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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 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: 000-52073
 
 SXC HEALTH SOLUTIONS CORP.
 (Exact name of registrant as specified in its charter)
 
 Yukon Territory
    
    75-2578509(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 2441 Warrenville Road, Suite 610, Lisle, IL 60532-3642
(Address of principal executive offices, zip code)
 (800) 282-3232
(Registrants phone number, including area code)
 þ o
  o þ o o
 Yes o No þ




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TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007
    
    
    5Consolidated Statements of Shareholders Equity for the Six Months Ended June 30, 2008
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    30PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    32Item 4. Submission of Matters to a Vote of Security Holders
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    34SIGNATURE
    
    
    35Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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Part I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Balance Sheets
 (in thousands of U.S. dollars except share data)
 (unaudited)June 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assetsCash and cash equivalents (note 6)
    
    $
    50,055
    
    
    $
    90,929Restricted cash
    
    
    17,455
    
    
    
    Accounts receivable, net of allowance for doubtful accounts of
$3,537 
(December 31, 2007 - $605)
    
    
    75,541
    
    
    
    17,990Rebates receivable
    
    
    26,050
    
    
    
    Unbilled revenue
    
    
    1,094
    
    
    
    1,195Prepaid expenses and other
    
    
    3,167
    
    
    
    2,361Inventory
    
    
    6,870
    
    
    
    242Income tax recoverable
    
    
    1,064
    
    
    
    1,073Deferred income tax asset, current
    
    
    4,091
    
    
    
    3,246Total current assets
    
    
    185,387
    
    
    
    117,036Property and equipment, net of accumulated depreciation of
$16,049 
(December 31, 2007 - $13,004)
    
    
    19,852
    
    
    
    13,629Goodwill
    
    
    158,848
    
    
    
    15,996Other intangible assets, net of accumulated amortization of $7,562

(December 31, 2007 - $4,734)
    
    
    51,253
    
    
    
    9,661Deferred financing charges
    
    
    1,701
    
    
    
    Deferred income tax asset
    
    
    3,939
    
    
    
    3,157Other assets
    
    
    1,311
    
    
    
    Total assets
    
    $
    422,291
    
    
    $
    159,479LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesCurrent portion of long-term debt
    
    $
    1,560
    
    
    $
    Accounts payable
    
    
    7,771
    
    
    
    1,344Customer deposits
    
    
    14,973
    
    
    
    2,506Salaries and wages payable
    
    
    9,251
    
    
    
    2,909Accrued liabilities
    
    
    29,645
    
    
    
    4,807Pharmacy benefit management rebates payable
    
    
    32,573
    
    
    
    2,766Pharmacy benefit claim payments payable
    
    
    58,227
    
    
    
    2,059Deferred revenue
    
    
    4,030
    
    
    
    4,244Total current liabilities
    
    
    158,030
    
    
    
    20,635Long-term debt, less current installments
    
    
    46,320
    
    
    
    Accrued liabilities
    
    
    1,985
    
    
    
    764Deferred income tax liability
    
    
    28,135
    
    
    
    1,091Deferred revenue
    
    
    183
    
    
    
    223Deferred lease inducements
    
    
    3,416
    
    
    
    3,222Deferred rent
    
    
    1,159
    
    
    
    1,087Other
    
    
    868
    
    
    
    Total liabilities
    
    
    240,096
    
    
    
    27,022Shareholders equityCommon stock: no par value, unlimited shares authorized;
23,823,271 issued and outstanding at June 30, 2008
(December 31, 2007 - 20,985,934)
    
    
    144,638
    
    
    
    103,520Additional paid-in capital
    
    
    10,295
    
    
    
    8,299Retained earnings
    
    
    27,262
    
    
    
    20,638Total shareholders equity
    
    
    182,195
    
    
    
    132,457Total liabilities and shareholders equity
    
    $
    422,291
    
    
    $
    159,479Commitments and contingencies (note 13)
 See accompanying notes to the unaudited consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Operations
 (in thousands of U.S. dollars except share data)
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(unaudited)
    
    
    (unaudited)Revenue:PBM revenue
    
    $
    204,860
    
    
    $
    
    
    
    $
    204,860
    
    
    $
    HCIT revenue:Transaction processing
    
    
    11,888
    
    
    
    13,094
    
    
    
    26,536
    
    
    
    26,926Maintenance
    
    
    4,130
    
    
    
    4,113
    
    
    
    8,340
    
    
    
    8,188Professional services
    
    
    3,066
    
    
    
    3,302
    
    
    
    6,857
    
    
    
    6,607System sales
    
    
    3,811
    
    
    
    2,579
    
    
    
    5,479
    
    
    
    5,688Total revenue
    
    
    227,755
    
    
    
    23,088
    
    
    
    252,072
    
    
    
    47,409Cost of revenue
    
    
    197,915
    
    
    
    9,648
    
    
    
    208,752
    
    
    
    19,322Gross profit
    
    
    29,840
    
    
    
    13,440
    
    
    
    43,320
    
    
    
    28,087Expenses:Product development costs
    
    
    2,480
    
    
    
    2,642
    
    
    
    4,939
    
    
    
    5,580Selling, general and administration
    
    
    19,557
    
    
    
    7,016
    
    
    
    25,428
    
    
    
    13,205Depreciation of property and equipment
    
    
    1,433
    
    
    
    590
    
    
    
    2,194
    
    
    
    1,168Amortization of intangible assets
    
    
    2,432
    
    
    
    396
    
    
    
    2,828
    
    
    
    792Net loss on disposal of capital assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13325,902
    
    
    
    10,644
    
    
    
    35,389
    
    
    
    20,878Operating income
    
    
    3,938
    
    
    
    2,796
    
    
    
    7,931
    
    
    
    7,209Interest income
    
    
    (647
    )
    
    
    (1,159
    )
    
    
    (1,701
    )
    
    
    (2,216
    )Interest expense
    
    
    763
    
    
    
    28
    
    
    
    798
    
    
    
    59Net interest income(expense)
    
    
    116
    
    
    
    (1,131
    )
    
    
    (903
    )
    
    
    (2,157
    )Other expense(income)
    
    
    29
    
    
    
    (196
    )
    
    
    35
    
    
    
    (198
    )Income before income taxes
    
    
    3,793
    
    
    
    4,123
    
    
    
    8,799
    
    
    
    9,564Income tax expense (recovery):Current
    
    
    597
    
    
    
    1,279
    
    
    
    1,979
    
    
    
    3,125Deferred
    
    
    (71
    )
    
    
    (111
    )
    
    
    196
    
    
    
    (250
    )526
    
    
    
    1,168
    
    
    
    2,175
    
    
    
    2,875Net income and comprehensive income
    
    $
    3,267
    
    
    $
    2,955
    
    
    $
    6,624
    
    
    $
    6,689Earnings per share:Basic
    
    $
    0.14
    
    
    $
    0.14
    
    
    $
    0.30
    
    
    $
    0.32Diluted
    
    $
    0.14
    
    
    $
    0.14
    
    
    $
    0.29
    
    
    $
    0.31Weighted average number of shares used in computing earnings per share:Basic
    
    
    22,948,940
    
    
    
    20,687,468
    
    
    
    21,972,315
    
    
    
    20,620,263Diluted
    
    
    23,558,446
    
    
    
    21,751,463
    
    
    
    22,510,153
    
    
    
    21,646,475
 See accompanying notes to the unaudited consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Cash Flows
 (in thousands of U.S. dollars)
 Six months endedJune 30,2008
    
    
    2007(unaudited)Cash flows from operating activities:Net income
    
    $
    6,624
    
    
    $
    6,689Items not involving cash, net of effects from acquisition:Stock-based compensation
    
