##### Table of Contents



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 September 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from  to .
 Commission file number: 000-52073
 SXC HEALTH SOLUTIONS CORP.
 (Exact name of registrant as specified in its charter)
 
 Yukon Territory
(State or other jurisdiction of 
incorporation or organization)
    
    75-2578509
(I.R.S. Employer
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 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




---



##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATION
    
    3Item 1.
    
    Financial Statements (unaudited)
    
    3Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008
    
    3Consolidated Statements of Operations for the Three and Nine Months Ended September 30,
2009 and 2008
    
    4Consolidated Statements of Comprehensive Income for the Three and Nine months ended
September 30, 2009 and 2008
    
    5Consolidated Statements of Cash Flows for the Nine months ended September 30, 2009 and 2008
    
    6Consolidated Statements of Shareholders Equity for the Nine months ended September 30,
2009 and 2008
    
    7Notes to Consolidated Financial Statements
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    29Item 4.
    
    Controls and Procedures
    
    29PART II  OTHER INFORMATION
    
    30Item 1.
    
    Legal Proceedings
    
    30Item 1A.
    
    Risk Factors
    
    30Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    30Item 3.
    
    Defaults Upon Senior Securities
    
    30Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    30Item 5.
    
    Other Information
    
    31Item 6.
    
    Exhibits
    
    31SIGNATURE
    
    32Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




---



##### Table of Contents



Part I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 
 SXC HEALTH SOLUTIONS CORP.
Consolidated Balance Sheets
(in thousands, except share data)
 September 30,
    
    
    December 31,2009
    
    
    2008(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    319,522
    
    
    $
    67,715Restricted cash
    
    
    12,433
    
    
    
    12,498Accounts receivable, net of allowance for doubtful accounts of
$3,319 (2008  $3,570)
    
    
    90,083
    
    
    
    80,531Rebates receivable
    
    
    20,577
    
    
    
    29,586Unbilled revenue
    
    
    
    
    
    
    73Prepaid expenses and other assets
    
    
    4,718
    
    
    
    4,382Inventory
    
    
    7,023
    
    
    
    6,689Income tax recoverable
    
    
    
    
    
    
    1,459Deferred income taxes
    
    
    9,919
    
    
    
    10,219Total current assets
    
    
    464,275
    
    
    
    213,152Property and equipment, net of accumulated depreciation of
$25,388 (2008  $19,449)
    
    
    19,543
    
    
    
    20,756Goodwill
    
    
    141,785
    
    
    
    143,751Other intangible assets, net of accumulated amortization of $21,585
(2008  $14,099)
    
    
    39,820
    
    
    
    46,406Deferred financing charges
    
    
    1,154
    
    
    
    1,481Deferred income taxes
    
    
    1,846
    
    
    
    1,323Other assets
    
    
    1,293
    
    
    
    1,474Total assets
    
    $
    669,716
    
    
    $
    428,343LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    5,920
    
    
    $
    8,302Customer deposits
    
    
    12,553
    
    
    
    11,875Salaries and wages payable
    
    
    13,184
    
    
    
    15,681Accrued liabilities
    
    
    27,709
    
    
    
    32,039Pharmacy benefit management rebates payable
    
    
    43,830
    
    
    
    36,326Pharmacy benefit claim payments payable
    
    
    51,808
    
    
    
    51,406Deferred revenue
    
    
    8,430
    
    
    
    7,978Current portion of long-term debt
    
    
    4,800
    
    
    
    3,720Total current liabilities
    
    
    168,234
    
    
    
    167,327Long-term debt, less current installments
    
    
    40,320
    
    
    
    43,920Deferred income taxes
    
    
    13,032
    
    
    
    15,060Deferred lease inducements
    
    
    2,867
    
    
    
    3,217Deferred rent
    
    
    1,327
    
    
    
    1,461Other liabilities
    
    
    2,929
    
    
    
    3,195Total liabilities
    
    
    228,709
    
    
    
    234,180Commitments and contingencies (Note 12)Shareholders equityCommon shares: no par value, unlimited shares authorized;
29,979,169 shares issued and outstanding at September 30, 2009
(2008  24,103,032 shares)
    
    
    360,131
    
    
    
    146,988Additional paid-in capital
    
    
    14,661
    
    
    
    11,854Retained earnings
    
    
    66,619
    
    
    
    35,751Accumulated other comprehensive loss
    
    
    (404
    )
    
