    
    
    (41,003
    )
    
    
    (16.7
    )
    
    
    (39,279
    )
    
    
    (20.0
    )
    
    
    (1,725
    )
    
    
    4.4Other service fees
    
    
    17,666
    
    
    
    7.2
    
    
    
    15,392
    
    
    
    7.9
    
    
    
    2,275
    
    
    
    14.8Total Spend Management
    
    
    96,161
    
    
    
    39.2
    
    
    
    93,747
    
    
    
    47.8
    
    
    
    2,414
    
    
    
    2.6Total net revenue
    
    $
    245,586
    
    
    
    100.0
    %
    
    $
    195,965
    
    
    
    100.0
    %
    
    $
    49,621
    
    
    
    25.3
    %
 
 (1)
    
    These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for additional information. Total Net Revenue
  Revenue Cycle Management net revenue .
 
    
    Acquisition related revenue.The operating results of Accuro were included in
our nine months ended September 30, 2009 and were only included in the comparable prior
period for approximately four months from the date of the Accuro Acquisition on June 2,
2008. $33.3 million of the net revenue increase was attributable to Accuro.Given the significant impact of the Accuro Acquisition on our Revenue Cycle Management
segment, we believe acquisition-affected measures are useful for the comparison of our year
over year net revenue growth. Revenue Cycle Management net revenue for the nine months ended
September 30, 2009 was $149.4 million, an increase of $18.7 million, or 14.3%, from Revenue
Cycle Management non-GAAP acquisition-affected net revenue of $130.8 million for the nine
months ended September 30, 2008. The following table sets forth the reconciliation of Revenue
Cycle Management non-GAAP acquisition-affected net revenue to GAAP net revenue:
 Nine Months Ended September 30,2009
    
    
    2008
    
    
    ChangeAmount
    
    
    Amount
    
    
    Amount
    
    
    %(Unaudited, in thousands)Revenue Cycle Management net revenue
    
    $
    149,425
    
    
    $
    102,218
    
    
    $
    47,207
    
    
    
    46.2
    %Acquisition related RCM adjustment(1)
    
    
    
    
    
    
    28,540
    
    
    
    (28,540
    )
    
    
    (100.0
    )Total RCM acquisition-affected net revenue(1)
    
    $
    149,425
    
    
    $
    130,758
    
    
    $
    18,667
    
    
    
    14.3
    %
 
 (1)
    
    These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for additional information. 
    
    Non-acquisition related revenue. The increase in net revenue from non-Accuro
related products and services was $13.9 million, or 17.4% growth. The increase was
primarily attributable to stronger demand for our products and services and consisted of a
$5.5 million increase from our claims and denial management tools; a $5.4 million increase
from our revenue cycle services; and a $3.6 million increase from our
decision support software.
 Spend Management net revenue .
 36




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
    
    Gross administrative fees.Non-GAAP gross administrative fee revenue increased
by $1.9 million, or 1.6%, as compared to the prior period, primarily due to higher
purchasing volumes by new and existing customers under our group purchasing organization contracts
with our manufacturer and distributor vendors. The net increase in non-GAAP gross
administrative fee revenue was comprised of a $4.9 million, or 4.3% increase, in non-GAAP
gross administrative fee revenue not associated with performance targets. This increase was
partially offset by a $3.0 million decrease in contingent revenue, which is recognized upon
confirmation from certain customers that respective performance targets had been achieved,
during the nine months ended September 30, 2009 compared to the nine months ended September
30, 2008. We may have fluctuations in our non-GAAP gross administrative fee revenue in
future quarters as the timing of vendor reporting and customer acknowledgement of achieved
performance targets vary in their timing and may not result in discernable trends. In
addition, a decrease in customer patient volume and supply utilization, the effect of
continued hospital budget challenges and the current economic environment may negatively
impact non-GAAP gross administrative fees in the future.
    
    Revenue share obligation.Non-GAAP revenue share obligation increased $1.7
million, or 4.4%, as compared to the prior period. The increase in
our revenue share ratio was primarily the result of changes in customer revenue mix to larger
customers during the period. Larger customers who commit to higher levels of purchasing
volume through our group purchasing organization contracts typically receive higher
non-GAAP revenue share obligation percentages. We analyze the impact of our non-GAAP
revenue share obligation on our results of operations by calculating the ratio of
non-GAAP revenue share obligation to non-GAAP gross administrative fees (or the revenue
share ratio). The revenue share ratio for the nine months ended September 30, 2009 was
34.3% as compared to 33.4% for the nine months ended September 30, 2008. We may also experience fluctuations in our
revenue share ratio because of the timing of vendor reporting and the timing of revenue
recognition based on performance target achievement for certain customers.
    