    
    2,104
    
    
    
    1,150Depreciation of property and equipment
    
    
    3,046
    
    
    
    1,900Amortization of intangible assets
    
    
    2,828
    
    
    
    792Deferred lease inducements and rent
    
    
    (107
    )
    
    
    385Loss on disposal of property and equipment
    
    
    
    
    
    
    133Deferred income taxes
    
    
    196
    
    
    
    270Gain on foreign exchange
    
    
    (21
    )
    
    
    (135
    )Changes in operating assets and liabilities, net of effects from acquisition:Accounts receivable
    
    
    12,828
    
    
    
    (176
    )Rebates receivable
    
    
    1,153
    
    
    
    Restricted cash
    
    
    (4,325
    )
    
    
    Unbilled revenue
    
    
    101
    
    
    
    13Prepaid expenses
    
    
    1,322
    
    
    
    244Inventory
    
    
    (264
    )
    
    
    (6
    )Income tax recoverable
    
    
    274
    
    
    
    (738
    )Income taxes payable
    
    
    
    
    
    
    (594
    )Accounts payable
    
    
    1,264
    
    
    
    (692
    )Accrued liabilities
    
    
    (5,715
    )
    
    
    Pharmacy benefit claim payments payable
    
    
    (1,536
    )
    
    
    (2,961
    )Pharmacy benefit management rebates payable
    
    
    (2,448
    )
    
    
    (594
    )Deferred revenue
    
    
    (254
    )
    
    
    (841
    )Customer deposits
    
    
    102
    
    
    
    314Other
    
    
    (131
    )
    
    
    Net cash provided by operating activities
    
    
    17,041
    
    
    
    5,153Cash flows from investing activities:Purchases of property and equipment
    
    
    (3,414
    )
    
    
    (6,181
    )Lease inducements received
    
    
    373
    
    
    
    391Acquisition
    
    
    (101,670
    )
    
    
    Proceeds from disposal of property and equipment
    
    
    
    
    
    
    9Net cash used in investing activities
    
    
    (104,711
    )
    
    
    (5,781
    )Cash flows from financing activities:Issuance of long-term debt
    
    
    48,000
    
    
    
    Payment of financing costs
    
    
    (1,518
    )
    
    
    Repayment of long-term debt
    
    
    (120
    )
    
    
    Proceeds from exercise of options
    
    
    333
    
    
    
    2,029Tax benefit on option exercises
    
    
    80
    
    
    
    2,216Net cash provided by financing activities
    
    
    46,775
    
    
    
    4,245Effect of foreign exchange on cash balances
    
    
    21
    
    
    
    135Increase(decrease) in cash and cash equivalents
    
    
    (40,874
    )
    
    
    3,752Cash and cash equivalents, beginning of period
    
    
    90,929
    
    
    
    70,943Cash and cash equivalents, end of period
    
    $
    50,055
    
    
    $
    74,695
 See accompanying notes to the unaudited consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Shareholders Equity
 (in thousands of U.S. dollars except share data)
 Common Stock
    
    
    Contributed
    
    
    RetainedNumber
    
    
    Amount
    
    
    Surplus
    
    
    Earnings
    
    
    TotalBalance at December 31, 2007
    
    
    20,985,934
    
    
    $
    103,520
    
    
    $
    8,299
    
    
    $
    20,638
    
    
    $
    132,457Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,624
    
    
    
    6,624Exercise of stock options
    
    
    51,800
    
    
    
    521
    
    
    
    (188
    )
    
    
    
    
    
    
    333Issuance of shares under ESPP
    
    
    2,386
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    33Issuance of shares for acquisition
    
    
    2,783,151
    
    
    
    40,884
    
    
    
    
    
    
    
    
    
    
    
    40,884Costs to issue shares for acquisition
    
    
    
    
    
    
    (320
    )
    
    
    
    
    
    
    
    
    
    
    (320
    )Tax benefit on options exercised
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    80Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    2,104
    
    
    
    
    
    
    
    2,104Balance at June 30, 2008 (unaudited)
    
    
    23,823,271
    
    
    $
    144,638
    
    
    $
    10,295
    
    
    $
    27,262
    
    
    $
    182,195
 See accompanying notes to the unaudited consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    Description of BusinessSXC Health Solutions Corp. (the Company) is a leading provider of pharmacy benefits
management (PBM) services and healthcare information technology (HCIT) solutions to the
healthcare benefits management industry. The Companys product offerings and solutions combine
a wide range of software applications, application service provider processing services and
professional services designed for many of the largest organizations in the pharmaceutical
supply chain, such as federal, provincial, and state and local governments, pharmacy benefit
managers, managed care organizations, retail pharmacy chains and other healthcare
intermediaries. The Companys headquarters are based in Lisle, Illinois with offices in Port
Washington, New York; Scottsdale, Arizona; Warminster, Pennsylvania; Alpharetta, Georgia;
Milton, Ontario and Victoria, British Columbia.2.
    
    Basis of Presentation
 (a)
    
    Basis of presentation:The consolidated financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP) and include its
majority-owned subsidiaries. All significant inter-company transactions and balances have
been eliminated in consolidation. Amounts in the consolidated financial statements and
notes are expressed in U.S. dollars, except where indicated, which is also the Companys
functional currency.Certain information and note disclosures normally included in the annual financial
statements prepared in accordance with U.S. GAAP have been condensed or excluded. As a
result, these unaudited interim consolidated financial statements do not contain all the
disclosures required to be included in the annual financial statements and should be read
in conjunction with the most recent audited annual consolidated financial statements and
notes thereto for the year ended December 31, 2007.These unaudited interim consolidated financial statements are prepared following accounting
policies consistent with the Companys audited annual consolidated financial statements for
the year ended December 31, 2007, except as set out in Notes 3 and 4.The financial information included herein reflects all adjustments (consisting only of
normal recurring adjustments), which, in the opinion of management, are necessary for a
fair presentation of the results for the interim periods presented. The results of
operations for the three and six-month periods ended June 30, 2008 are not necessarily
indicative of the results to be expected for the full year ending December 31, 2008.Effective with the acquisition of National Medical Health Card Systems, Inc. (NMHC), the
Company will now operate in two reportable segments: PBM and HCIT. Please see Note 11 for
more information.(b)
    
    Use of estimates:The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities,
and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the period. Significant items
subject to such estimates and assumptions include revenue recognition, purchase price
allocation in connection with acquisitions, valuation of property and equipment, valuation
of intangible assets acquired and related amortization periods, impairment of goodwill,
income tax uncertainties, contingencies and valuation allowances for receivables and income
taxes. Actual results could differ from those estimates.
 3.
    