    
    (430
    )Total shareholders equity
    
    
    441,007
    
    
    
    194,163Total liabilities and shareholders equity
    
    $
    669,716
    
    
    $
    428,343
 See accompanying notes to the consolidated financial statements.
  3




---



##### Table of Contents



SXC
HEALTH SOLUTIONS CORP.  Consolidated Statements of Operations
(in thousands, except per share data)
 Three months ended September 30,
    
    
    Nine months ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(unaudited)
    
    
    (unaudited)Revenue:PBM
    
    $
    357,473
    
    
    $
    297,178
    
    
    $
    919,158
    
    
    $
    502,038HCIT:Transaction processing
    
    
    16,461
    
    
    
    11,631
    
    
    
    45,852
    
    
    
    38,167Maintenance
    
    
    4,733
    
    
    
    3,998
    
    
    
    13,684
    
    
    
    12,338Professional services
    
    
    3,187
    
    
    
    3,836
    
    
    
    10,630
    
    
    
    10,693System sales
    
    
    1,675
    
    
    
    1,458
    
    
    
    5,994
    
    
    
    6,937Total revenue
    
    
    383,529
    
    
    
    318,101
    
    
    
    995,318
    
    
    
    570,173Cost of revenue:PBM
    
    
    321,234
    
    
    
    272,654
    
    
    
    819,608
    
    
    
    460,700HCIT
    
    
    14,615
    
    
    
    10,561
    
    
    
    41,634
    
    
    
    31,267Total cost of revenue
    
    
    335,849
    
    
    
    283,215
    
    
    
    861,242
    
    
    
    491,967Gross profit
    
    
    47,680
    
    
    
    34,886
    
    
    
    134,076
    
    
    
    78,206Expenses:Product development costs
    
    
    2,833
    
    
    
    2,486
    
    
    
    9,024
    
    
    
    7,425Selling, general and administrative
    
    
    22,153
    
    
    
    21,863
    
    
    
    64,857
    
    
    
    47,291Depreciation of property and
equipment
    
    
    1,467
    
    
    
    1,222
    
    
    
    4,354
    
    
    
    3,416Amortization of intangible assets
    
    
    2,238
    
    
    
    3,449
    
    
    
    7,478
    
    
    
    6,27728,691
    
    
    
    29,020
    
    
    
    85,713
    
    
    
    64,409Operating income
    
    
    18,989
    
    
    
    5,866
    
    
    
    48,363
    
    
    
    13,797Interest income
    
    
    (101
    )
    
    
    (508
    )
    
    
    (572
    )
    
    
    (2,209
    )Interest expense
    
    
    1,088
    
    
    
    1,609
    
    
    
    3,248
    
    
    
    2,407Net interest expense
    
    
    987
    
    
    
    1,101
    
    
    
    2,676
    
    
    
    198Other income, net
    
    
    (20
    )
    
    
    (50
    )
    
    
    (62
    )
    
    
    (15
    )Income before income taxes
    
    
    18,022
    
    
    
    4,815
    
    
    
    45,749
    
    
    
    13,614Income tax expense (benefit):Current
    
    
    9,215
    
    
    
    3,356
    
    
    
    15,818
    
    
    
    5,335Deferred
    
    
    (2,402
    )
    
    
    (2,080
    )
    
    
    (937
    )
    
    
    (1,884
    )6,813
    
    
    
    1,276
    
    
    
    14,881
    
    
    
    3,451Net income
    
    $
    11,209
    
    
    $
    3,539
    
    
    $
    30,868
    
    
    $
    10,163Earnings per share:Basic
    
    $
    0.45
    
    
    $
    0.15
    
    
    $
    1.25
    
    
    $
    0.45Diluted
    
    $
    0.43
    
    
    $
    0.15
    
    
    $
    1.22
    
    
    $
    0.44Weighted average number of shares used
in computing earnings per share:Basic
    
    
    25,111,763
    
    
    
    23,891,438
    
    
    
    24,651,293
    
    
    
    22,616,694Diluted
    
    
    26,109,202
    
    
    
    24,346,740
    
    
    
    25,318,349
    
    
    
    23,034,651
 See accompanying notes to the consolidated financial statements.
  4




---



##### Table of Contents



SXC HEALTH SOLUTIONS CORP.
Consolidated Statements of Comprehensive Income
(in thousands)
 Three months ended September 30,
    
