##### Table of Contents



UNITED STATESSECURITIES 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 June 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.
  DELAWARE(State or other jurisdiction of 
incorporation or organization)
    
    51-0391128(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 June 30, 2009 and December 31, 2008
    
    
    3Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008
    
    
    4Condensed Consolidated Statement of Stockholders Equity for the six months ended June 30, 2009
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    47Item 4. Controls and Procedures
    
    
    48PART II. OTHER INFORMATION
    
    
    48Item 1. Legal Proceedings
    
    
    48Item 1A. Risk Factors
    
    
    48Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    48Item 3. Defaults Upon Senior Securities
    
    
    49Item 4. Submission of Matters to a Vote of Security Holders
    
    
    49Item 5. Other Information
    
    
    49Item 6. Exhibits
    
    
    49Signatures
    
    
    49EX-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)
 June 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)ASSETSCurrentCash and cash equivalents (Note 1)
    
    $
    
    
    
    $
    5,429Accounts receivable, net of allowances of
$1,752 and $2,247 as of June 30, 2009 and
December 31, 2008, respectively
    
    
    56,272
    
    
    
    55,048Deferred tax asset, current
    
    
    13,780
    
    
    
    13,780Prepaid expenses and other current assets
    
    
    7,151
    
    
    
    5,997Total current assets
    
    
    77,203
    
    
    
    80,254Property and equipment, net
    
    
    48,565
    
    
    
    42,417Other long term assetsGoodwill
    
    
    511,861
    
    
    
    508,748Intangible assets, net
    
    
    109,959
    
    
    
    124,340Other
    
    
    18,947
    
    
    
    18,101Other long term assets
    
    
    640,767
    
    
    
    651,189Total assets
    
    $
    766,535
    
    
    $
    773,860LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    6,571
    
    
    $
    6,725Accrued revenue share obligation and rebates
    
    
    30,607
    
    
    
    29,698Accrued payroll and benefits
    
    
    15,458
    
    
    
    21,837Other accrued expenses
    
    
    7,829
    
    
    
    6,981Deferred revenue, current portion
    
    
    25,546
    
    
    
    24,280Deferred purchase consideration (Note 3)
    
    
    
    
    
    
    19,361Current portion of notes payable
    
    
    2,685
    
    
    
    30,277Current portion of finance obligation
    
    
    156
    
    
    
    149Total current liabilities
    
    
    88,852
    
    
    
    139,308Notes payable, less current portion
    
    
    238,667
    
    
    
    215,349Finance obligation, less current portion
    
    
    9,779
    
    
    
    9,860Deferred revenue, less current portion
    
    
    5,598
    
    
    
    6,411Deferred tax liability
    
    
    14,028
    
    
    
    15,817Other long term liabilities
    
    
    5,360
    
    
    
    4,176Total liabilities
    
    
    362,284
    
    
    
    390,921Commitments and contingenciesStockholders equityCommon stock, $0.01 par value, 150,000,000
shares authorized; 55,888,000 and 53,917,000
shares issued and outstanding as of June 30,
2009 and December 31, 2008, respectively
    
    
    559
    
    
    
    539Additional paid in capital
    
    
    622,069
    
    
    
    605,340Accumulated other comprehensive loss (Note 11)
    
    
    (1,605
    )
    
    
    (2,088
    )Accumulated deficit
    
    
    (216,772
    )
    
    
    (220,852
    )Total stockholders equity
    
    
    404,251
    
    
    
    382,939Total liabilities and stockholders equity
    
    $
    766,535
    
    
    $
    773,860
  3




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##### Table of Contents



MedAssets, Inc.
  Condensed Consolidated Statements of Operations
 (Unaudited)
 Three Months Ended June 30,
    
    Six Months Ended June 30,2009
    
    2008
    
    2009
    
    2008(In thousands, except per share amounts)Revenue:Administrative fees, net
    
    $
    25,378
    
    
    $
    25,148
    
    
    $
    52,864
    
    
    $
    52,693Other service fees
    
    
    58,831
    
    
    
    36,087
    
    
    
    110,329
    
    
    
    67,300Total net revenue
    
    
    84,209
    
    
    
    61,235
    
    
    
    163,193
    
    
    
    119,993Operating expenses:Cost of revenue (inclusive of
certain amortization expense)
    
    
    17,613
    
    
    
    10,688
    
    
    
    34,358
    
    
    
    19,151Product development expenses
    
    
    5,250
    
    
    
    3,611
    
    
    
    11,268
    
    
    
    6,308Selling and marketing expenses
    
    
    15,595
    
    
    
    9,544
    
    
    
    26,491
    
    
    
    22,455General and administrative expenses
    
    
    27,481
    
    
    
    22,215
    
    
    
    54,932
    
    
    
    43,275Depreciation
    
    
    2,985
    
    
    
    2,349
    
    
    
    5,895
    
    
    
    4,470Amortization of intangibles
    
    
    7,000
    
    
    
    5,016
    
    
    
    14,011
    
    
    
    8,793Impairment of intangibles (Note 3)
    
    
    
    
    
    
    2,079
    
    
    
    
    
    
    
    2,079Total operating expenses
    
    
    75,924
    
    
    
    55,502
    
    
    
    146,955
    
    
    
    106,531Operating income
    
    
    8,285
    
    
    
    5,733
    
    
    
    16,238
    
    
    
    13,462Other income (expense):Interest (expense)
    
    
    (4,763
    )
    
    
    (5,000
    )
    
    
    (9,756
    )
    
    
    (9,317
    )Other income (expense)
    
    
    (33
    )
    
    
    (3,362
    )
    
    
    181
    
    
    
    (2,329
    )Income (loss) before income taxes
    
    
    3,489
    
    
    
    (2,629
    )
    
    
    6,663
    
    
    
    1,816Income tax expense (benefit)
    
    
    1,314
    
    
    
    (1,053
    )
    
    
    2,583
    
    
    
    693Net income (loss)
    
    $
    2,175
    
    
    $
    (1,576
    )
    
    $
    4,080
    
    
    $
    1,123Basic and diluted income (loss) per share:Basic net income (loss)
    
    $
    0.04
    
    
    $
    (0.03
    )
    
    $
    0.08
    
    
    $
    0.02Diluted net income (loss)
    
    $
    0.04
    
    
    $
    (0.03
    )
    
    $
    0.07
    
    
    $
    0.02Weighted average shares  basic
    
    
    54,527
    
    
    
    47,288
    
    
    
    54,316
    
    
    
    45,853Weighted average shares  diluted
    
    
    56,968
    
    
    
    47,288
    
    
    
    56,699
    
    
    
    48,485
  4




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MedAssets, Inc.
  Condensed Consolidated Statement of Stockholders Equity (Unaudited)
 Six Months Ended June 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
    
    
    931
    
    
    
    9
    
    
    
    4,467
    
    
    
    
    
    
    
    
    
    
    
    4,476Issuance of common restricted stock
    
    
    1,040
    
    
    
    11
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    8,960
    
    
    
    
    
    
    
    
    
    
    
    8,960Excess tax benefit from stock option
exercises
    
    
    
    
    
    
    
    
    
    
    3,313
    
    
    
    
    
    
    
    
    
    
    
    3,313Other comprehensive income:Unrealized gain from hedging activities
(net of a tax expense of $292)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    483
    
    
    
    
    
    
    
    483Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,080
    
    
    
    4,080Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    483
    
    
    
    4,080
    
    
    
    4,563Balances at June 30, 2009
    
    
    55,888
    
    
    $
    559
    
    
    $
    622,069
    
    
    $
    (1,605
    )
    