    Summary of Significant Accounting Policies
 (a)
    
    Restricted Cash:Restricted cash balances at June 30, 2008 and December 31, 2007 are restricted as to their
use related to the maintenance of minimum cash balances required to be maintained in
accordance with various state statutes, contractual terms with customers and other customer
restrictions.(b)
    
    Rebates:The Company currently administers two separate rebate programs through which it receives
rebates and administrative fees from pharmaceutical manufacturers that are shared with
customers. The principal difference between these two programs arises from whether the
Company is the principal contracting party with the pharmaceutical manufacturers or acts as
an agent for its clients. The rebates that the Company receives from pharmaceutical
manufacturers for which the Company acts as an agent for its clients are recognized when
(i) the Company is entitled to them in accordance with the terms of its arrangements with
pharmaceutical manufacturers and its third party rebate administrator and (ii) the amounts
of the rebates are determinable.The rebates are earned for the administration of the program in which the Company is the
principal contracting party are recorded as a reduction of cost of
revenue and the portion
of the rebate payable to customers is treated as a reduction of revenue. Rebates
receivable include billed and unbilled PBM receivables from pharmaceutical manufacturers.
The Company records the gross rebate receivable and the related payable to the customers
based on estimates, which are subject to final settlement. The estimates are based upon
claims submitted and the Companys rebate experience, and are adjusted as additional
information becomes available.
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Upon billing the pharmaceutical manufacturer,
any difference between the Companys estimate and the actual amount of the rebate
receivable are recorded to cost of revenue, net of the estimated impact to the Companys
customers. Currently, some rebates are processed by a third party administrator and the
remaining rebate claims are submitted directly by the Company. The Company generally pays
rebates to its customers on a quarterly basis, or as agreed upon with its customers. There
are certain instances where the Company pays rebates to its customers on a more accelerated
basis.As of June 30, 2008 and December 31, 2007, total unbilled manufacturer rebates receivables
amounted to $10.6 million and nil, respectively.(c)
    
    Customer Deposits:The Company requires deposits from certain customers in order to satisfy liabilities
incurred by the Company on the customers behalf for the adjudication of pharmacy claims.
Customer deposits totalled $15.0 million and $2.5 million as of June 30, 2008 and December
31, 2007, respectively.(d)
    
    Derivatives:The Company accounts for derivatives pursuant to Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities,
and SFAS. No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment of SFAS No. 133. SFAS No. 133 and SFAS No. 138 require that all
derivative instruments are recorded on the balance sheet at their respective fair value.(e)
    
    Revenue Recognition:The Companys revenue is derived from prescription drug sales along with transaction
processing services, maintenance, professional services, and systems sales (including
software license and hardware sales).The Company recognizes revenue when all of the following conditions are satisfied:
(1) there is persuasive evidence of an arrangement; (2) the service or product has been
provided to the customer and no uncertainties exist surrounding product acceptance; (3) the
amount of fees to be paid by the customer is fixed or determinable; and (4) the collection
of fees is reasonably assured.When the Company enters into arrangements with multiple deliverables, it applies FASB
Emerging Issues Task Force (EITF) 00-21, Revenue Arrangements with Multiple Deliverables
(EITF 00-21),and evaluates each deliverable to determine whether it represents a
separate unit of accounting based on the following criteria: (1) whether the delivered item
has value to the customer on a stand-alone basis, (2) whether there is objective and
reliable evidence of the fair value of the undelivered item(s), and (3) if the contract
includes a general right of return relative to the delivered item, delivery or performance
of the undelivered item(s) is considered probable and substantially in the control of the
Company. If objective reliable evidence of fair value exists for all units of accounting in
the arrangement, revenue is allocated to each unit of accounting or element based on
relative fair values. In situations where there is objective and reliable evidence of fair
value for all undelivered elements, but not for delivered elements, the residual method is
used to allocate the contract consideration. Under the residual method, the amount of
revenue allocated to delivered elements equals the total arrangement consideration less the
aggregate fair value of any undelivered elements.Each unit of accounting is then accounted for under the applicable revenue recognition
guidance. In cases where elements cannot be treated as separate units of accounting under
EITF 00-21, the elements are combined into a single unit of accounting for revenue
recognition purposes and revenue is deferred and recognized based on the revenue
recognition guidance applicable to the last delivered element within the unit of
accounting.Revenue is recognized for specific types of transactions as follows:Transaction processing revenue:Revenue from transaction processing includes application
service provider (ASP) and switching services. ASP services consist primarily of hosting,
claims adjudication, customer support, financial reporting, on-line and off-line data
storage and rebate administration services. The Company earns a transaction fee for each
transaction processed. The Company recognizes revenue at the time the transaction is
processed provided the related contracts include a substantive minimum monthly payment
which exceeds the fair value of any undelivered elements. If a substantive monthly minimum
payment does not exist in the customer contract, the fair value of any undelivered elements
is deferred. The residual amount of the contract is recognized at the time the transaction
is processed.Certain ASP contracts contain performance-based revenue that is not finalized until the end
of a period of time specified in the contract. Under such an arrangement, revenue is
deferred until the end of the period as the Company may be obligated to pay the customer if
the performance objective is not met.Switching services consist of customers using the Companys software to connect
electronically to their insurance company either through a telephone line or the internet.
Each connection is billed to the customers by the Company as an electronic claims
submission otherwise known as a switching transaction. For switching services, the
revenue is recognized as the services are performed.System sales revenue:Revenue from software licenses is recognized in accordance with the
American Institute of Certified Public Accountants Statement of Position (SOP) No. 97-2,
Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP No. 97-2,
Software Revenue Recognition with Respect to Certain Transactions.Revenue is recognized
when all the conditions described above are satisfied. In the event the fee is not fixed or
determinable, revenue is recognized as the payments become due from the customer. In cases
where collectibility is not deemed probable, revenue is recognized upon receipt of cash,
assuming all other criteria have been met.
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Accounting for Performance of Construction-Type and Certain Production-Type Contracts,
  Maintenance revenue:
 Professional services revenue:
 PBM revenue
  Reporting Gross Revenue as a Principal vs. Net as an Agent
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(f)
    
    Cost of Revenue:The Companys cost of revenue includes the cost of pharmaceuticals dispensed, either
directly through Mail Service, Specialty Service or indirectly through its nationwide
network of pharmacies. Cost of revenue also includes an offsetting credit for rebates
earned from pharmaceutical manufacturers.
 4.
    
    New Accounting Pronouncements
 (a)
    
    Recently Adopted Accounting Standards:FASB Statement No. 157In September 2006, the Financial Accounting Standards Board (FASB) issued Statement
No. 157, Fair Value Measurements(SFAS 157), which addresses how companies should measure
fair value when they are required to use a fair value measure for recognition or disclosure
purposes under U.S. GAAP. In accordance with the guidance in FSP 157-2, the Company
adopted the provisions of SFAS 157 with respect to financial assets and liabilities on
January 1, 2008, which did not have a significant impact on the Companys consolidated
financial statements.The Company will adopt the provisions of SFAS 157 for non financial
assets and liabilities in the first quarter of 2009, and is currently evaluating the impact
of adopting this portion of the standard.FASB Statement No. 159In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115(SFAS
159), which permits companies to measure many financial instruments and certain other
items at fair value. The objective is to improve financial reporting by providing
companies with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. The Company adopted SFAS 159 effective January 1, 2008. The
Company did not elect the fair value option for any items upon adoption of SFAS 159 and,
therefore, the adoption of the statement did not have a significant impact on the Companys
consolidated financial statements.(b)
    
    Accounting Standards yet to be Adopted:In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments
and Hedging Activities- an amendment of FASB Statement No. 133(SFAS 161), which amends
and expands the disclosure requirements of SFAS 133. SFAS 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative disclosures
about fair value amounts and gains and losses on derivative instruments, and disclosures
about credit-risk-related contingent features in derivative agreements. SFAS 161 is
effective for the Companys fiscal year beginning January 1, 2009, and the impact of such
adoption is not known at this time.In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations
(SFAS 141(R)), which applies to all transactions or other events in which an entity (the
acquirer) obtains control of one or more businesses. SFAS 141(R) establishes principles
and requirements for how the acquirer recognizes and measures in its financial statements
the assets, liabilities, noncontrolling interest and goodwill related to a business
combination. SFAS 141(R) also establishes what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the business
combination. SFAS 141(R) applies prospectively to business combinations for which the
acquisition date is on or after January 1, 2009, and will impact the Company with respect
to future business combinations entered into on or after January 1, 2009.In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements  an amendment of ARB No. 51(SFAS 160), which
establishes accounting and reporting standards for entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. A
noncontrolling interest (previously referred to as a minority interest) is the portion of
equity in a subsidiary not attributable, directly or indirectly, to a parent. SFAS 160 is
effective for the Companys fiscal year beginning January 1, 2009, and will be applied
prospectively to all noncontrolling interests, including those that arose before the
effective date. The Company is currently evaluating the impact of SFAS 160 but does not
expect it to be material.
 5.
    