    
    Nine months ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(unaudited)
    
    
    (unaudited)Net income
    
    $
    11,209
    
    
    $
    3,539
    
    
    $
    30,868
    
    
    $
    10,163Other comprehensive (loss) income, net of taxUnrealized (loss) gain
on cash flow hedges
(net of income tax
benefit of $31, and
income tax expense of
$7, for the three and
nine months ended
September 30, 2009,
respectively)
    
    
    (50
    )
    
    
    
    
    
    
    26
    
    
    
    Comprehensive income
    
    $
    11,159
    
    
    $
    3,539
    
    
    $
    30,894
    
    
    $
    10,163
 See accompanying notes to the consolidated financial statements.
  5




---



##### Table of Contents



SXC HEALTH SOLUTIONS CORP.
Consolidated Statements of Cash Flows
(in thousands)
 Nine months endedSeptember 30,2009
    
    
    2008(unaudited)Cash flows from operating activities:Net income
    
    $
    30,868
    
    
    $
    10,163Items not involving cash:Stock-based compensation
    
    
    2,477
    
    
    
    3,006Depreciation of property and equipment
    
    
    5,981
    
    
    
    4,715Amortization of intangible assets
    
    
    7,478
    
    
    
    6,277Deferred lease inducements and rent
    
    
    (484
    )
    
    
    (206
    )Deferred income taxes
    
    
    (937
    )
    
    
    (1,884
    )Tax benefit on option exercises
    
    
    (3,447
    )
    
    
    (799
    )Gain on foreign exchange
    
    
    (50
    )
    
    
    (14
    )Changes in operating assets and liabilities, net of
effects from acquisition:Accounts receivable
    
    
    (9,444
    )
    
    
    7,858Rebates receivable
    
    
    9,009
    
    
    
    3,017Restricted cash
    
    
    65
    
    
    
    (4,660
    )Unbilled revenue
    
    
    73
    
    
    
    103Prepaid expenses
    
    
    (302
    )
    
    
    915Inventory
    
    
    (318
    )
    
    
    (171
    )Income tax recoverable
    
    
    5,205
    
    
    
    1,618Accounts payable
    
    
    (2,382
    )
    
    
    496Accrued liabilities
    
    
    (3,575
    )
    
    
    (4,452
    )Pharmacy benefit claim payments payable
    
    
    402
    
    
    
    1,049Pharmacy benefit management rebates payable
    
    
    7,504
    
    
    
    (5,080
    )Deferred revenue
    
    
    409
    
    
    
    (393
    )Customer deposits
    
    
    678
    
    
    
    (1,070
    )Other
    
    
    383
    
    
    
    111Net cash provided by operating activities
    
    
    49,593
    
    
    
    20,599Cash flows from investing activities:Purchases of property and equipment
    
    
    (6,611
    )
    
    
    (5,970
    )Lease inducements received
    
    
    
    
    
    
    373Acquisitions, net of cash acquired
    
    
    (2,176
    )
    
    
    (102,562
    )Net cash used in investing activities
    
    
    (8,787
    )
    
    
    (108,159
    )Cash flows from financing activities:Issuance of long-term debt
    
    
    
    
    
    
    48,000Proceeds from public offering, net of issuance costs
    
    
    204,107
    
    
    
    Payment of financing costs
    
    
    
    
    
    
    (1,792
    )Repayment of long-term debt
    
    
    (2,520
    )
    
    
    (240
    )Proceeds from exercise of options
    
    
    5,917
    
    
    
    1,440Tax benefit on option exercises
    
    
    3,447
    
    
    
    799Net cash provided by financing activities
    
    
    210,951
    
    
    
    48,207Effect of foreign exchange on cash balances
    
    
    50
    
    
    
    14Increase (decrease) in cash and cash equivalents
    
    
    251,807
    
    
    
    (39,339
    )Cash and cash equivalents, beginning of period
    
    
    67,715
    
    
    
    90,929Cash and cash equivalents, end of period
    
    $
    319,522
    
    
    $
    51,590
 See accompanying notes to unaudited consolidated financial statements.
  6




---



##### Table of Contents



SXC HEALTH SOLUTIONS CORP.
Consolidated Statements of Shareholders Equity
(in thousands, except share data)
 Common Shares
    