    $
    (216,772
    )
    
    $
    404,251
  5




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##### Table of Contents



MedAssets, Inc.
  Condensed Consolidated Statements of Cash Flows
 (Unaudited)
 Six Months Ended June 30,2009
    
    
    2008(In thousands)Operating activitiesNet income
    
    $
    4,080
    
    
    $
    1,123Adjustments to reconcile income from continuing operations to net cash provided by operating activities:Bad debt expense
    
    
    2,524
    
    
    
    985Depreciation
    
    
    7,115
    
    
    
    4,729Amortization of intangibles
    
    
    14,382
    
    
    
    9,296Loss (gain) on sale of assets
    
    
    193
    
    
    
    (3
    )Noncash stock compensation expense
    
    
    8,960
    
    
    
    4,139Excess tax benefit from exercise of stock options
    
    
    (3,313
    )
    
    
    Amortization of debt issuance costs
    
    
    922
    
    
    
    414Noncash interest expense, net
    
    
    913
    
    
    
    402Impairment of intangibles
    
    
    
    
    
    
    2,079Deferred income tax (benefit) expense
    
    
    (57
    )
    
    
    165Changes in assets and liabilities:Accounts receivable
    
    
    (3,872
    )
    
    
    (5,640
    )Prepaid expenses and other assets
    
    
    (1,155
    )
    
    
    (915
    )Other long-term assets
    
    
    (1,895
    )
    
    
    (703
    )Accounts payable
    
    
    1,966
    
    
    
    5,000Accrued revenue share obligations and rebates
    
    
    909
    
    
    
    (2,364
    )Accrued payroll and benefits
    
    
    (6,483
    )
    
    
    (956
    )Other accrued expenses
    
    
    (2,725
    )
    
    
    3,262Deferred revenue
    
    
    453
    
    
    
    3,361Cash provided by operating activities
    
    
    22,917
    
    
    
    24,374Investing activitiesPurchases of property, equipment and software
    
    
    (6,186
    )
    
    
    (2,790
    )Capitalized software development costs
    
    
    (7,071
    )
    
    
    (4,953
    )Acquisitions, net of cash acquired (Note 3)
    
    
    (18,275
    )
    
    
    (209,423
    )Cash used in investing activities
    
    
    (31,532
    )
    
    
    (217,166
    )Financing activitiesProceeds from notes payable
    
    
    60,932
    
    
    
    100,000Repayment of notes payable and capital lease obligations
    
    
    (65,206
    )
    
    
    (24,136
    )Repayment of finance obligations
    
    
    (329
    )
    
    
    (320
    )Debt issuance costs
    
    
    
    
    
    
    (6,167
    )Excess tax benefit from exercise of stock options
    
    
    3,313
    
    
    
    Interest accrued on note receivable from stockholders
    
    
    
    
    
    
    (14
    )Issuance of common stock, net of offering costs
    
    
    4,476
    
    
    
    534Cash provided by financing activities
    
    
    3,186
    
    
    
    69,897Net decrease in cash and cash equivalents
    
    
    (5,429
    )
    
    
    (122,895
    )Cash and cash equivalents, beginning of period
    
    
    5,429
    
    
    
    136,952Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    14,057
  6




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##### Table of Contents



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
 Disclosures about Derivative Instruments and Hedging Activities
 Disclosures about Derivative Instruments and Hedging
Activities  An Amendment of SFAS No. 133
 Business Combinations
 Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arises from Contingencies
 7




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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)
 Fair Value Measurements
 Disclosures about Fair Value of Financial Instruments Interim Financial
Reporting
 Subsequent Events
 Subsequent Events
 Accounting for Transfers of Financial Assets
 Accounting for Transfers of Financial Assets  an amendment
of FASB Statement No. 140
 Consolidation of Variable Interest Entities
 Amendments to FASB Interpretation No. 46(R)
 GAAP Hierarchy
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162
 3. ACQUISITION AND RESTRUCTURING ACTIVITIES
 Accuro Acquisition
  8




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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)
     Accuro Purchase Price Allocation
  PreliminaryPurchase
    
    
    
    
    
    
    FinalPrice
    
    
    
    
    
    
    PurchaseAllocation
    
    
    
    
    
    
    PriceDecember
    
    
    
    
    
    
    Allocation31, 2008
    
    
    Adjustments
    
    
    June 30, 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);
 9




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
 (In thousands, except share and per share amounts)
 
    
    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
   Accrued
    
    
    
    
    
    
    
    
    
    
    Accrued,December 31,
    
    
    Adjustments
    
    
    Cash
    
    
    June 30,2008
    
    
    to Costs
    
    
    Payments
    
    
    2009Accuro Restructuring PlanSeverance
    
    $
    920
    
    
    $
    108
    
    
    $
    (657
    )
    
    $
    371Other
    
    
    709
    
    
    
    3,355
    
    
    
    (390
    )
    
    
    3,674Total Accuro Restructuring Costs
    
    $
    1,629
    
    
    $
    3,463
    
    
    $
    (1,047
    )
    
    $
    4,045
  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.
  10




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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 June 30,
    
    Six Months Ended June 30,2009
    
    2008
    
    2009
    
    2008(Unaudited, in thousands, except per share data)Net revenue
    
    $
    84,209
    
    
    $
    73,270
    
    
    $
    163,193
    
    
    $
    148,533Net income (loss)
    
    $
    2,175
    
    
    $
    (6,498
    )
    
    $
    4,080
    
    
    $
    (4,912
    )Basic net income (loss) per share
    
    $
    0.04
    
    
    $
    (0.12
    )
    
    $
    0.08
    
    
    $
    (0.09
    )Diluted net income (loss) per share
    
    $
    0.04
    
    
    $
    (0.12
    )
    
    $
    0.07
    
    
    $
    (0.09
    )
 4. DEFERRED REVENUE
   June 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)Software and implementation fees
    
    $
    14,079
    
    
    $
    13,839Service fees
    
    
    16,155
    
    
    
    14,206Administrative
fees, net
    
    
    874
    
    
    
    1,313Other fees
    
    
    36
    
    
    
    1,333Deferred revenue, total
    
    
    31,144
    
    
    
    30,691Less: Deferred revenue, current portion
    
    
    (25,546
    )
    
    
    (24,280
    )Deferred revenue, non-current portion
    
    $
    5,598
    
    
    $
    6,411
  5. NOTES PAYABLE
  June 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)Notes payable  senior
    
    $
    241,166
    
    
    $
    245,176Other
    
    
    186
    
    
    
    450Total notes payable
    
    
    241,352
    
    
    
    245,626Less: current portion
    
    
    (2,685
    )
    
    
    (30,277
    )Total long-term notes payable
    
    $
    238,667
    
    
    $
    215,349
  11




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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
    
    $
    1,2492010
    
    
    2,6862011
    
    
    27,2542012
    
    
    2,4992013
    
    
    207,664Thereafter
    
    
    Total notes payable
    
    $
    241,352
 6. COMMITMENTS AND CONTINGENCIES
 Performance Targets
  Legal Proceedings
   12




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
 (In thousands, except share and per share amounts)
 7. STOCKHOLDERS EQUITY AND SHARE-BASED COMPENSATION
 Common Stock
    Determination of the
Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business
Combination
     Share-Based Compensation
     13




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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 June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited)Cost of revenue
    
    $
    769
    
    
    $
    457
    
    
    $
    1,629
    
    
    $
    1,105Product development
    
    
    296
    
    
    
    134
    
    
    
    605
    
    
    
    256Selling and marketing
    
    
    764
    
    
    