    Business CombinationEffective April 30, 2008, the Company completed the acquisition of NMHC, a pharmacy benefit
management company, in an exchange offer of (i) 0.217 of a common share of the Companys
common stock and (ii) $7.70 in cash for each outstanding NMHC common share. Total deal
consideration approximated $143 million, which included the issuance of 2,783,151 shares of
the Companys common stock. The value of the stock issued was based on the guidance issued
under EITF 99-12, Determination of the Measurement Date for the Market Price Acquirer
Securities Issued in a Purchase Business Combination. This EITF provides that the value of
 shares issued is based on the average market price of the acquirers stock from a few days
before to a few days after the agreement is agreed to and announced. To fund the transaction,
the Company entered into a six-year $48.0 million term loan agreement. The Company also
signed a $10.0 million senior secured revolving credit revolver. NMHC results of operations
are included in the consolidated financial statements for the period
from May 1, 2008
through June 30, 2008.Prior to the acquisition, the Company and one of NMHCs subsidiaries, NMHCRX, Inc., were
parties to a consulting agreement and software license and maintenance agreements pursuant to
which the Company licensed, and provided consulting and support services in connection with,
certain computer software for one of NMHCRX, Inc.s claims adjudication systems.The Company and NMHC have similar missions and core values, and the Company believes the
synergies gained from this business combination will create long term value for customers,
vendors and shareholders, as well as opportunities for new and existing employees by making
the Company better positioned to compete in the changing PBM environment.
  10




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##### Table of Contents



Cash payment to NMHC shareholders
    
    $
    98,711Shares issued
    
    
    40,884Direct costs of the acquisition
    
    
    3,749Total purchase price
    
    $
    143,344
 Direct Costs of the Acquisition
  Preliminary Purchase Price Allocation
 Business Combinations
  Current assets
    
    $
    115,879Property and equipment
    
    
    5,970Goodwill
    
    
    142,852Intangible assets
    
    
    44,420Deferred income taxes
    
    
    (16,818
    )Other assets
    
    
    1,258Total assets acquired
    
    
    293,561Current liabilities
    
    
    137,802Other liabilities
    
    
    12,415Total liabilities assumed
    
    
    150,217Net assets acquired
    
    $
    143,344
  Fair value
    
    
    Useful LifeTrademarks/Trade Names
    
    $
    1,120
    
    
    6 monthsCustomer Relationships
    
    
    39,700
    
    
    8 yearsNon-Compete Agreements
    
    
    1,480
    
    
    1 yearSoftware
    
    
    1,120
    
    
    1 yearLicenses
    
    
    1,000
    
    
    15 yearsTotal
    
    $
    44,420
  Unaudited Pro Forma Financial Information
   11




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Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Sales
    
    $
    321,233
    
    
    $
    282,060
    
    
    $
    631,139
    
    
    $
    571,299Gross Profit
    
    $
    32,863
    
    
    $
    34,289
    
    
    $
    66,011
    
    
    $
    70,022Net income (loss)
    
    $
    (976
    )
    
    $
    (2,729
    )
    
    $
    288
    
    
    $
    (1,285
    )Earnings (loss) per share:Basic
    
    $
    (0.04
    )
    
    $
    (0.12
    )
    
    $
    0.01
    
    
    $
    (0.05
    )Diluted
    
    $
    (0.04
    )
    
    $
    (0.11
    )
    
    $
    0.01
    
    
    $
    (0.05
    )Weighted average shares outstandingBasic
    
    
    23,808,512
    
    
    
    23,470,619
    
    
    
    23,793,677
    
    
    
    23,403,414Diluted
    
    
    24,418,018
    
    
    
    24,534,614
    
    
    
    24,331,515
    
    
    
    24,429,626
 This unaudited pro forma financial information is not intended to represent or be indicative
of what would have occurred if the transactions had taken place on the dates presented and are
not indicative of what the Companys actual results of operations would have been had the
acquisition been completed on the dates indicated above. Further, the pro forma combined
results do not reflect one-time costs to fully merge and operate the combined organization
more efficiently, or anticipated synergies expected to result from the combination and should
not be relied upon as being indicative of the future results that the Company will experience.6.
    
    Cash and Cash EquivalentsThe components of cash and cash equivalents are as follows (in thousands):
 June 30, 2008
    
    
    December 31, 2007(unaudited)Cash on deposit
    
    $
    24,982
    
    
    $
    28,674U.S. money market funds
    
    
    25,039
    
    
    
    62,219Canadian
dollar deposits (June 30, 2008 - Cdn. $35 at 1.0202; December 31, 2007 - Cdn. $35 at 0.9809)
    
    
    34
    
    
    
    36$
    50,055
    
    
    $
    90,929
 7.
    
    Goodwill and Other Intangible AssetsGoodwill and indefinite-lived intangible assets are reviewed for impairment annually, or more
frequently if impairment indicators arise. The Company allocates goodwill to both the PBM and
HCIT segments. There were no impairments of goodwill or indefinite-lived intangible assets
during the three and six months ended June 30, 2008 and 2007.Definite-lived intangible assets are amortized over the useful life of the related assets. At
June 30, 2008, intangible assets relating to the acquisition of NMHC are estimates and are
subject to change. The components of intangible assets were as follows (in thousands):
 June 30, 2008
    
    
    December 31, 2007Gross
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationCustomer relationships
    
    $
    52,650
    
    
    $
    (5,740
    )
    
    $
    12,950
    
    
    $
    (3,874
    )Acquired software
    
    
    2,565
    
    
    
    (1,192
    )
    
    
    1,445
    
    
    
    (860
    )Trademarks/Tradenames
    
    
    1,120
    
    
    
    (373
    )
    
    
    
    
    
    
    Non-compete agreements
    
    
    1,480
    
    
    
    (246
    )
    
    
    
    
    
    
    Licenses
    
    
    1,000
    
    
    
    (11
    )
    
    
    
    
    
    
    Total
    
    $
    58,815
    
    
    $
    (7,562
    )
    
    $
    14,395
    
    
    $
    (4,734
    )
   12




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##### Table of Contents



8.
    
    Long Term DebtOn April 25, 2008, the Companys U.S. subsidiary, SXC Health Solutions, Inc. (US Corp),
entered into a credit agreement (the Credit Agreement) providing for up to $58 million of
borrowings, consisting of (i) a $10 million senior secured revolving credit facility
(including borrowing capacity available for letters of credit and for borrowings on same-day
notice, referred to as a swing loan (the Revolving Credit Facility) and (ii) a $48 million
senior secured term loan (the Term Loan Facility and, together with the Revolving Credit
Facility, the Credit Facilities). On April 29, 2008, US Corp. borrowed $48 million under
the Term Loan Facility to pay a portion of the consideration in connection with the
acquisition of NMHC and certain transaction fees and expenses related to the acquisition.The interest rates applicable to the loans under the Credit Facilities are based on a
fluctuating rate measured by reference to either, at US Corp.s option, (i) a base rate, plus
an applicable margin, subject to adjustment, or (ii) an adjusted London interbank offered rate
(adjusted for the maximum reserves)(LIBOR), plus an applicable margin. The initial
applicable margin for all borrowings is 2.25% with respect to base rate borrowings and 3.25%
with respect to LIBOR borrowings. During an event of default, default interest is payable at
a rate that is 2% higher than the rate otherwise applicable. In addition to paying interest
on outstanding principal under the Credit Facilities, US Corp. is required to pay an unused
commitment fee to the lenders in respect of any unutilized commitments under the Revolving
Credit Facility at a rate of 0.50% per annum. US Corp. is also required to pay customary
letter of credit fees.The Credit Facilities require US Corp. to prepay outstanding loans, subject to certain
exceptions, with:
 
    
    50% of the net proceeds arising from the issuance or sale by the Company of its own
stock;
    
    100% of the net proceeds of an incurrence of debt, other than proceeds from the
debt permitted under the Credit Facilities; and
    
    100% of the net proceeds of certain asset sales and casualty events, subject to a
right to reinvest the proceeds.
       Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Long-term debt
    
    $
    590
    
    
    $
    
    
    
    $
    590
    
    
    $
    Financing charges
    
    
    79
    
    
    
    
    
    
    
    79
    
    
    
    Other
    
    
    94
    
    
    
    28
    
    
    
    129
    
    
    
    59Total
    
    $
    763
    
    
    $
    28
    
    
    $
    798
    
    
    $
    59
 9.
    