    
    Additional
    
    
    Retained
    
    
    Accumulated OtherShares
    
    
    Amount
    
    
    Paid-in Capital
    
    
    Earnings
    
    
    Comprehensive Loss
    
    
    TotalBalance at December 31, 2008
    
    
    24,103,032
    
    
    $
    146,988
    
    
    $
    11,854
    
    
    $
    35,751
    
    
    $
    (430
    )
    
    $
    194,163Activity during the period (unaudited):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,868
    
    
    
    
    
    
    
    30,868Exercise of stock options
    
    
    687,045
    
    
    
    8,549
    
    
    
    (2,632
    )
    
    
    
    
    
    
    
    
    
    
    5,917Issuance of common shares
    
    
    5,175,000
    
    
    
    204,107
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204,107Issuance of common shares for
acquisition
    
    
    140
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Vesting of restricted stock units
    
    
    13,952
    
    
    
    485
    
    
    
    (485
    )
    
    
    
    
    
    
    
    
    
    
    Tax benefit on options exercised
    
    
    
    
    
    
    
    
    
    
    3,447
    
    
    
    
    
    
    
    
    
    
    
    3,447Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    2,477
    
    
    
    
    
    
    
    
    
    
    
    2,477Other comprehensive income, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    26Balance at September 30, 2009 (unaudited)
    
    
    29,979,169
    
    
    
    360,131
    
    
    
    14,661
    
    
    
    66,619
    
    
    
    (404
    )
    
    
    441,007Balance at December 31, 2007
    
    
    20,985,934
    
    
    
    103,520
    
    
    
    8,299
    
    
    
    20,638
    
    
    
    
    
    
    
    132,457Activity during the period (unaudited):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,163
    
    
    
    
    
    
    
    10,163Issuance of shares under ESPP
    
    
    2,386
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Issuance of shares for acquisition
    
    
    2,785,636
    
    
    
    40,921
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,921Costs to issue shares for acquisition
    
    
    
    
    
    
    (362
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (362
    )Exercise of stock options
    
    
    269,426
    
    
    
    2,095
    
    
    
    (655
    )
    
    
    
    
    
    
    
    
    
    
    1,440Tax benefit on options exercised
    
    
    
    
    
    
    
    
    
    
    799
    
    
    
    
    
    
    
    
    
    
    
    799Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    3,006
    
    
    
    
    
    
    
    
    
    
    
    3,006Balance at September 30, 2008 (unaudited)
    
    
    24,043,382
    
    
    $
    146,207
    
    
    $
    11,449
    
    
    $
    30,801
    
    
    $
    
    
    
    $
    188,457
 See accompanying notes to the consolidated financial statements.
  7




---



##### Table of Contents



SXC HEALTH SOLUTIONS CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    Description of Business
 SXC 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 is headquartered in Lisle, Illinois with several locations in the
U.S. and Canada. For more information please visit www.sxc.com.
 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 consolidated 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, 2008.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, 2008.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 nine-month periods ended September 30, 2009 are not
necessarily indicative of the results to be expected for the full year ending December 31,
2009.Effective with the acquisition of National Medical Health Card Systems, Inc. (NMHC) on
April 30, 2008, the Company began operating in two reportable segments: PBM and HCIT.
Please see Note 10 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, rebates, 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.(c)
    
    Subsequent Events:As of the issuance date of the Companys financial statements, no subsequent events have
occurred that would require disclosure in accordance with Financial Accounting Standards
Boards (FASB) guidance.(d)
    
    Accounting Standards CodificationEffective with the quarter ended September 30, 2009, the Company adopted the FASBs
Accounting Standards Codification (the Codification), which is now the exclusive
authoritative reference for nongovernmental U.S. GAAP. Where applicable, titles and
references to accounting standards have been updated to reflect the Codification.
  8




---



##### Table of Contents



3.
    