    511
    
    
    
    1,562
    
    
    
    988General and administrative
    
    
    2,745
    
    
    
    1,297
    
    
    
    5,164
    
    
    
    1,790Total share-based compensation expense
    
    $
    4,574
    
    
    $
    2,399
    
    
    $
    8,960
    
    
    $
    4,139
 Management Equity Award Grant
  Number ofEquityAward Type
    
    AwardsRestricted common stock  service based vesting
    
    
    340,000Restricted common stock  performance based vesting
    
    
    675,000Restricted common stock awards
    
    
    1,015,000SSARs  service based vesting
    
    
    1,200,000SSARs  performance based based vesting
    
    
    1,369,000SSARs awards
    
    
    2,569,000Total management equity awards granted
    
    
    3,584,000
  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
 14




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
 (In thousands, except share and per share amounts)
 
    
    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
    
    100% vesting based on achievement of a 25% compounded annual growth rate of Cash EPS for
the three-year period ending December 31, 2011
     Service-Based Equity Awards
    Board Equity Award Grant
   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)
   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
    
    
    179,000
    
    
    
    14.21Exercised
    
    
    (931,000
    )
    
    
    4.81Forfeited
    
    
    (107,000
    )
    
    
    12.44Options outstanding as of June 30, 2009
    
    
    7,136,000
    
    
    $
    9.21
    
    
    7 years
    
    $
    73,035Options exercisable as of June 30, 2009
    
    
    2,675,000
    
    
    $
    7.03
    
    
    6 years
    
    $
    33,221
   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)
  June 30,
    
    June 30,2009
    
    2008Range of exercise prices
    
    $0.63 - $17.86
    
    $0.63 - $17.86Number of options outstanding
    
    7,136,000
    
    7,502,000Weighted average exercise price
    
    $9.21
    
    $7.63Weighted average remaining contractual life
    
    7.1 years
    
    8.0 years
 Equity Award Valuation
 Share Based Compensation
  Six Months Ended
    
    Six Months EndedJune 30, 2009
    
    June 30, 2008Range of calculated volatility
    
    33.35% - 34.73%
    
    32.16% - 35.31%Dividend yield
    
    0%
    
    0%Range of risk free interest rate
    
    1.36% - 1.98%
    
    3.00% - 3.56%Range of expected term
    
    4.0 - 5.0 years
    
    5.4 - 6.5 years
  8. INCOME TAXES
  9. INCOME PER SHARE
 Earnings Per Share.
 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)
  Three Months Ended June 30,2009
    
    
    2008(Unaudited)Numerator for Basic and Diluted Income (Loss) Per Share:Net income (loss)
    
    $
    2,175
    
    
    $
    (1,576
    )Denominator for basic income (loss) per share
weighted average shares
    
    
    54,527,000
    
    
    
    47,288,000Effect of dilutive securities:Stock options
    
    
    2,181,000
    
    
    
    Stock settled stock appreciation rights
    
    
    12,000Restricted stock and stock warrants
    
    
    248,000
    
    
    
    Denominator for diluted income (loss) per share  adjusted weighted
average shares and assumed conversions
    
    
    56,968,000
    
    
    
    47,288,000Basic income (loss) per share:Basic net income (loss) per common share
    
    $
    0.04
    
    
    $
    (0.03
    )Diluted net income (loss) per share:Diluted net income (loss) per common share
    
    $
    0.04
    
    
    $
    (0.03
    )Six Months Ended June 30,2009
    
    
    2008(Unaudited)Numerator for Basic and Diluted Income Per Share:Net income
    
    $
    4,080
    
    
    $
    1,123Denominator for basic income per share
weighted average shares
    
    
    54,316,000
    
    
    
    45,853,000Effect of dilutive securities:Stock options
    
    
    2,157,000
    
    
    
    2,596,000Stock settled stock appreciation rights
    
    
    8,000
    
    
    
    Restricted stock and stock warrants
    
    
    218,000
    
    
    
    36,000Denominator for diluted income per share  adjusted weighted
average shares and assumed conversions
    
    
    56,699,000
    
    
    
    48,485,000Basic income per share:Basic net income per common share
    
    $
    0.08
    
    
    $
    0.02Diluted net income per share:Diluted net income per common share
    
    $
    0.07
    
    
    $
    0.02
  18




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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 June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited)Stock options
    
    
    89,000
    
    
    
    2,450,000
    
    
    
    177,000
    
    
    
    Stock settled stock appreciation rights
    
    
    144,000
    
    
    
    
    
    
    
    257,000
    
    
    
    Restricted stock and stock warrants
    
    
    
    
    
    
    36,000
    
    
    
    
    
    
    
    Total potentially dilutive securities
    
    
    233,000
    
    
    
    2,486,000
    
    
    
    434,000
    
    
    
    
 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.
 Disclosures About Segments of an Enterprise and Related Information
   19




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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 June 30, 2009RCM
    
    
    SM
    
    
    Corporate
    
    
    Total(Unaudited, in thousands)Results of Operations:Revenue:Gross administrative fees(1)
    
    $
    
    
    
    $
    39,344
    
    
    $
    
    
    
    $
    39,344Revenue share obligation(1)
    
    
    
    
    
    
    (13,966
    )
    
    
    
    
    
    
    (13,966
    )Other service fees
    
    
    50,770
    
    
    
    8,061
    
    
    
    
    
    
    
    58,831Total net revenue
    
    
    50,770
    
    
    
    33,439
    
    
    
    
    
    
    
    84,209Total operating expenses
    
    
    46,615
    
    
    
    21,742
    
    
    
    7,567
    
    
    
    75,924Operating income (loss)
    
    
    4,155
    
    
    
    11,697
    
    
    
    (7,567
    )
    
    
    8,285Interest (expense)
    
    
    
    
    
    
    
    
    
    
    (4,763
    )
    
    
    (4,763
    )Other income (expense)
    
    
    (181
    )
    
    
    33
    
    
    
    115
    
    
    
    (33
    )Income (loss) before income taxes
    
    $
    3,974
    
    
    $
    11,730
    
    
    $
    (12,215
    )
    
    $
    3,489Income tax (benefit)
    
    
    1,522
    
    
    
    4,381
    
    
    
    (4,589
    )
    
    
    1,314Net income (loss)
    
    
    2,452
    
    
    
    7,349
    
    
    
    (7,626
    )
    
    
    2,175Segment Adjusted EBITDA
    
    $
    14,495
    
    
    $
    14,173
    
    
    $
    (5,154
    )
    
    $
    23,514
 
 (1)
    
    These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for
additional information. As of June 30, 2009RCM
    
    
    SM
    
    
    Corporate
    
    
    Total(Unaudited, in thousands)Financial Position:Accounts receivable, net
    
    $
    42,234
    
    
    $
    33,917
    
    
    $
    (19,879
    )
    
    $
    56,272Other assets
    
    
    572,502
    
    
    
    95,606
    
    
    
    42,155
    
    
    
    710,263Total assets
    
    
    614,736
    
    
    
    129,523
    
    
    
    22,276
    
    
    
    766,535Accrued revenue share obligation
    
    
    
    
    
    
    30,607
    
    
    
    
    
    
    
    30,607Deferred revenue
    
    
    27,878
    
    
    
    3,266
    
    
    
    
    
    
    
    31,144Other liabilities
    
    
    33,029
    
    
    
    28,506
    
    
    
    238,998
    
    
    