    Shareholders equity
 (a)
    
    Stock option plan:The Company maintains a stock option plan (the Plan), as amended, which provides for a
maximum of 3,937,500 common shares of the Company to be issued as option grants. The
Compensation Committee of the Board of Directors determines award amounts, option prices
and
vesting periods, subject to the provisions of the Plan. All officers, directors, employees
and service providers of the Company are eligible to receive option awards at the
discretion of the Compensation Committee.
  13




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##### Table of Contents



(b)
    
    Employee Stock Purchase Plan:The Company maintains an Employee Stock Purchase Plan (ESPP) which allows eligible
employees to withhold annually up to a maximum of 15% of their base salary, or $25,000,
subject to IRS limitations, for the purchase of the Companys common shares. Common shares
will be purchased on the last day of each offering period at a discount of 5% of the fair
market value of the common shares on such date. The aggregate number of common shares that
may be issued under the ESPP may not exceed 100,000 common shares.The common shares available for purchase under the ESPP may be drawn from either authorized
but previously unissued common shares or from reacquired common shares, including those
purchased by the Company in the open market. During the three and six months ended June
30, 2008, 2,386 shares were issued under the ESPP. There were no common shares issued
under the ESPP during the three and six months ended June 30, 2007.The ESPP is not considered compensatory under the provisions of SFAS 123R and therefore, no
portion of the costs related to ESPP purchases will be included in the Companys
stock-based compensation expense.(c)
    
    Outstanding shares:At June 30, 2008, the Company had outstanding common shares of 23,823,271 and stock options
outstanding of 2,113,919. At December 31, 2007, the Company had outstanding common shares
of 20,985,934 and stock options outstanding of 1,988,602. As of June 30, 2008, stock
options outstanding consisted of 1,378,969 options at a weighted-average exercise price of
Canadian $9.58 and 734,950 options at a weighted-average exercise price of U.S. $18.04. In
connection with the acquisition of NMHC, the Company issued 2,783,151 common shares to
former shareholders of NMHC.(d)
    
    Restricted stock units:The Company assumed 170,500 restricted stock units of NMHC after the acquisition, which
converted into 126,749 restricted stock units of the Company. The restricted stock units
vest 33% each in November 2008, November 2009 and November 2010. At June 30, 2008, there
were 110,395 restricted stock units outstanding.
 10.
    
    Stock-based compensationDuring the three month periods ended June 30, 2008 and 2007, the Company recorded stock-based
compensation expense of $1.3 million and $0.7 million, respectively. During the six month
periods ended June 30, 2008 and 2007, the Company recorded stock-based compensation expense of
$2.1 million and $1.2 million, respectively. The Black-Scholes option-pricing model was used
to estimate the fair value of the stock options at the grant date based on the following
assumptions:
 Six months ended June 30,2008
    
    
    2007Total stock options granted:Canadian dollar stock options
    
    
    
    
    
    
    6,000U.S. dollar stock options
    
    
    267,450
    
    
    
    455,500Volatility
    
    
    49.6 - 52.4%
    
    
    
    40.7 - 44.4%Risk-free interest rate
    
    
    1.67 - 3.00%
    
    
    
    4.62 - 4.85%Expected life
    
    
    2.5 - 4.5 years
    
    
    
    1 - 5 yearsDividend yield
    
    
    
    
    
    
    Weighted-average grant date fair value:Canadian dollar stock options
    
    
    
    
    
    
    C$5.57U.S. dollar stock options
    
    
    $4.94
    
    
    
    $9.46
  Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Cost of revenue
    
    $
    142
    
    
    $
    49
    
    
    $
    274
    
    
    $
    100Product development costs
    
    
    54
    
    
    
    63
    
    
    
    132
    
    
    
    114Selling, general and administration
    
    
    1,129
    
    
    
    635
    
    
    
    1,698
    
    
    
    936Total stock-based compensation
    
    $
    1,325
    
    
    $
    747
    
    
    $
    2,104
    
    
    $
    1,150
  14




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##### Table of Contents



11.
    
    Segment information
  Three months ended June 30,
    
    

Six months ended June 30,Revenue
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007United States
    
    $
    226,545
    
    
    $
    21,836
    
    
    $
    249,649
    
    
    $
    45,002Canada
    
    
    1,210
    
    
    
    1,252
    
    
    
    2,423
    
    
    
    2,407Total
    
    $
    227,755
    
    
    $
    23,088
    
    
    $
    252,072
    
    
    $
    47,409
 Net assets
    
    June 30, 2008
    
    
    December 31, 2007United States
    
    $
    180,940
    
    
    $
    129,045Canada
    
    
    1,255
    
    
    
    3,412Total
    
    $
    182,195
    
    
    $
    132,457
  Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007PBM operations:Operating revenues
    
    $
    204,860
    
    
    $
    
    
    
    $
    204,860
    
    
    $
    Gross Profit
    
    $
    16,814
    
    
    $
    
    
    
    $
    16,814
    
    
    $
    Total assets at June 30, 2008
    
    $
    303,834HCIT:Operating revenues
    
    $
    22,895
    
    
    $
    23,088
    
    
    $
    47,212
    
    
    $
    47,409Gross Profit
    
    $
    13,026
    
    
    $
    13,440
    
    
    $
    26,506
    
    
    $
    28,087Total assets at June 30, 2008
    
    $
    118,457Consolidated:Operating revenues
    
    $
    227,755
    
    
    $
    23,088
    
    
    $
    252,072
    
    
    $
    47,409Gross Profit
    
    $
    29,840
    
    
    $
    13,440
    
    
    $
    43,320
    
    
    $
    28,087Total assets at June 30, 2008
    
    $
    422,291
  15




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Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007RecurringTransaction processing
    
    $
    11,888
    
    
    $
    13,094
    
    
    $
    26,536
    
    
    $
    26,926Maintenance
    
    
    4,130
    
    
    
    4,113
    
    
    
    8,340
    
    
    
    8,188Total recurring
    
    
    16,018
    
    
    
    17,207
    
    
    
    34,876
    
    
    
    35,114Non-RecurringProfessional services
    
    
    3,066
    
    
    
    3,302
    
    
    
    6,857
    
    
    
    6,607System sales
    
    
    3,811
    
    
    
    2,579
    
    
    
    5,479
    
    
    
    5,688Total non-recurring
    
    
    6,877
    
    
    
    5,881
    
    
    
    12,336
    
    
    
    12,295Total revenue
    
    $
    22,895
    
    
    $
    23,088
    
    
    $
    47,212
    
    
    $
    47,409
  Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007RecurringRevenue
    