    Recent Accounting Pronouncements
 Derivative Instruments and Hedging Activities DisclosuresIn March 2008, the FASB issued an amendment to derivative instruments and hedging
activities guidance. The amended accounting guidance 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. The amended accounting
guidance was effective for the Companys fiscal year beginning January 1, 2009, and its
adoption did not have a material impact to the Company.Business CombinationsNew accounting guidance for business combinations was issued by the FASB in December 2007.
The new accounting guidance applies to all transactions or other events in which an entity
(the acquirer) obtains control of one or more businesses. The new guidance 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. It also establishes what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the business
combination. This new accounting guidance applies prospectively to business combinations
for which the acquisition date is on or after January 1, 2009.Noncontrolling Interests in Consolidated Financial StatementsIn December 2007, the FASB issued updated accounting guidance for non-controlling interests
in consolidated financial statements. The updated accounting guidance 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. The updated accounting
guidance was effective for the Companys fiscal year beginning January 1, 2009, and has
been applied prospectively to all noncontrolling interests, including those that arose
before the effective date. Its adoption did not have a material impact to the Company.Revenue Arrangements with Multiple DeliverablesIn October 2009, the FASB issued an amendment to revenue recognition guidance for
transactions with multiple deliverables. The updated accounting guidance changes the
criteria necessary for a delivered item to be considered a separate element. The new
accounting guidance eliminates the requirement of using objective and reliable evidence of
fair value in determining the amount of revenue to recognize. In place of having objective
and reliable evidence of fair value for delivered and undelivered elements, a company may
use its best estimate of selling price to determine the amount of revenue to recognize.
The new guidance is effective for the Companys fiscal year beginning January 1, 2011, with
early adoption permitted. The Company is currently evaluating the impact the new
guidance will have on its financial results.Revenue Arrangements that Include Software ElementsThe FASB issued new revenue recognition guidance in October 2009 for transactions of
tangible products that have software components. The new accounting guidance removes the
non-software components and software elements of the tangible product from the scope of
software revenue recognition accounting guidance. The new accounting guidance is effective
for the Companys fiscal year beginning January 1, 2011, with early adoption permitted.
The Company is currently evaluating the impact the new guidance will have on its financial
results.
 4.
    
    Business Combinations
 NMHC
Acquisition
Effective 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 Company common share and (ii) $7.70
in cash for each outstanding NMHC common share. Total deal consideration approximated $143.8
million, which included the issuance of 2,786,100 Company common shares. The value of the
common shares issued was based on the average market price of the Companys common shares from
a few days before to a few days after the agreement was finalized 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 agreement. NMHC results
of operations are included in the consolidated financial statements from the date of
acquisition.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.
  9




---



##### Table of Contents



The purchase price of the acquired operations was comprised of the following (in thousands):
 Cash payment to NMHC shareholders
    
    $
    98,711Value assigned to shares issued
    
    
    40,928Direct costs of the acquisition
    
    
    4,114Total purchase price
    
    $
    143,753
 Direct Costs of the
Acquisition
Direct costs of the acquisition include investment banking fees, legal and accounting fees and
other external costs directly related to the acquisition.Purchase Price Allocation
The acquisition was accounted for under the purchase method of accounting with the Company
treated as the acquiring entity. Accordingly, the consideration paid by the Company to
complete the acquisition has been allocated to the assets acquired and liabilities assumed
based upon their estimated fair values as of the date of acquisition. The excess of the
purchase price over the estimated fair values of the net assets acquired and liabilities
assumed was recorded as goodwill. Goodwill is non-amortizing for financial statement purposes
and is not tax deductible. The changes in goodwill from December 31, 2008 to September 30,
2009 are primarily due to deferred tax adjustments, changes in the estimated fair value of
acquired fixed assets and revisions to the estimated fair values of assumed liabilities
related to the NMHC acquisition. During the three months ended September 30, 2009, the Company
recorded an adjustment to goodwill and deferred tax liabilities. The adjustment decreased
goodwill and decreased deferred tax liabilities (non-current) by approximately $2.1 million.
The purchase price allocation is considered final as of June 30, 2009.The following summarizes the estimates of the fair values of the assets acquired and
liabilities assumed at the acquisition date (in thousands):
 Current assets
    
    $
    115,864Property and equipment
    
    
    3,495Goodwill
    
    
    122,120Intangible assets
    
    
    44,420Other assets
    
    
    1,258Total assets acquired
    
    
    287,157Current liabilities
    
    
    132,618Deferred income taxes
    
    
    10,490Other liabilities
    
    
    296Total liabilities assumed
    
    
    143,404Net assets acquired
    
    $
    143,753
 During the three and nine months ended September 30, 2009, the Company recognized $1.7 million
and $5.9 million of amortization expense from intangible assets acquired, respectively.
Amortization for the remainder of 2009 is expected to be $1.7 million. Amortization for 2010
and 2011 is expected to be $6.0 million and $5.3 million, respectively. The estimated fair
values and useful lives of intangible assets acquired are as follows (in thousands):
 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
The following unaudited pro forma financial information presents the combined historical
results of the operations of the Company and NMHC as if the acquisition had occurred on the
first day of the period presented. Certain adjustments have been made to reflect changes in
depreciation, amortization and income taxes based on the Companys estimates of fair values
recognized in the application of purchase accounting, and interest expense on borrowings to
finance the acquisition.
  10