    300,533Total liabilities
    
    $
    60,907
    
    
    $
    62,379
    
    
    $
    238,998
    
    
    $
    362,284
 Three Months Ended June 30, 2008RCM
    
    
    SM
    
    
    Corporate
    
    
    Total(Unaudited, in thousands)Results of Operations:Revenue:Gross administrative fees(1)
    
    $
    
    
    
    $
    37,879
    
    
    $
    
    
    
    $
    37,879Revenue share obligation(1)
    
    
    
    
    
    
    (12,731
    )
    
    
    
    
    
    
    (12,731
    )Other service fees
    
    
    31,320
    
    
    
    4,767
    
    
    
    
    
    
    
    36,087Total net revenue
    
    
    31,320
    
    
    
    29,915
    
    
    
    
    
    
    
    61,235Total operating expenses
    
    
    32,750
    
    
    
    17,173
    
    
    
    5,579
    
    
    
    55,502Operating (loss) income
    
    
    (1,430
    )
    
    
    12,742
    
    
    
    (5,579
    )
    
    
    5,733Interest (expense)
    
    
    (3
    )
    
    
    
    
    
    
    (4,997
    )
    
    
    (5,000
    )Other income (expense)
    
    
    15
    
    
    
    (25
    )
    
    
    (3,352
    )
    
    
    (3,362
    )Income (loss) before income taxes
    
    $
    (1,418
    )
    
    $
    12,717
    
    
    $
    (13,928
    )
    
    $
    (2,629
    )Income tax (benefit)
    
    
    (734
    )
    
    
    5,283
    
    
    
    (5,602
    )
    
    
    (1,053
    )Net income (loss)
    
    
    (684
    )
    
    
    7,434
    
    
    
    (8,326
    )
    
    
    (1,576
    )Segment Adjusted EBITDA
    
    $
    7,799
    
    
    $
    15,313
    
    
    $
    (4,075
    )
    
    $
    19,037
 
 (1)
    
    These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for
additional information. 20




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
 (In thousands, except share and per share amounts)
 Six Months Ended June 30, 2009RCM
    
    
    SM
    
    
    Corporate
    
    
    Total(Unaudited, in thousands)Results of Operations:Revenue:Gross administrative fees(1)
    
    $
    
    
    
    $
    80,276
    
    
    $
    
    
    
    $
    80,276Revenue share obligation(1)
    
    
    
    
    
    
    (27,412
    )
    
    
    
    
    
    
    (27,412
    )Other service fees
    
    
    97,790
    
    
    
    12,539
    
    
    
    
    
    
    
    110,329Total net revenue
    
    
    97,790
    
    
    
    65,403
    
    
    
    
    
    
    
    163,193Total operating expenses
    
    
    92,138
    
    
    
    39,943
    
    
    
    14,874
    
    
    
    146,955Operating income (loss)
    
    
    5,652
    
    
    
    25,460
    
    
    
    (14,874
    )
    
    
    16,238Interest (expense)
    
    
    (1
    )
    
    
    
    
    
    
    (9,755
    )
    
    
    (9,756
    )Other income (expense)
    
    
    (145
    )
    
    
    85
    
    
    
    241
    
    
    
    181Income (loss) before income taxes
    
    $
    5,506
    
    
    $
    25,545
    
    
    $
    (24,388
    )
    
    $
    6,663Income tax (benefit)
    
    
    2,134
    
    
    
    9,904
    
    
    
    (9,455
    )
    
    
    2,583Net income (loss)
    
    
    3,372
    
    
    
    15,641
    
    
    
    (14,933
    )
    
    
    4,080Segment Adjusted EBITDA
    
    $
    26,821
    
    
    $
    30,425
    
    
    $
    (10,403
    )
    
    $
    46,843
 
 (1)
    
    These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for additional
information. Six Months Ended June 30, 2008RCM
    
    
    SM
    
    
    Corporate
    
    
    Total(Unaudited, in thousands)Results of Operations:Revenue:Gross administrative fees(1)
    
    $
    
    
    
    $
    77,766
    
    
    $
    
    
    
    $
    77,766Revenue share obligation(1)
    
    
    
    
    
    
    (25,073
    )
    
    
    
    
    
    
    (25,073
    )Other service fees
    
    
    56,426
    
    
    
    10,874
    
    
    
    
    
    
    
    67,300Total net revenue
    
    
    56,426
    
    
    
    63,567
    
    
    
    
    
    
    
    119,993Total operating expenses
    
    
    59,001
    
    
    
    37,072
    
    
    
    10,458
    
    
    
    106,531Operating (loss) income
    
    
    (2,575
    )
    
    
    26,495
    
    
    
    (10,458
    )
    
    
    13,462Interest (expense)
    
    
    (3
    )
    
    
    
    
    
    
    (9,314
    )
    
    
    (9,317
    )Other income (expense)
    
    
    29
    
    
    
    (33
    )
    
    
    (2,325
    )
    
    
    (2,329
    )Income (loss) before income taxes
    
    $
    (2,549
    )
    
    $
    26,462
    
    
    $
    (22,097
    )
    
    $
    1,816Income tax (benefit)
    
    
    (973
    )
    
    
    9,608
    
    
    
    (7,942
    )
    
    
    693Net income (loss)
    
    
    (1,576
    )
    
    
    16,854
    
    
    
    (14,155
    )
    
    
    1,123Segment Adjusted EBITDA
    
    $
    12,041
    
    
    $
    31,340
    
    
    $
    (8,314
    )
    
    $
    35,067
 
 (1)
    
    These are non-GAAP measures. See Use of Non-GAAP Financial Measures section 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)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited, in thousands)
    
    
    (Unaudited, in thousands)RCM Adjusted EBITDA
    
    $
    14,495
    
    
    $
    7,799
    
    
    $
    26,821
    
    
    $
    12,041SM Adjusted EBITDA
    
    
    14,173
    
    
    
    15,313
    
    
    
    30,425
    
    
    
    31,340Total reportable Segment Adjusted EBITDA
    
    
    28,668
    
    
    
    23,112
    
    
    
    57,246
    
    
    
    43,381Depreciation
    
    
    (2,465
    )
    
    
    (1,943
    )
    
    
    (4,903
    )
    
    
    (3,675
    )Amortization of intangibles
    
    
    (7,000
    )
    
    
    (5,016
    )
    
    
    (14,011
    )
    
    
    (8,793
    )Amortization of intangibles (included in cost of revenue)
    
    
    (802
    )
    
    
    (371
    )
    
    
    (1,590
    )
    
    
    (762
    )Interest expense, net of interest income(1)
    
    
    3
    
    
    
    (3
    )
    
    
    12
    
    
    
    2Income tax
    
    
    (5,903
    )
    
    
    (4,549
    )
    
    
    (12,038
    )
    
    
    (8,635
    )Impairment of intangibles(2)
    
    
    
    
    
    
    (1,916
    )
    
    
    
    
    
    
    (1,916
    )Share-based compensation expense(3)
    
    
    (2,685
    )
    
    
    (1,462
    )
    
    
    (5,499
    )
    
    
    (2,965
    )Accuro & XactiMed purchase accounting adjustments(4)
    
    
    (15
    )
    
    
    (1,102
    )
    
    
    (204
    )
    
    
    (1,359
    )Total reportable segment net income
    
    
    9,801
    
    
    
    6,750
    
    
    
    19,013
    
    
    
    15,278Corporate net (loss)
    
    
    (7,626
    )
    
    
    (8,326
    )
    
    
    (14,933
    )
    
    
    (14,155
    )Consolidated net income (loss)
    
    $
    2,175
    
    
    $
    (1,576
    )
    
    $
    4,080
    
    
    $
    1,123
 
 (1)
    