    Other service fees. The $2.3 million, or 14.8%, increase in other service fees
primarily related to $2.7 million in higher revenues from our supply chain consulting
partially offset by $0.4 million decrease in our market research services. The growth in
supply chain consulting was mainly due to an increased number of engagements from new and
existing customers.
 Total Operating Expenses
 2009
    
    
    2008
    
    
    Change% of
    
    
    
    
    
    
    % ofAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    Amount
    
    
    %(Unaudited, in thousands)Operating expenses:Cost of revenue
    
    $
    55,830
    
    
    
    22.7
    %
    
    $
    36,252
    
    
    
    18.5
    %
    
    $
    19,578
    
    
    
    54.0
    %Product development expenses
    
    
    15,424
    
    
    
    6.3
    
    
    
    11,027
    
    
    
    5.6
    
    
    
    4,397
    
    
    
    39.9Selling and marketing expenses
    
    
    36,529
    
    
    
    14.9
    
    
    
    32,096
    
    
    
    16.4
    
    
    
    4,433
    
    
    
    13.8General and administrative expenses
    
    
    77,971
    
    
    
    31.7
    
    
    
    66,054
    
    
    
    33.7
    
    
    
    11,917
    
    
    
    18.0Depreciation
    
    
    9,020
    
    
    
    3.7
    
    
    
    7,051
    
    
    
    3.6
    
    
    
    1,969
    
    
    
    27.9Amortization of intangibles
    
    
    21,029
    
    
    
    8.6
    
    
    
    16,117
    
    
    
    8.2
    
    
    
    4,912
    
    
    
    30.5Impairment of intangibles
    
    
    
    
    
    
    0.0
    
    
    
    2,079
    
    
    
    1.1
    
    
    
    (2,079
    )
    
    
    (100.0
    )Total operating expenses
    
    
    215,803
    
    
    
    87.9
    
    
    
    170,676
    
    
    
    87.1
    
    
    
    45,127
    
    
    
    26.4Operating expenses by segment:Revenue Cycle Management
    
    
    136,205
    
    
    
    55.5
    
    
    
    100,704
    
    
    
    51.4
    
    
    
    35,501
    
    
    
    35.3Spend Management
    
    
    57,443
    
    
    
    23.4
    
    
    
    54,289
    
    
    
    27.7
    
    
    
    3,154
    
    
    
    5.8Total segment operating expenses
    
    
    193,648
    
    
    
    78.9
    
    
    
    154,993
    
    
    
    79.1
    
    
    
    38,655
    
    
    
    24.9Corporate expenses
    
    
    22,155
    
    
    
    9.0
    
    
    
    15,683
    
    
    
    8.0
    
    
    
    6,472
    
    
    
    41.3Total operating expenses
    
    $
    215,803
    
    
    
    87.9
    %
    
    $
    170,676
    
    
    
    87.1
    %
    
    $
    45,127
    
    
    
    26.4
    %
 Cost of revenue .
 37




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Product development expenses .
   Selling and marketing expenses .
  General and administrative expenses .
   Depreciation .
  Amortization of intangibles .
 38




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Impairment of intangibles .
  Segment Operating Expenses
 Revenue Cycle Management expenses .
   Spend Management expenses .
   Corporate expenses .
 Non-operating Expenses
 Interest expense .
 Other income (expense) .
 39




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Income tax expense
 Critical Accounting Policies
   Allowance for Doubtful Accounts
       Liquidity and Capital Resources
  40




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
    
    changes in working capital due to inconsistent timing of cash receipts and payments for
major recurring items such as trade accounts payable, revenue share obligation,
incentive compensation, changes in deferred revenue, and other various items;
    
    acquisitions; and
    
    unforeseeable events or transactions.
  Discussion of Cash Flow
  Nine Months EndedSeptember 30, 2009(Unaudited, in millions)Net income
    