---



##### Table of Contents



Unaudited pro forma results of operations are as follows (in thousands, except per share
data):
 Nine monthsendedSeptember 30,2008Sales
    
    $
    951,842Gross profit
    
    $
    103,493Income
    
    $
    6,157Income per share:Basic
    
    $
    0.26Diluted
    
    $
    0.25Weighted average shares outstandingBasic
    
    
    23,828,989Diluted
    
    
    24,246,946
 This unaudited pro forma financial information is not intended to represent or be indicative
of what would have occurred if the transaction had taken place on the date presented and is
not indicative of what the Companys actual results of operations would have been had the
acquisition been completed at the beginning of the period 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.Other Acquisitions
On December 22, 2008, the Company announced that it had acquired substantially all of the
assets of Zynchros, a privately-owned leader in formulary management solutions, in a cash
transaction effective December 19, 2008. Founded in 2000, Zynchros provides a suite of
on-demand formulary management tools to approximately 45 health plan and PBM customers. The
zynchros.com platform helps payers to effectively manage their formulary programs, and to
maintain Medicare Part D compliance of their programs. The Company recorded identifiable
intangible assets of $1.7 million with estimated useful lives of 4 to 5 years and goodwill of
$2.7 million associated with the acquisition. The goodwill acquired was allocated to the
Companys HCIT segment. Zynchros results of operations are included in the consolidated
statement of operations as of the effective date of the acquisition and were not material to
the Companys results of operations on a pro forma basis.In the second quarter of 2009, the Company completed the acquisition of substantially all of
the assets of a small pharmacy system vendor in a cash transaction, effective June 11, 2009.
The Company recorded identifiable intangible assets of $0.9 million with estimated useful
lives of 1 to 10 years and goodwill of $1.1 million associated with the acquisition. The
goodwill acquired was allocated to the Companys HCIT segment. The results of operations are
included in the consolidated statement of operations as of the effective date of the
acquisition and were not material to the Companys results of operations on a pro forma basis.
 5.
    
    Cash and Cash Equivalents
 The components of cash and cash equivalents are as follows (in thousands):
 September 30,
    
    
    December 31,2009
    
    
    2008(unaudited)Cash on deposit
    
    $
    146,254
    
    
    $
    46,532Payments in transit
    
    
    (79,476
    )
    
    
    (55,559
    )U.S. money market funds
    
    
    252,711
    
    
    
    76,713Canadian dollar deposits (September 30, 2009  Cdn. $35 at 1.0691;
    
    
    33
    
    
    
    29December 31, 2008  Cdn. $35 at 1.2168)
    
    $
    319,522
    
    
    $
    67,715
 The Company determined the carrying amount reported in the consolidated balance sheets as cash
and cash equivalents approximates fair value because of the short maturities of these
instruments and are considered Level 1 investments in the fair value hierarchy.
 6.
    
    Goodwill and Other Intangible Assets
 Goodwill 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 nine months ended September 30, 2009 and 2008.During the second quarter of 2009, the Company recorded an additional $0.9 million in
identifiable intangible assets related to the acquisition of a small pharmacy system vendor as
described in Note 4. The identifiable intangible assets were allocated to the Companys HCIT
segment.
  11




---



##### Table of Contents



Definite-lived intangible assets are amortized over the useful lives of the related assets.
The components of intangible assets were as follows (in thousands):
 September 30, 2009
    
    
    December 31, 2008Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    53,760
    
    
    $
    16,090
    
    
    $
    37,670
    
    
    $
    53,100
    
    
    $
    10,043
    
    
    $
    43,057Acquired software
    
    
    3,765
    
    
    
    2,748
    
    
    
    1,017
    
    
    
    3,565
    
    
    
    1,903
    
    
    
    1,662Trademarks/Trade names
    
    
    1,370
    
    
    
    1,170
    
    
    
    200
    
    
    
    1,360
    
    
    
    1,122
    
    
    
    238Non-compete agreements
    
    
    1,510
    
    
    
    1,483
    
    
    
    27
    
    
    
    1,480
    
    
    
    987
    
    
    
    493Licenses
    
    
    1,000
    
    
    
    94
    
    
    
    906
    
    
    
    1,000
    
    
    
    44
    
    
    
    956Total
    
    $
    61,405
    
    
    $
    21,585
    
    
    $
    39,820
    
    
    $
    60,505
    
    
    $
    14,099
    
    
    $
    46,406
 Amortization associated with intangible assets at September 30, 2009 is estimated to be $2.2
million for the remainder of 2009, $7.9 million in 2010, $7.1 million in 2011, $6.5 million in
2012, $5.7 million in 2013, $5.2 million in 2014 and $5.2 million for years after 2014.
 7.
    