    Interest income is included in other income (expense) and is not netted against
interest expense in our condensed consolidated statement of operations.(2)
    
    Impairment of intangibles during the three and six months ended June 30, 2008 primarily
related to acquired developed technology from prior acquisitions, revenue cycle management
tradename and internally developed software products, primarily
because of the acquired Accuro products.(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 the
acquisition and is not indicative of changes in underlying results of operations. 11. DERIVATIVE FINANCIAL INSTRUMENTS
 . Accounting for Derivative Instruments and Hedging Activities, as
amended
 Interest rate swap
  22




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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
  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 swap termination
   Asset Derivatives
    
    
    Liability DerivativesJune 30,
    
    
    June 30,2009
    
    
    2009Derivatives designated as hedging instruments under
    
    Balance Sheet
    
    
    
    
    
    Balance SheetStatement 133
    
    Location
    
    Fair Value
    
    
    Location
    
    Fair Value(Unaudited)
    
    
    (Unaudited)Interest rate contracts
    
    
    
    $
    426
    
    
    Other long term liabilities
    
    $
    3,129Foreign exchange contracts
    
    Other long term assets
    
    
    123
    
    
    
    
    
    Total derivatives
designated as hedging
instruments under
Statement 133
    
    
    
    $
    549
    
    
    
    
    $
    3,129
 24




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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 June 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 Statement 133
    
    Derivative (Effective
    
    
    Accumulated OCI into
    
    Accumulated OCI intoCash Flow Hedging
    
    Portion)
    
    
    Income
    
    Income (Effective Portion)Relationships
    
    2009
    
    
    (Effective Portion)
    
    2009(Unaudited)Interest rate contracts
    
    $
    337
    
    
    n/a
    
    $
    Foreign exchange contracts
    
    
    (99
    )
    
    n/a
    
    
    Total gain recognized in
other comprehensive income
    
    $
    238
    
    
    
    
    $
    
 The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
for the Six Month Period Ended June 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 Statement 133
    
    Derivative (Effective
    
    
    Accumulated OCI into
    
    Accumulated OCI intoCash Flow Hedging
    
    Portion)
    
    
    Income
    
    Income (Effective Portion)Relationships
    
    2009
    
    
    (Effective Portion)
    
    2009(Unaudited)Interest rate contracts
    
    $
    598
    
    
    n/a
    
    $
    Foreign exchange contracts
    
    
    (115
    )
    
    n/a
    
    
    Total gain recognized in
other comprehensive income
    
    $
    483
    
    
    
    
    $
    
 12. FAIR VALUE MEASUREMENTS
 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;
    
    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;
 25




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MedAssets, Inc.
 Notes to Condensed Consolidated Financial Statements (Unaudited)(continued)
 (In thousands, except share and per share amounts)
 
    
    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 which contain an element of default risk; 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
  26




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 NOTE ON FORWARD-LOOKING STATEMENTS
   Overview
  
 Three Months Ended
    
    
    
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    Change
    
    June 30,
    
    Change2009
    
    2008
    
    Amount
    
    %
    
    2009
    
    2008
    
    Amount
    
    %(In millions)
    
    (In millions)Gross fees(1)
    
    $
    98.2
    
    
    $
    73.9
    
    
    $
    24.3
    
    
    
    32.9
    %
    
    $
    190.6
    
    
    $
    145.1
    
    
    $
    45.5
    
    
    
    31.4
    %Revenue share obligation(1)
    
    
    (14.0
    )
    
    
    (12.7
    )
    
    
    (1.3
    )
    
    
    10.2
    
    
    
    (27.4
    )
    
    
    (25.1
    )
    
    
    (2.3
    )
    
    
    9.2Total net revenue
    
    
    84.2
    
    
    
    61.2
    
    
    
    23.0
    
    
    
    37.6
    
    
    
    163.2
    
    
    
    120.0
    
    
    
    43.2
    
    
    
    36.0Operating income
    
    
    8.3
    
    
    
    5.7
    
    
    
    2.6
    
    
    
    45.6
    
    
    
    16.2
    
    
    
    13.5
    
    
    
    2.7
    
    
    
    20.0Net income (loss)
    
    $
    2.2
    
    
    $
    (1.6
    )
    
    $
    3.8
    
    
    
    -237.5
    %
    
    $
    4.1
    
    
    $
    1.1
    
    
    $
    3.0
    
    
    
    272.7
    %Adjusted EBITDA(1)
    
    $
    23.5
    
    
    $
    19.0
    
    
    $
    4.5
    
    
    
    23.7
    %
    
    $
    46.8
    
    
    $
    35.1
    
    
    $
    11.7
    
    
    
    33.3
    %Adjusted EBITDA Margin(1)
    
    
    27.9
    %
    
    
    31.0
    %
    
    
    
    
    
    
    
    
    
    
    28.7
    %
    
    
    29.3
    %Cash EPS (1)
    
    $
    0.17
    
    
    $
    0.15
    
    
    $
    0.02
    
    
    
    13.3
    %
    
    $
    0.32
    
    
    $
    0.27
    
    
    $
    0.05
    
    
    
    18.5
    %
 
 (1)
    
    These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for additional information.  
    
    the acquisition of Accuro Healthcare Solutions, Inc.
(collectively with its subsidiaries, Accuro), which was
acquired on June 2, 2008 (the Accuro Acquisition);
    
    organic growth in our Revenue Cycle Management segment exclusive of Accuro due to
increased demand for our reimbursement technologies, revenue cycle services and decision
support software; and,
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
    
    organic growth in our Spend Management segment due to increased demand for our
consulting and data analysis services.
  
    
    increased amortization of acquired intangibles;
    
    increased cost of revenue attributable to a higher percentage of net revenue being
derived from the Revenue Cycle Management segment as compared to the Spend Management
segment; and
    
    higher general and administrative costs associated with expanded infrastructure and
increased personnel.
   Recent Developments
  Long-Term Performance Incentive Plan
  Segment Structure and Revenue Streams
  Revenue Cycle Management
  
    
    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.
 28




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##### Table of Contents




    
    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 arrangements and cost-plus
arrangements. The related revenues are earned when 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, or
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 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.
 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
 29




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internally, our costs to provide these services
are primarily labor-driven. A less significant portion of our cost of revenue derives
from 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 operating expense
classifications resulting from the implementation of our accounting policies that could
affect period over period comparability.
    
    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.
    
    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
  30




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited, in thousands)Net revenue:Revenue Cycle Management
    
    $
    50,770
    
    
    $
    31,320
    
    
    $
    97,790
    
    
    $
    56,426Spend ManagementGross administrative fees(1)
    
    
    39,344
    
    
    
    37,879
    
    
    
    80,276
    
    
    
    77,766Revenue share obligation(1)
    
    
    (13,966
    )
    
    
    (12,731
    )
    
    
    (27,412
    )
    
    
    (25,073
    )Other service fees
    
    
    8,061
    
    
    
    4,767
    
    
    
    12,539
    
    
    
    10,874Total Spend Management
    
    
    33,439
    
    
    
    29,915
    
    
    
    65,403
    
    
    
    63,567Total net revenue
    
    
    84,209
    
    
    
    61,235
    
    
    
    163,193
    
    
    
    119,993Operating expenses:Revenue Cycle Management
    
    
    46,615
    
    
    
    32,750
    
    
    
    92,138
    
    
    
    59,001Spend Management
    
    
    21,742
    
    
    
    17,173
    
    
    
    39,943
    
    
    
    37,072Total segment operating expenses
    
    
    68,357
    
    
    