    $
    16,018
    
    
    $
    17,207
    
    
    $
    34,876
    
    
    $
    35,114Cost of revenue
    
    
    7,039
    
    
    
    7,286
    
    
    
    15,534
    
    
    
    14,501Gross profit
    
    $
    8,979
    
    
    $
    9,921
    
    
    $
    19,342
    
    
    $
    20,613Gross profit %
    
    
    56
    %
    
    
    58
    %
    
    
    55
    %
    
    
    59
    %Non-RecurringRevenue
    
    $
    6,877
    
    
    $
    5,881
    
    
    $
    12,336
    
    
    $
    12,295Cost of revenue
    
    
    2,830
    
    
    
    2,362
    
    
    
    5,172
    
    
    
    4,821Gross profit
    
    $
    4,047
    
    
    $
    3,519
    
    
    $
    7,164
    
    
    $
    7,474Gross profit %
    
    
    59
    %
    
    
    60
    %
    
    
    58
    %
    
    
    61
    %
 For the three-month period ended June 30, 2008, one customer accounted for 11.1% and another
for 10.4% of total revenue, respectively. For the six-month period ended June 30, 2008, one
customer accounted for 10.0% of total revenue. For the three and six-month periods ended June
30, 2007, one customer accounted for 10.7% and 12.0% of total revenue, respectively.At June 30, 2008, no customer accounted for more than 10% of the outstanding accounts
receivable balance. At December 31, 2007, one customer accounted for 12% of the total
accounts receivable balance.12.
    
    Income TaxesTax benefits utilized by the Company as a result of historical net operating losses (NOLs)
and tax-related timing are recognized in accordance with SFAS 109, Accounting for Income
Taxes. In assessing the realizability of deferred tax assets (DTAs), management considers
whether it is more likely than not that some portion or all of the DTAs will be realized. The
ultimate realization of DTAs is dependent upon the generation of future taxable income during
the period in which those temporary differences become deductible, in addition to managements
tax planning strategies. In consideration of net losses incurred, the Company has provided a
valuation allowance to reduce the net carrying value of DTAs. The amount of this valuation
allowance is subject to adjustment by the Company in future periods based upon its assessment
of evidence supporting the degree of probability that DTAs will be realized.The Companys effective tax rate for the three months ended June 30, 2008 and 2007 was 14% and
28%, respectively. The Companys effective tax rate for the six months ended June 30, 2008
and 2007 was 25% and 30%, respectively.Uncertain Tax PositionsAs a result of the implementation of FIN 48, the Company recognized an increase in the
liability for unrecognized income tax benefits of $0.2 million with a corresponding reduction
in the balance of retained earnings at January 1, 2007. As of June 30, 2008 and at December
31, 2007, the Company had a long-term accrued liability of $0.3 million and $0.2 million,
respectively, related to various federal and state income tax matters on the consolidated
balance sheet, all of which would impact the Companys effective tax rate.
  16




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Three months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Beginning balance
    
    $
    219
    
    
    $
    155
    
    
    $
    202
    
    
    $
    Effect of change in accounting for income tax uncertainties
    
    
    42
    
    
    
    
    
    
    
    42
    
    
    
    155Increase in interest related to tax positions taken in prior years
    
    
    9
    
    
    
    
    
    
    
    26
    
    
    
    Balance at June 30
    
    $
    270
    
    
    $
    155
    
    
    $
    270
    
    
    $
    155
 The Company recognizes interest and penalties related to uncertain tax positions in income tax
expense. The Company does not expect the liability to change significantly in the next twelve
months.The Company and its subsidiary file income tax returns in Canadian and U.S. federal
jurisdictions, and various provincial, state and local jurisdictions. With few exceptions,
the Company is no longer subject to tax examinations by tax authorities for years prior to
2002.13.
    
    ContingenciesFrom time to time in connection with its operations, the Company is named as a defendant in
actions for damages and costs allegedly sustained by the plaintiffs. The Company has
considered these proceedings and disputes in determining the necessity of any reserves for
losses that are probable and reasonably estimable. In addition, various aspects of the
Companys business may subject it to litigation and liability for damages arising from errors
in the processing of prescription drug claims, failure to meet performance measures within
certain contracts relating to its services or its ability to obtain certain levels of
discounts or rebates on prescription purchases from retail pharmacies and drug manufacturers
or other actions or omissions. The Companys recorded reserves are based on estimates
developed with consideration given to the potential merits of claims or quantification of any
performance obligations. The Company takes into account its history of claims, the
limitations of any insurance coverage, advice from outside counsel, and managements strategy
with regard to the settlement or defense of such claims and obligations. While the ultimate
outcome of those claims, lawsuits or performance obligations cannot be predicted with
certainty, the Company believes, based on its understanding of the facts of these claims and
performance obligations, that adequate provisions have been recorded in the consolidated
financial statements where required.During the routine course of securing new clients, the Company is sometimes required to
provide payment and performance bonds to cover client transaction fees and any funds and
pharmacy benefit claim payments provided by the client in the event that the Company does not
perform its duties under the contract. The terms of these payment and performance bonds are
typically one year in duration.14.
    
    Subsequent EventTo help manage exposure to interest rate fluctuations, the Company entered into a 3-year
interest rate swap agreement with a notional amount of $14 million to effectively fix the
interest rate on $14 million of the term loan at 4.31%. The Company also entered into a
3-year interest rate cap with a notional amount of $10 million to effectively cap the interest
rate on $10 million of the term loan at 4.50%, excluding the associated fees. The Company was
required to hedge $24 million of the long term debt for a period of three years pursuant to
the terms of the Credit Agreement.
  17




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Caution Concerning Forward-Looking Statements
   Overview
       18




---



##### Table of Contents



Selected financial highlights for the three and six months ended June 30, 2008 compared to the same
periods in 2007
  
    
    Total revenue in 2008 was $227.8 million, which included $204.9 million of revenue from
the Companys new PBM segment, which is largely attributable to the acquisition of NMHC in
April 2008, as compared to $23.1 million in 2007.
    
    The Company reported net income of $3.3 million, or $0.14 per share (fully-diluted), for
the three months ended June 30, 2008 compared to $3.0 million, or $0.14 per share (fully
diluted), for the same period in 2007.
  
    
    Total revenue in 2008 was $252.1 million, which included $204.9 million of revenue from
the Companys new PBM segment, which is largely attributable to the acquisition of NMHC in
April 2008, as compared to $47.4 million in 2007.
    
    The Company reported net income of $6.6 million, or $0.29 per share (fully-diluted), for
the three months ended June 30, 2008 compared to $6.7 million, or $0.31 per share (fully
diluted), for the same period in 2007.
 NMHC Acquisition
     19




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##### Table of Contents



Results of Operations
 Three months ended June 30, 2008 as compared to the three months ended June 30, 2007
 Three months ended June 30,In thousands, except per common share amounts
    
    2008
    
    
    2007Revenue
    
    $
    227,755
    
    
    $
    23,088Gross profit
    
    
    29,840
    
    
    
    13,440Product development costs
    
    
    2,480
    
    
    
    2,642Selling, general and administration
    
    
    19,557
    
    
    
    7,016Depreciation
    
    
    1,433
    
    
    
    590Amortization of intangibles
    
    
    2,432
    
    
    
    396Interest expense, net
    
    
    116
    
    
    
    (1,131
    )Other expense, net
    
    
    29
    
    
    
    (196
    )Earnings before income tax provision
    
    
    3,793
    
    
    
    4,123Income tax provision
    
    
    526
    
    
    
    1,168Net income
    
    $
    3,267
    
    
    $
    2,955Diluted earnings per common share
    
    $
    0.14
    
    
    $
    0.14
 Revenue
  Gross profit
  Product Development Costs
   SG&A Costs
   Depreciation
  Amortization
  Interest Income and Expense
  Income Taxes
   20