    $
    10.0Non-cash items
    
    
    45.6Net changes in working capital
    
    
    (15.6
    )Net cash provided by operations
    
    $
    40.0
   41




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Working capital changes resulting in a reduction to cash flow from operations of $21.5
million were:
 
    
    an increase in accounts receivable of $4.5 million related to the timing of invoicing
and cash collections and because of our growth;
    
    an increase in other long term assets of $3.6 million related to the timing of cash
payments for our annual customer and vendor meeting and other deferred sales expenses;
    
    an increase in prepaid expenses and other assets of $1.5 million primarily related to
sales incentive compensation payments;
    
    a decrease in accrued revenue share obligation and rebates of $5.0 million due to the
timing of cash payments and customer purchasing volume at our GPO;
    
    a decrease in accrued payroll and benefits of $4.1 million due to the payroll cycle
timing and incentive payment accruals; and
    
    a decrease in other accrued expenses of $2.8 million due to the timing of various payment obligations.
    Off-Balance Sheet Arrangements and Commitments
   Amount(Unaudited)2009
    
    $
    2,1122010
    
    
    7,8002011
    
    
    6,8062012
    
    
    6,9552013
    
    
    6,767Thereafter
    
    
    25,980Total future minimum rental payments
    
    $
    56,420
  42




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Use of Non-GAAP Financial Measures
   Gross Fees, Gross Administrative Fees and Revenue Share Obligation .
 EBITDA, Adjusted EBITDA and Adjusted EBITDA margin .
   43




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
    
    EBITDA does not reflect our cash expenditures or future requirements for capital
expenditures or contractual commitments;
    
    EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
    
    EBITDA does not reflect the interest expense, or the cash requirements to service
interest or principal payments under our credit agreement;
    
    EBITDA does not reflect income tax payments we are required to make; and
    
    Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized often will have to be replaced in the future, and EBITDA does not
reflect any cash requirements for such replacements.
   44




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Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited, in thousands)Net income
    
    $
    5,896
    
    
    $
    3,686
    
    
    $
    9,976
    
    
    $
    4,809Depreciation
    
    
    3,125
    
    
    
    2,581
    
    
    
    9,020
    
    
    
    7,051Amortization of intangibles
    
    
    7,018
    
    
    
    7,324
    
    
    
    21,029
    
    
    
    16,117Amortization of intangibles (included in
cost of revenue)
    
    
    801
    
    
    
    233
    
    
    
    2,391
    
    
    
    995Interest expense, net of interest
income(1)
    
    
    4,255
    
    
    
    5,761
    
    
    
    13,994
    
    
    
    13,715Income tax expense
    
    
    3,613
    
    
    
    2,566
    
    
    
    6,196
    
    
    
    3,259EBITDA
    
    
    24,708
    
    
    
    22,151
    
    
    
    62,606
    
    
    
    45,946Impairment of intangibles(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,079Share-based compensation(3)
    
    
    3,951
    
    
    
    2,452
    
    
    
    12,911
    
    
    
    6,591Rental income from capitalizing building
lease(4)
    
    
    (110
    )
    
    
    (109
    )
    
    
    (329
    )
    
    
    (329
    )Purchase accounting adjustment(5)
    
    
    (1
    )
    
    
    707
    
    
    
    203
    
    
    
    2,066Interest rate swap cancellation(6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,914Adjusted EBITDA
    
    $
    28,548
    
    
    $
    25,201
    
    
    $
    75,391
    
    
    $
    60,267
 
 (1)
    
    Interest income is included in other income (expense) and is not netted against
interest expense in our Condensed Consolidated Statements of Operations.(2)
    
    Impairment of intangibles during the nine months ended September 30, 2008
primarily relates to acquired developed technology from prior acquisitions, revenue cycle
management tradename and internally developed software products, mainly resulting from the
acquired Accuro technology.(3)
    
    Represents non-cash share-based compensation to both employees and directors. The
significant increase in 2009 is due to share-based grants made from the Long-Term
Performance Incentive Plan previously discussed. We believe excluding this non-cash expense
allows us to compare our operating performance without regard to the impact of share-based
compensation expense, which varies from period to period based on the amount and timing of
grants.(4)
    
    The imputed rental income recognized with respect to a capitalized building lease is
deducted from net income (loss) due to its non-cash nature. We believe this income is not a
useful measure of continuing operating performance. See our Consolidated Financial
Statements filed in our annual report on Form 10-K for the year ended December 31, 2008 for
further discussion of this rental income.(5)
    
    These adjustments include the effect on revenue of adjusting acquired deferred revenue
balances, net of any reduction in associated deferred costs, to fair value as of the
respective acquisition dates for Accuro and XactiMed. The reduction of the deferred revenue balances
materially affects period-to-period financial performance comparability and revenue and
earnings growth in future periods subsequent to the acquisition and is not indicative of
changes in underlying results of operations.(6)
    