    49,923
    
    
    
    132,081
    
    
    
    96,073Operating income (loss)Revenue Cycle Management
    
    
    4,155
    
    
    
    (1,430
    )
    
    
    5,652
    
    
    
    (2,575
    )Spend Management
    
    
    11,697
    
    
    
    12,742
    
    
    
    25,460
    
    
    
    26,495Total segment operating income
    
    
    15,852
    
    
    
    11,312
    
    
    
    31,112
    
    
    
    23,920Corporate expenses(2)
    
    
    7,567
    
    
    
    5,579
    
    
    
    14,874
    
    
    
    10,458Operating income
    
    
    8,285
    
    
    
    5,733
    
    
    
    16,238
    
    
    
    13,462Other income (expense):Interest expense
    
    
    (4,763
    )
    
    
    (5,000
    )
    
    
    (9,756
    )
    
    
    (9,317
    )Other income (expense)
    
    
    (33
    )
    
    
    (3,362
    )
    
    
    181
    
    
    
    (2,329
    )Income (loss) before income taxes
    
    
    3,489
    
    
    
    (2,629
    )
    
    
    6,663
    
    
    
    1,816Income tax expense (benefit)
    
    
    1,314
    
    
    
    (1,053
    )
    
    
    2,583
    
    
    
    693Net income (loss)
    
    
    2,175
    
    
    
    (1,576
    )
    
    
    4,080
    
    
    
    1,123Reportable segment adjusted EBITDA(3):Revenue Cycle Management
    
    
    14,495
    
    
    
    7,799
    
    
    
    26,821
    
    
    
    12,041Spend Management
    
    $
    14,173
    
    
    $
    15,313
    
    
    $
    30,425
    
    
    $
    31,340Reportable segment adjusted EBITDA margin(4):Revenue Cycle Management
    
    
    28.6
    %
    
    
    24.9
    %
    
    
    27.4
    %
    
    
    21.3
    %Spend Management
    
    
    42.4
    %
    
    
    51.2
    %
    
    
    46.5
    %
    
    
    49.3
    %
 
 (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 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. 31




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Comparison of the Three Months Ended June 30, 2009 and June 30, 2008
 Three Months Ended June 30,2009
    
    
    2008
    
    
    Change% of
    
    
    
    
    
    
    % ofAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    Amount
    
    
    %(Unaudited, in thousands)Net revenue:Revenue Cycle Management
    
    $
    50,770
    
    
    
    60.3
    %
    
    $
    31,320
    
    
    
    51.1
    %
    
    $
    19,450
    
    
    
    62.1
    %Spend ManagementGross administrative fees(1)
    
    
    39,344
    
    
    
    46.7
    
    
    
    37,879
    
    
    
    61.9
    
    
    
    1,465
    
    
    
    3.9Revenue share obligation(1)
    
    
    (13,966
    )
    
    
    (16.6
    )
    
    
    (12,731
    )
    
    
    (20.8
    )
    
    
    (1,235
    )
    
    
    9.7Other service fees
    
    
    8,061
    
    
    
    9.6
    
    
    
    4,767
    
    
    
    7.8
    
    
    
    3,294
    
    
    
    69.1Total Spend Management
    
    
    33,439
    
    
    
    39.7
    
    
    
    29,915
    
    
    
    48.9
    
    
    
    3,524
    
    
    
    11.8Total net revenue
    
    $
    84,209
    
    
    
    100.0
    %
    
    $
    61,235
    
    
    
    100.0
    %
    
    $
    22,974
    
    
    
    37.5
    %
  (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 .
 
    
    Acquisition related revenue.The operating results of Accuro were included in
our three months ended June 30, 2009 and were only included in the comparable prior period
for approximately one month from the date of the Accuro Acquisition on June 2, 2008. $13.3
million of the net revenue increase resulted from revenue 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 three months ended
June 30, 2009 was $50.8 million, an increase of $7.4 million, or 17.1%, from Revenue Cycle
Management non-GAAP acquisition-affected net revenue of $43.4 million for the three months
ended June 30, 2008. The following table sets forth the reconciliation of Revenue Cycle
Management non-GAAP acquisition-affected net revenue to GAAP net revenue:
 Three Months Ended June 30,2009
    
    
    2008
    
    
    ChangeAmount
    
    
    Amount
    
    
    Amount
    
    
    %(Unaudited, in thousands)Revenue Cycle Management net revenue
    
    
    $50,770
    
    
    
    $31,320
    
    
    
    $19,450
    
    
    
    62.1
    %Acquisition related RCM adjustments(1)
    
    
    
    
    
    
    12,035
    
    
    
    (12,035
    )
    
    
    (100.0
    )Total RCM acquisition-affected net revenue(1)
    
    
    $50,770
    
    
    
    $43,355
    
    
    
    $7,415
    
    
    
    17.1
    %
 
 (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-acquisition related products and services was $6.2 million, or 23.5%. The increase was
primarily attributable to a $2.6 million increase in revenue from our revenue cycle
services; a $1.9 million increase in revenue from our claims and denial management tools;
and a $1.4 million increase in revenue from our decision support software.
 Spend Management net revenue .
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##### Table of Contents




    
    Gross administrative fees.Non-GAAP gross administrative fee revenue
increased by $1.4 million, or 3.9%, as compared to the prior period, primarily due to
higher purchasing volumes by existing customers and the addition of new 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 $1.8 million,
or 4.9% increase, in non-GAAP gross administrative fee revenue not associated with
performance targets. This increase was partially offset by a $0.4 million decrease in
contingent revenue which is recognized upon confirmation from certain customers that
respective performance targets had been achieved. 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, supply
utilization, the impact of continued hospital budget challenges and the current economic
environment may negatively impact  non-GAAP gross administrative fee revenue in the future.
    
    Revenue share obligation.Non-GAAP revenue share obligation increased
$1.2 million, or 9.7%, as compared to the prior period. We analyze the impact that our
non-GAAP revenue share obligation has on our results of operations by analyzing 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 June 30, 2009 was 35.5%
as compared to 33.6% for the three months ended June 30, 2008. The increase in our revenue
share ratio was primarily the result of changes in 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 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 $3.3 million or 69.1% increase in other service fees
primarily related to revenue from our annual customer and vendor meeting of $3.0 million
recognized during the quarter as compared to $2.9 million of revenue that was recognized in
the three months ended March 31, 2008. The remaining increase was attributable to our
supply chain consulting growth, which was due to an increase in the number of consulting
engagements from new and existing customers partially offset by a $0.5 million decrease in contingent revenue
that was recognized upon confirmation from certain customers that
respective performance targets had been achieved.
 Total Operating Expenses
 Three Months Ended June 30,2009
    
    
    2008
    
    
    Change% of
    
    
    
    
    
    
    % ofAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    Amount
    
    
    %(Unaudited, in thousands)Operating expenses:Cost of revenue
    
    $
    17,613
    
    
    
    20.9
    %
    
    $
    10,688
    
    
    
    17.5
    %
    
    $
    6,925
    
    
    
    64.8
    %Product development expenses
    
    
    5,250
    
    
    
    6.2
    
    
    
    3,611
    
    
    
    5.9
    
    
    
    1,639
    
    
    
    45.4Selling and marketing expenses
    
    
    15,595
    
    
    
    18.5
    
    
    
    9,544
    
    
    
    15.6
    
    
    
    6,051
    
    
    
    63.4General and administrative expenses
    
    
    27,481
    
    
    
    32.6
    
    
    
    22,215
    
    
    
    36.3
    
    
    
    5,266
    
    
    