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##### Table of Contents



Net Income
  Segment Analysis
  In thousands
    
    PBM
    
    
    HCIT
    
    
    Consolidated3 months ended June 30,
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue
    
    $
    204,860
    
    
    $
    
    
    
    $
    22,895
    
    
    $
    23,088
    
    
    $
    227,755
    
    
    $
    23,088Gross profit
    
    $
    16,814
    
    
    $
    
    
    
    $
    13,026
    
    
    $
    13,440
    
    
    $
    29,840
    
    
    $
    13,440Gross profit %
    
    
    8.2
    %
    
    
    
    
    
    
    56.9
    %
    
    
    58.2
    %
    
    
    13.1
    %
    
    
    58.2
    %
 PBM
     HCIT
  2008
    
    
    2007RecurringTransaction processing
    
    $
    11,888
    
    
    $
    13,094Maintenance
    
    
    4,130
    
    
    
    4,113Total recurring
    
    
    16,018
    
    
    
    17,207Non-RecurringProfessional services
    
    
    3,066
    
    
    
    3,302System sales
    
    
    3,811
    
    
    
    2,579Total non-recurring
    
    
    6,877
    
    
    
    5,881Total revenue
    
    $
    22,895
    
    
    $
    23,088
  21




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##### Table of Contents



2008
    
    
    2007RecurringRevenue
    
    $
    16,018
    
    
    $
    17,207Cost of revenue
    
    
    7,039
    
    
    
    7,286Gross profit
    
    $
    8,979
    
    
    $
    9,921Gross profit %
    
    
    56
    %
    
    
    58
    %Non-RecurringRevenue
    
    $
    6,877
    
    
    $
    5,881Cost of revenue
    
    
    2,830
    
    
    
    2,362Gross profit
    
    $
    4,047
    
    
    $
    3,519Gross profit %
    
    
    59
    %
    
    
    60
    %
  Recurring Revenue :
   Non-Recurring Revenue:
   Cost of Revenue:
  Gross Profit:
  22




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##### Table of Contents



Six months ended June 30, 2008 as compared to the six months ended June 30, 2007
 Six months ended June 30,In thousands, except per common share amounts
    
    2008
    
    
    2007Revenue
    
    $
    252,072
    
    
    $
    47,409Gross profit
    
    
    43,320
    
    
    
    28,087Product development costs
    
    
    4,939
    
    
    
    5,580Selling, general and administration
    
    
    25,428
    
    
    
    13,205Depreciation
    
    
    2,194
    
    
    
    1,168Amortization of intangibles
    
    
    2,828
    
    
    
    792Net loss on disposal of capital assets
    
    
    
    
    
    
    133Interest expense, net
    
    
    (903
    )
    
    
    (2,157
    )Other expense, net
    
    
    35
    
    
    
    (198
    )Earnings before income tax provision
    
    
    8,799
    
    
    
    9,564Income tax provision
    
    
    2,175
    
    
    
    2,875Net income
    
    $
    6,624
    
    
    $
    6,689Diluted earnings per common share
    
    $
    0.29
    
    
    $
    0.31
 Revenue
  Gross profit
  Product Development Costs
   SG&A Costs
   Depreciation
  Amortization
  Interest Income and Expense
  Income Taxes
  Net Income
   23




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##### Table of Contents



Segment Analysis
  In thousands
    
    PBM
    
    
    HCIT
    
    
    Consolidated6 months ended June 30,
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue
    
    $
    204,860
    
    
    $
    
    
    
    $
    47,212
    
    
    $
    47,409
    
    
    $
    252,072
    
    
    $
    47,409Gross profit
    
    $
    16,814
    
    
    $
    
    
    
    $
    26,506
    
    
    $
    28,087
    
    
    $
    43,320
    
    
    $
    28,087Gross profit %
    
    
    8.2
    %
    
    
    
    
    
    
    56.1
    %
    
    
    59.2
    %
    
    
    17.2
    %
    
    
    59.2
    %
 PBM
     HCIT
  2008
    
    
    2007RecurringTransaction processing
    
    $
    26,536
    
    
    $
    26,926Maintenance
    
    
    8,340
    
    
    
    8,188Total recurring
    
    
    34,876
    
    
    
    35,114Non-RecurringProfessional services
    
    
    6,857
    
    
    
    6,607System sales
    
    
    5,479
    
    
    
    5,688Total non-recurring
    
    
    12,336
    
    
    
    12,295Total revenue
    
    $
    47,212
    
    
    $
    47,409
  24




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##### Table of Contents



2008
    
    
    2007RecurringRevenue
    
    $
    34,876
    
    
    $
    35,114Cost of revenue
    
    
    15,534
    
    
    
    14,501Gross profit
    
    $
    19,342
    
    
    $
    20,613Gross profit %
    
    
    55
    %
    
    
    59
    %Non-RecurringRevenue
    
    $
    12,336
    
    
    $
    12,295Cost of revenue
    
    
    5,172
    
    
    
    4,821Gross profit
    
    $
    7,164
    
    
    $
    7,474Gross profit %
    
    
    58
    %
    
    
    61
    %
  Recurring Revenue:
   Non-Recurring Revenue:
   Cost of Revenue:
  Gross Profit:
 Liquidity and Capital Resources
    25




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##### Table of Contents



The New Credit Agreement
    
    
    50% of the net proceeds arising from the issuance or sale by the Company of its own stock;
    
    100% of the net proceeds of any incurrence of debt, other than proceeds from debt permitted
under the Credit Facilities; and
    
    100% of the net proceeds of certain asset sales and casualty events, subject to a right to
reinvest the proceeds.
     Consolidated Balance Sheets
  Cash flows from operating activities
   Cash flows from investing activities
   Cash flows from financing activities
   26




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##### Table of Contents



Future Capital Requirements
    Contingencies
   Contractual Obligations
  Less than 1
    
    
    
    
    
    
    
    
    
    
    More than 5year
    
    
    Years 1-3
    
    
    Years 4-5
    
    
    years
    
    
    TotalLong-term debt
    
    $
    1,560
    
    
    $
    10,200
    
    
    $
    18,480
    
    
    $
    17,640
    
    
    $
    47,880Operating leases acquired
    
    
    3,639
    
    
    
    4,155
    
    
    
    1,721
    
    
    
    604
    
    
    
    10,119Capital leases acquired
    
    
    830
    
    
    
    768
    
    
    
    98
    
    
    
    
    
    
    
    1,696$
    6,029
    
    
    $
    15,123
    
    
    $
    20,299
    
    
    $
    18,244
    
    
    $
    59,695
 Outstanding Securities
  Critical Accounting Policies
  Revenue Recognition
   27




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##### Table of Contents



Revenue Arrangements with Multiple Deliverables ,
   Transaction processing revenue:
   System sales revenue: Software Revenue
Recognition Modification of SOP No. 97-2, Software Revenue Recognition
with Respect to Certain Transactions.
  Accounting for
Performance of Construction-Type and Certain Production-Type Contracts,
   28




---



##### Table of Contents



Maintenance revenue:
 Professional services revenue:
 PBM revenue
  Reporting Gross Revenue as a Principal vs. Net as an Agent
  Rebates
  Recently Adopted Accounting Standards
 FASB Statement No. 157
 Fair
Value Measurements .
  29




---



##### Table of Contents



FASB Statement No. 159
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
 Accounting Standards yet to be Adopted
 Disclosures about Derivative Instruments and
Hedging Activities- an amendment of FASB Statement No. 133
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
   