    Long Term Debt
 On 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 rate for
all borrowings is prime plus 2.25% with respect to base rate borrowings or LIBOR plus 3.25%.
During an event of default, default interest is payable at a rate that is 2% higher than the
rate otherwise applicable. The interest rate on the loan at September 30, 2009 was 3.53%. 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. In addition, pursuant to the terms of
its credit agreement, the Company entered into interest rate contracts for 50% of the borrowed
amount, or $24 million, to provide protection against fluctuations in interest rates for a
three-year period from the date of issue. See Note 13 for more information.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
common shares;
    
    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.
 The foregoing mandatory prepayments will be applied first to the Term Loan Facility and second
to the Revolving Credit Facility.In September 2009, the Company raised net proceeds of $204.1 million from a public
offering of the Companys common shares as described in Note 8. US Corp. obtained a consent
from its creditors which waived the need to use part of the proceeds to prepay the outstanding
loans under the Credit Facilities. The consent applies only to this public offering of the
Companys common shares and does not amend the Credit Facilities for future issuances or other
events that would require a prepayment of outstanding loans under the Credit Facilities as
noted above.The Term Loan Facility will amortize in quarterly installments, which commenced on June 30,
2008, in aggregate annual amounts equal to 1% (year 1), 10% (years 2 and 3), 15% (years 4 and
5), and 49% (year 6) of the original funded principal amount of such facility. Principal
repayments will be $3.7 million in 2009, $4.8 million in 2010, $6.6 million in 2011, $7.2
million in 2012, $19.4 million in 2013 and $5.9 million in 2014. Principal amounts
outstanding under the Revolving Credit Facility are due and payable in full on April 30, 2013.The Company and all material U.S. subsidiaries of US Corp. guarantee the obligations under the
Credit Agreement. All future material U.S. subsidiaries of the Company, as well as certain
future Canadian subsidiaries, will guarantee the obligations under the Credit Agreement as
well. In addition, the Credit Facilities and the guarantees are secured by the capital stock
of US Corp. and certain other subsidiaries of the Company and substantially all other tangible
and intangible assets owned by the Company, US Corp. and each subsidiary that guarantees the
obligations of US Corp. under the Credit Facilities, subject to certain specified exceptions.The Credit Agreement also contains certain restrictive covenants including financial covenants
that require the Company to maintain (i) a maximum consolidated leverage ratio, (ii) a minimum
consolidated fixed charge coverage ratio and (iii) a maximum capital expenditure level. As of
September 30, 2009, the Company is in compliance with its covenants.
  12




---



##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Long-term debt
    
    $
    468
    
    
    $
    782
    
    
    $
    1,463
    
    
    $
    1,372Finacing charges
    
    
    106
    
    
    
    118
    
    
    
    328
    
    
    
    197Other
    
    
    514
    
    
    
    709
    
    
    
    1,457
    
    
    
    838Total
    
    $
    1,088
    
    
    $
    1,609
    
    
    $
    3,248
    
    
    $
    2,407
 8.
    
    Shareholders equity
 (a)
    
    Public offering:On September 23, 2009, the Company completed a public offering of 5,175,000 of its common
 shares. The shares were offered to the public at a price of $41.50 per share. The net
proceeds to the Company from the offering totalled $204.1 million, net of $10.7 million for
underwriting discounts and commissions, and other offering costs.(b)
    