    23.7Depreciation
    
    
    2,985
    
    
    
    3.5
    
    
    
    2,349
    
    
    
    3.8
    
    
    
    636
    
    
    
    27.1Amortization of intangibles
    
    
    7,000
    
    
    
    8.3
    
    
    
    5,016
    
    
    
    8.2
    
    
    
    1,984
    
    
    
    39.6Impairment of intangibles
    
    
    
    
    
    
    0.0
    
    
    
    2,079
    
    
    
    3.4
    
    
    
    (2,079
    )
    
    
    (100.0
    )Total operating expenses
    
    
    75,924
    
    
    
    90.2
    
    
    
    55,502
    
    
    
    90.6
    
    
    
    20,422
    
    
    
    36.8Operating expenses by segment:Revenue Cycle Management
    
    
    46,615
    
    
    
    55.4
    
    
    
    32,750
    
    
    
    53.5
    
    
    
    13,865
    
    
    
    42.3Spend Management
    
    
    21,742
    
    
    
    25.8
    
    
    
    17,173
    
    
    
    28.0
    
    
    
    4,569
    
    
    
    26.6Total segment operating expenses
    
    
    68,357
    
    
    
    81.2
    
    
    
    49,923
    
    
    
    81.5
    
    
    
    18,434
    
    
    
    36.9Corporate expenses
    
    
    7,567
    
    
    
    9.0
    
    
    
    5,579
    
    
    
    9.1
    
    
    
    1,988
    
    
    
    35.6Total operating expenses
    
    $
    75,924
    
    
    
    90.2
    %
    
    $
    55,502
    
    
    
    90.6
    %
    
    $
    20,422
    
    
    
    36.8
    %
 Cost of revenue .
 33




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##### Table of Contents



Product development expenses .
   Selling and marketing expenses .
  General and administrative expenses .
   Depreciation .
  Amortization of intangibles .
 34




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##### Table of Contents



Impairment of intangibles .
  Segment Operating Expenses
 Revenue Cycle Management expense s.
   Spend Management expenses .
   Corporate expenses .
 Non-operating Expenses
 Interest expense .
 Other income (expense) .
 35




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##### Table of Contents



Income tax expense (benefit)
 Comparison of the Six Months Ended June 30, 2009 and June 30, 2008
 Six Months Ended June 30,2009
    
    
    2008
    
    
    Change% of
    
    
    
    
    
    
    % ofAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    Amount
    
    
    %(Unaudited, in thousands)Net revenue:Revenue Cycle Management
    
    $
    97,790
    
    
    
    59.9
    %
    
    $
    56,426
    
    
    
    47.0
    %
    
    $
    41,364
    
    
    
    73.3
    %Spend ManagementGross administrative fees(1)
    
    
    80,276
    
    
    
    49.2
    
    
    
    77,766
    
    
    
    64.8
    
    
    
    2,510
    
    
    
    3.2Revenue share obligation(1)
    
    
    (27,412
    )
    
    
    (16.8
    )
    
    
    (25,073
    )
    
    
    (20.9
    )
    
    
    (2,339
    )
    
    
    9.3Other service fees
    
    
    12,539
    
    
    
    7.7
    
    
    
    10,874
    
    
    
    9.1
    
    
    
    1,665
    
    
    
    15.3Total Spend Management
    
    
    65,403
    
    
    
    40.1
    
    
    
    63,567
    
    
    
    53.0
    
    
    
    1,836
    
    
    
    2.9Total net revenue
    
    $
    163,193
    
    
    
    100.0
    %
    
    $
    119,993
    
    
    
    100.0
    %
    
    $
    43,200
    
    
    
    36.0
    %
 
 (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 six months ended June 30, 2009 and were only included in the comparable prior period
for approximately one month from the date of the Accuro Acquisition on June 2, 2008.
$32.0 million of the net revenue increase resulted from revenue 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 six months ended
June 30, 2009 was $97.8 million, an increase of $12.8 million, or 15.1%, from Revenue Cycle
Management non-GAAP acquisition-affected net revenue of $85.0 million for the six months
ended June 30, 2008. The following table sets forth the reconciliation of Revenue Cycle
Management non-GAAP acquisition-affected net revenue to GAAP net revenue:
 36




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##### Table of Contents



Six Months Ended June 30,2009
    
    
    2008
    
    
    ChangeAmount
    
    
    Amount
    
    
    Amount
    
    
    %(Unaudited, in thousands)Revenue Cycle Management net revenue
    
    $
    97,790
    
    
    $
    56,426
    
    
    $
    41,364
    
    
    
    73.3
    %Acquisition related RCM adjustments(1)
    
    
    
    
    
    
    28,540
    
    
    
    (28,540
    )
    
    
    (100.0
    )Total RCM acquisition-affected net revenue(1)
    
    $
    97,790
    
    
    $
    84,966
    
    
    $
    12,824
    
    
    
    15.1
    %
 
 (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-acquisition related products and services was $9.4 million, or 18.2%. The increase was
primarily attributable to stronger demand for our products and services and consisted of a
$3.9 million increase from our revenue cycle services, exclusive of Accuro; a $3.1 million
increase from our claims and denial management tools; and a $2.3 million increase from our
decision support software.
 Spend Management net revenue .
 
    
    Gross administrative fees.Non-GAAP gross administrative fee revenue
increased by $2.5 million, or 3.2%, as compared to the prior period, primarily due to
higher purchasing volumes by 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 $5.0 million, or 6.6% increase, in non-GAAP
gross administrative fee revenue not associated with performance targets. This increase was
partially offset by a $2.5 million decrease in contingent revenue recognized upon
confirmation from certain customers that respective performance targets had been achieved
during the six months ended June 30, 2009 compared to the six months ended June 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,  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
$2.3 million, or 9.3%, as compared to the prior period. We analyze the impact that our
non-GAAP revenue share obligation has on our results of operations by analyzing 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 six months ended June 30, 2009 was 34.1% as
compared to 32.2% for the six months ended June 30, 2008. The increase in our revenue share
ratio was primarily the result of the timing of contingency-based
revenue recognition  period over period and of changes in 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 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 $1.6 million or 15.3% increase in other service fees
primarily related to $1.0 million in higher revenues from our supply chain consulting and
$0.3 million from our data analysis subscription services. The growth was mainly due to an
increased number of consulting engagements and subscription-based services from new and
existing customers.
 37




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##### Table of Contents



Total Operating Expenses
 Six Months Ended June 30,2009
    
    2008
    
    Change% of
    
    
    
    
    
    % ofAmount
    
    Revenue
    
    Amount
    
    Revenue
    
    Amount
    
    %(Unaudited, in thousands)Operating expenses:Cost of revenue
    
    $
    34,358
    
    
    
    21.1
    %
    
    $
    19,151
    
    
    
    16.0
    %
    
    $
    15,207
    
    
    
    79.4
    %Product development expenses
    
    
    11,268
    
    
    
    6.9
    
    
    
    6,308
    
    
    
    5.3
    
    
    
    4,960
    
    
    
    78.6Selling and marketing expenses
    
    
    26,491
    
    
    
    16.2
    
    
    
    22,455
    
    
    
    18.7
    
    
    
    4,036
    
    
    
    18.0General and administrative expenses
    
    
    54,932
    
    
    
    33.7
    
    
    
    43,275
    
    
    
    36.1
    
    
    
    11,657
    
    
    
    26.9Depreciation
    
    
    5,895
    
    
    
    3.6
    
    
    
    4,470
    
    
    
    3.7
    
    
    
    1,425
    
    
    
    31.9Amortization of intangibles
    
    
    14,011
    
    
    