 ITEM 4. Controls and Procedures
    
 PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
   30




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##### Table of Contents



Due to complex calculations within our customer contracts, we may be required to issue significant
credit memos to our customers that could adversely affect our business, profitability and growth
prospects.
  Failure of our health plan customers to pay for prescription claims or a delay in payment of those
claims could have a material adverse effect on our profitability.
  Due to the complex laws and regulations governing the Medicare program in which we participate, our
recorded estimates may materially change in the future, and our failure to fully comply with such
laws and regulations may adversely impact our business and financial results.
   Uncertainty regarding the impact of Medicare Part D may adversely impact our business and financial
results.
   We are subject to a number of existing laws, regulations and industry initiatives, non-compliance
with which could adversely affect our business, financial condition and results of operations.
   
    
    health care fraud and abuse laws and regulations, which prohibit certain types of
payments and referrals as well as false claims made in connection with health benefit
programs;
 
    
    privacy and confidentiality laws and regulations, including those under HIPAA;
 
    
    ERISA and related regulations, which regulate many health care plans;
 
    
    potential regulation of the PBM industry by the FDA;
 
    
    the Medicare prescription drug coverage law and CMS regulations;
 
    
    consumer protection and unfair trade practice laws and regulations;
 
    
    various licensure laws, such as state insurance, managed care and third party
administrator licensure laws;
 
    
    pharmacy laws and regulations;
 
    
    antitrust lawsuits challenging PBM pricing practices;
 
    
    state legislation regulating PBMs or imposing fiduciary status on PBMs;
 
    
    drug pricing legislation, including most favored nation pricing and unitary pricing
legislation;
 
    
    other Medicare and Medicaid reimbursement regulations;
 
    
    pending legislation regarding importation of drug products into the United States;
 
    
    legislation imposing benefit plan design restrictions, which limit how our customers can
design their drug benefit plans;
 
    
    network pharmacy access laws, including any willing provider and due process
legislation, that affect aspects of our pharmacy network contracts; and
 
    
    formulary development and disclosure laws.
  31




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##### Table of Contents



ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
   Nominee
    
    For
    
    
    WithheldTerrence C. Burke
    
    
    13,669,650
    
    
    
    139,612William J. Davis
    
    
    13,669,650
    
    
    
    139,612Gordon S. Glenn
    
    
    13,669,650
    
    
    
    139,612Philip R. Reddon
    
    
    13,669,650
    
    
    
    139,612Mark A. Thierer
    
    
    13,669,650
    
    
    
    139,612Steven Cosler
    
    
    13,669,650
    
    
    
    139,612Curtis Thorne
    
    
    13,669,650
    
    
    
    139,612Anthony Masso
    
    
    13,669,650
    
    
    
    139,61213,669,650
    
    
    
    139,612
  For
    
    Withheld12,548,204
    
    1,261,059
 
 ITEM 5. Other Information
 Employment Agreement with Mark Thierer
   32




---



##### Table of Contents



Employment Agreement with Jeff Park
    33




---



##### Table of Contents



ITEM 6. Exhibits
 ExhibitNumber
    
    Description of Document
    
    Reference10.1
    
    
    Credit Agreement, dated as of April
25, 2008, among SXC Health
Solutions, Inc., as borrower, SXC
Health Solutions Corp., as one of
the guarantors, Comet Merger
Corporation, as one of the
guarantors, Health Business Systems,
Inc., as one of the guarantors, the
other entities from time to time
party thereto as guarantors, the
Lenders and L/C issuers party
thereto, General Electric Capital
Corporation, as administrative agent
and collateral agent and GE Capital
Markets, Inc., as sole lead arranger
and bookrunner.
    
    Incorporated by
reference to Exhibit
10.1 to the Current
Report on Form 8-K
filed by SXC with the
SEC on April 25, 200810.2
    
    
    Gordon Glenn Separation Agreement
    
    Filed herewith10.3
    
    
    Employment agreement, effective as
of June 30, 2008, between SXC Health
Solutions Corp. and Mark Thierer
    
    Filed herewith10.4
    
    
    Employment agreement, effective as
of June 30, 2008, between SXC Health
Solutions Corp. and Jeffrey Park
    
    Filed herewith10.5
    
    

Amended
and Restated 2000 Restricted Stock Grant Plan of National Medical
Health Card Systems, Inc.
    
    Incorporated by reference to
Appendix D to NMHCs Definitive Proxy Statement on Schedule 14-A
filed by NMHC with the SEC on October 28, 2004.10.5
    
    
    Amended
and Restated 2000 Restricted Stock Grant Plan of National Medical
Health Card Systems, Inc.
    
    Incorporated by reference to
Appendix D to NMHCs Definitive Proxy Statement on
Schedule 14-A filed by NMHC with the SEC on October 28, 2004.31.1
    
    
    Rule 13a-14(a)/15d-14(a)
Certification of CEO pursuant to
Section 302 of the Sarbanes-Oxley
Act
    
    Filed herewith31.2
    
    
    Rule 13a-14(a)/15d-14(a)
Certification of CFO pursuant to
Section 302 of the Sarbanes-Oxley
Act
    
    Filed herewith32.1
    
    
    Section 1350 Certification of CEO as
adopted by Section 906 of the
Sarbanes-Oxley Act
    
    Filed herewith32.2
    
    
    Section 1350 Certification of CFO as
adopted by Section 906 of the
Sarbanes-Oxley Act
    
    Filed herewith
  34




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##### Table of Contents



SIGNATURE
  SXC Health Solutions Corp.August 7, 2008
    By:
    /s/ Jeffrey ParkJeffrey ParkChief Financial Officer
(on behalf of the registrant and
as Chief Accounting Officer)  35




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Document
    
    Reference10.1
    
    
    Credit Agreement, dated as of April
25, 2008, among SXC Health
Solutions, Inc., as borrower, SXC
Health Solutions Corp., as one of
the guarantors, Comet Merger
Corporation, as one of the
guarantors, Health Business Systems,
Inc., as one of the guarantors, the
other entities from time to time
party thereto as guarantors, the
Lenders and L/C issuers party
thereto, General Electric Capital
Corporation, as administrative agent
and collateral agent and GE Capital
Markets, Inc., as sole lead arranger
and bookrunner.
    
    Incorporated by
reference to Exhibit
10.1 to the Current
Report on Form 8-K
filed by SXC with the
SEC on April 25, 200810.2
    
    
    Gordon Glenn Separation Agreement
    
    Filed herewith10.3
    
    
    Employment agreement, effective as
of June 30, 2008, between SXC Health
Solutions Corp. and Mark Thierer
    
    Filed herewith10.4
    
    
    Employment agreement, effective as
of June 30, 2008, between SXC Health
Solutions Corp. and Jeffrey Park
    
    Filed herewith10.5
    
    

Amended
and Restated 2000 Restricted Stock Grant Plan of National Medical
Health Card Systems, Inc.
    
    Incorporated by reference to
Appendix D to NMHCs Definitive Proxy Statement on Schedule 14-A
filed by NMHC with the SEC on October 28, 2004.31.1
    
    
    Rule 13a-14(a)/15d-14(a)
Certification of CEO pursuant to
Section 302 of the Sarbanes-Oxley
Act
    
    Filed herewith31.2
    
    
    Rule 13a-14(a)/15d-14(a)
Certification of CFO pursuant to
Section 302 of the Sarbanes-Oxley
Act
    
    Filed herewith32.1
    
    
    Section 1350 Certification of CEO as
adopted by Section 906 of the
Sarbanes-Oxley Act
    
    Filed herewith32.2
    
    
    Section 1350 Certification of CFO as
adopted by Section 906 of the
Sarbanes-Oxley Act
    
    Filed herewith
  36