    During the nine months ended September 30, 2008, we recorded an expense
associated with the cancellation of our interest rate swap arrangements. In connection with
the cancellation, we paid the counterparty $3.9 million in termination fees. We believe
such expense is infrequent in nature and is not indicative of continuing operating
performance. Revenue Cycle Management Acquisition-Affected Net Revenue .
 45




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Cash Diluted Earnings Per Share
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Per share data
    
    (Unaudited)
    
    (Unaudited)Diluted EPS attributable to common stockholders
    
    $
    0.10
    
    
    $
    0.07
    
    
    $
    0.17
    
    
    $
    0.09Non-cash, tax-adjusted acquisition-related intangible amortization
    
    
    0.08
    
    
    
    0.08
    
    
    
    0.23
    
    
    
    0.20Non-cash, tax-adjusted share-based compensation(1)
    
    
    0.04
    
    
    
    0.03
    
    
    
    0.14
    
    
    
    0.08Tax-adjusted interest rate swap cancellation(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.05Non-cash, tax-adjusted impairment of intangibles(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02Non-GAAP cash diluted EPS
    
    $
    0.22
    
    
    $
    0.18
    
    
    $
    0.54
    
    
    $
    0.44Weighted average shares  diluted
    
    
    57,855
    
    
    
    56,136
    
    
    
    57,223
    
    
    
    51,035
 
 (1)
    
    Represents the per share impact, on a tax-adjusted basis of non-cash share-based
compensation to both employees and directors. The significant increase in 2009 is due to
share-based grants made from the Long-Term Performance Incentive Plan previously discussed.
We believe excluding this non-cash expense allows us to compare our operating performance
without regard to the impact of share-based compensation expense, which varies from period
to period based on the amount and timing of grants.(2)
    
    Represents the per share impact, on a tax-adjusted basis of an expense associated with
the cancellation of our interest rate swap arrangement during the nine months
ended September 30, 2008. In connection with the cancellation, we paid the counterparty
$3.9 million in termination fees. We believe such expense is infrequent in nature and is
not indicative of continuing operating performance.(3)
    
    Represents the per share impact, on a tax-adjusted basis of impairment of intangibles
during the nine months ended September 30, 2008. The impairment primarily relates
to acquired developed technology from prior acquisitions, revenue cycle management
tradename and internally developed software products deemed impaired as a result of the
Accuro Acquisition. New Pronouncements
 Accounting Standards Codification
 The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162
 46




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Revenue Recognition
  Software
  Accounting for Transfers of Financial Assets
  Consolidation of Variable Interest Entities
  Subsequent Events
  47




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##### Table of Contents



Business Combinations
  Fair Value Measurements
  Disclosures about Derivative Instruments and Hedging Activities
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign currency exchange risk .
  Interest rate risk .
  48




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##### Table of Contents



Item 4. Controls and Procedures
 Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  49




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##### Table of Contents



Item 1A. Risk Factors
 Risks Related to Government Regulation
 Our business and our industry are highly regulated, and if government regulations are interpreted
or enforced in a manner adverse to us or our business, we may be subject to enforcement actions,
penalties, and other material limitations on our business.
     
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 ExhibitNo.
    
    Description of Exhibit31.1*
    
    Sarbanes-Oxley Act of 2002, Section 302 Certification for President and Chief Executive Officer31.2*
    
    Sarbanes-Oxley Act of 2002, Section 302 Certification for Chief Financial Officer32.1*
    
    Sarbanes-Oxley Act of 2002, Section 906 Certification for President and Chief Executive Officer
and Chief Financial Officer
 
 *
    
    Filed herewith 50




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##### Table of Contents



Signatures
  Signature
    
    Title
    
    Date/s/ JOHN A. BARDIS

Name: John A. Bardis
    
    Chairman of the Board of Directors and Chief
Executive Officer 
(Principal
Executive Officer)
    
    November 6, 2009/s/ L. NEIL HUNN

Name: L. Neil Hunn
    
    Chief Financial Officer 
(Principal
Financial Officer)
    
    November 6, 2009
 51




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##### Table of Contents



ExhibitNo.
    
    Description of Exhibit31.1*
    
    Sarbanes-Oxley Act of 2002, Section 302 Certification for President and Chief
Executive Officer31.2*
    
    Sarbanes-Oxley Act of 2002, Section 302 Certification for Chief Financial Officer32.1*
    
    Sarbanes-Oxley Act of 2002, Section 906 Certification for President and Chief
Executive Officer
and Chief Financial Officer
 
 *
    
    Filed herewith 52