    8.6
    
    
    
    8,793
    
    
    
    7.3
    
    
    
    5,218
    
    
    
    59.3Impairment of intangibles
    
    
    
    
    
    
    0.0
    
    
    
    2,079
    
    
    
    1.7
    
    
    
    (2,079
    )
    
    
    (100.0
    )Total operating expenses
    
    
    146,955
    
    
    
    90.0
    
    
    
    106,531
    
    
    
    88.8
    
    
    
    40,424
    
    
    
    37.9Operating expenses by segment:Revenue Cycle Management
    
    
    92,138
    
    
    
    56.5
    
    
    
    59,001
    
    
    
    49.2
    
    
    
    33,137
    
    
    
    56.2Spend Management
    
    
    39,943
    
    
    
    24.5
    
    
    
    37,072
    
    
    
    30.9
    
    
    
    2,871
    
    
    
    7.7Total segment operating expenses
    
    
    132,081
    
    
    
    80.9
    
    
    
    96,073
    
    
    
    80.1
    
    
    
    36,008
    
    
    
    37.5Corporate expenses
    
    
    14,874
    
    
    
    9.1
    
    
    
    10,458
    
    
    
    8.7
    
    
    
    4,416
    
    
    
    42.2Total operating expenses
    
    $
    146,955
    
    
    
    90.0
    %
    
    $
    106,531
    
    
    
    88.8
    %
    
    $
    40,424
    
    
    
    37.9
    %
 Cost of revenue .
   Product development expenses .
   Selling and marketing expenses .
  - 38 -




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##### Table of Contents



General and administrative expenses .
   Depreciation .
  Amortization of intangibles .
 Impairment of intangibles .
  Segment Operating Expenses
 Revenue Cycle Management expense s.
   Spend Management expenses .
  39




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##### Table of Contents



Corporate expenses .
 Non-operating Expenses
 Interest expense .
 Other income (expense) .
 Income tax expense
 Critical Accounting Policies
   Allowance for Doubtful Accounts
   40




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##### Table of Contents



Liquidity and Capital Resources
     
    
    changes in working capital due to inconsistent timing of cash receipts and payments for
major recurring items such as trade accounts payable payments, revenue share obligations,
incentive compensation, changes in deferred revenue, and other various items;
    
    acquisitions; and
    
    unforeseeable events or transactions
  41




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##### Table of Contents



Discussion of Cash Flow
      Acquisition Contingent Consideration
  Off-Balance Sheet Arrangements and Commitments
   42




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##### Table of Contents



Amount(Unaudited)2009
    
    $
    3,7482010
    
    
    7,6732011
    
    
    6,7352012
    
    
    7,8562013
    
    
    5,451Thereafter
    
    
    28,243Total future minimum rental payments
    
    $
    59,706
   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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##### Table of Contents




    
    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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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Unaudited, in thousands)Net income (loss)
    
    $
    2,175
    
    
    $
    (1,576
    )
    
    $
    4,080
    
    
    $
    1,123Depreciation
    
    
    2,985
    
    
    
    2,349
    
    
    
    5,895
    
    
    
    4,470Amortization of intangibles
    
    
    7,000
    
    
    
    5,016
    
    
    
    14,011
    
    
    
    8,793Amortization of intangibles
(included in
cost of revenue)
    
    
    802
    
    
    
    371
    
    
    
    1,590
    
    
    
    762Interest expense, net of interest
income(1)
    
    
    4,758
    
    
    
    4,545
    
    
    
    9,739
    
    
    
    7,954Income tax expense (benefit)
    
    
    1,314
    
    
    
    (1,053
    )
    
    
    2,583
    
    
    
    693EBITDA
    
    
    19,034
    
    
    
    9,652
    
    
    
    37,898
    
    
    
    23,795Impairment of intangibles(2)
    
    
    
    
    
    
    2,079
    
    
    
    
    
    
    
    2,079Share-based compensation(3)
    
    
    4,574
    
    
    
    2,399
    
    
    
    8,960
    
    
    
    4,139Rental income from capitalizing
building
lease(4)
    
    
    (109
    )
    
    
    (109
    )
    
    
    (219
    )
    
    
    (219
    )Purchase accounting adjustment(5)
    
    
    15
    
    
    
    1,102
    
    
    
    204
    
    
    
    1,359Interest rate swap cancellation(6)
    
    
    
    
    
    
    3,914
    
    
    
    
    
    
    
    3,914Adjusted EBITDA
    
    $
    23,514
    
    
    $
    19,037
    
    
    $
    46,843
    
    
    $
    35,067
 
 (1)
    
    Interest income is included in other income (expense) and is not netted against
interest expense in our Condensed Consolidated Statement of Operations.(2)
    
    Impairment of intangibles during the three and six months ended June 30, 2008 primarily
relates to acquired developed technology from prior acquisitions, revenue cycle management
tradename and internally developed software products, mainly because of the acquired Accuro products.(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 three and six months ended June 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 .
 Cash Diluted Earnings Per Share
  45




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    2009
    
    2008Per share data
    
    (Unaudited)


    
    (Unaudited)Diluted EPS attributable to common stockholders
    
    $
    0.04
    
    
    $
    (0.03
    )
    
    $
    0.07
    
    
    $
    0.02Non-cash, tax-adjusted acquisition-related intangible amortization
    
    
    0.08
    
    
    
    0.07
    
    
    
    0.16
    
    
    
    0.12Non-cash, tax-adjusted share-based compensation (1)
    
    
    0.05
    
    
    
    0.03
    
    
    
    0.10
    
    
    
    0.05Tax-adjusted interest rate swap cancellation (2)
    
    
    
    
    
    
    0.05
    
    
    
    
    
    
    
    0.05Non-cash, tax-adjusted impairment of intangibles (3)
    
    
    
    
    
    
    0.03
    
    
    
    
    
    
    
    0.03Non-GAAP cash diluted EPS
    
    $
    0.17
    
    
    $
    0.15
    
    
    $
    0.32
    
    
    $
    0.27Weighted average shares  diluted
    
    
    56,968
    
    
    
    47,288
    
    
    
    56,699
    
    
    
    48,485
 
 (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 three and  six months ended June 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 three and six months ended June
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. 46




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##### Table of Contents



New Pronouncements
 Disclosures about Derivative Instruments and Hedging Activities
 Disclosures about Derivative Instruments and Hedging
Activities  An Amendment of SFAS No. 133
 Business Combinations
 Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arises from Contingencies
 Fair Value Measurements
 Disclosures about Fair Value of Financial Instruments Interim Financial
Reporting
 Subsequent Events
 Subsequent Events
 Accounting for Transfers of Financial Assets
 Accounting for Transfers of Financial Assets  an
amendment of FASB Statement No. 140
 Consolidation of Variable Interest Entities
 Amendments to FASB Interpretation No. 46(R)
 47




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##### Table of Contents



GAAP Hierarchy
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162
 
 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
    
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   49




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##### Table of Contents



Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
   Votes For
    
    Votes WithheldRand A. Ballard
    
    
    48,094,400
    
    
    
    459,424C.A. Lance Piccolo
    
    
    47,866,572
    
    
    
    687,252Bruce F. Wesson
    
    
    48,074,206
    
    
    
    479,618
    Votes For
    
    Votes Against
    
    Votes Abstained48,504,258
    
    8,324
    
    41,242
  
 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)
    
    August 10, 2009/s/ L. NEIL HUNN

Name: L. Neil Hunn
    
    Chief Financial Officer
(Principal Financial Officer)
    
    August 10, 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