    Stock incentive plans:The Company maintains a stock option plan (the Option Plan), as amended, under which
there were outstanding 1,581,956 stock options as of September 30, 2009. Effective on March
11, 2009, the Board of Directors of the Company adopted the SXC Health Solutions Corp.
Long-Term Incentive Plan (the LTIP), which was approved by the shareholders of the
Company at the Annual and Special Meeting of Shareholders on May 13, 2009. The LTIP
provides for the grant of stock option awards, stock appreciation rights, restricted stock
awards, restricted stock unit awards, performance awards and other stock-based awards to
eligible persons, including executive officers and directors of the Company. The purpose of
the LTIP is to advance the interests of the Company by attracting and retaining high
caliber employees and other key individuals who perform services for the Company, a
subsidiary or an affiliate; align the interests of the Companys shareholders and
recipients of awards under the LTIP by increasing the proprietary interest of such
recipients in the Companys growth and success; and motivate award recipients to act in the
best long-term interest of the Company and its shareholders. The LTIP replaced the Option
Plan, and no further grants or awards will be issued under the Option Plan. The LTIP
provides for a maximum of 1,070,000 common shares of the Company to be issued in addition
to the common shares that remained available for issuance under the Option Plan.(c)
    
    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.During the first quarter of 2009, the ESPP was amended so that the common shares available
for purchase under the ESPP are drawn from reacquired common shares purchased on behalf of
the Company in the open market. During the nine months ended September 30, 2009 and 2008,
there were 6,198 and 2,386 shares issued under the ESPP, respectively.The ESPP is not considered compensatory as its purchase discount is not greater than 5%,
the plan is available to substantially all employees, and the plan does not incorporate
option features. Accordingly, no portion of the cost related to ESPP purchases is included
in the Companys stock-based compensation expense.(d)
    
    Outstanding shares and stock options:At September 30, 2009, the Company had outstanding common shares of 29,979,169 and stock
options outstanding of 1,581,956. At December 31, 2008, the Company had outstanding common
 shares of 24,103,032 and stock options outstanding of 2,093,194. As of September 30, 2009,
stock options outstanding consisted of 524,587 options at a weighted-average exercise price
of Canadian $12.04 and 1,057,369 options at a weighted-average exercise price of U.S.
$18.87.(e)
    
    Restricted stock units:The Company assumed 170,500 restricted stock units (RSUs) of NMHC after the NMHC
acquisition, which converted into 126,749 RSUs of the Company. In September 2008, the
Company issued an additional 51,000 RSUs with a grant date fair value of $15.90 per share
to certain new employees who were previous employees of NMHC.
 
  13




---



##### Table of Contents



During the nine months ended September 30, 2009, the Company granted a total of 168,205
RSUs to its employees and non-employee directors with a grant date fair value of $25.54 per
share.Substantially all RSUs vest on a straight-line basis over a range of three to four years.
Certain additional RSUs granted to senior management cliff vest based upon reaching agreed
upon three-year performance conditions.At September 30, 2009, there were 256,133 RSUs outstanding.
 9.
    
    Stock-based compensation
 During the three and nine month periods ended September 30, 2009, the Company recorded
stock-based compensation expense of $1.1 million and $2.5 million, respectively. During the
three and nine month periods ended September 30, 2008, the Company recorded stock-based
compensation expense of $0.9 million and $3.0 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:
 Nine months ended September 30,2009
    
    
    2008Total stock options granted
    
    
    191,607
    
    
    
    474,950Volatility
    
    
    47.1  48.0
    %
    
    
    49.6  52.4
    %Risk-free interest rate
    
    
    1.96  2.75
    %
    
    
    1.67  3.27
    %Expected life
    
    4.5 years
    
    2.5  4.5 yearsDividend yield
    
    
    
    
    
    
    Weighted-average grant date fair value:
    
    $
    10.89
    
    
    $
    5.69
 There were no Canadian dollar stock options granted during the nine months ended September 30,
2009 and 2008.
 10.
    
    Segment information
 The Company operates in two geographic areas as follows (in thousands):
 Three months ended September 30,
    
    
    Nine months ended September 30,Revenue
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008United States
    
    $
    382,754
    
    
    $
    317,122
    
    
    $
    993,486
    
    
    $
    566,772Canada
    
    
    775
    
    
    
    979
    
    
    
    1,832
    
    
    
    3,401Total
    
    $
    383,529
    
    
    $
    318,101
    
    
    $
    995,318
    
    
    $
    570,173
 Net assets
    
    September 30, 2009
    
    
    December 31, 2008United States
    
    $
    427,113
    
    
    $
    182,105Canada
    
    
    13,894
    
    
    
    12,058Total
    
    $
    441,007
    
    
    $
    194,163
  14




---



##### Table of Contents



With the acquisition of NMHC during the second quarter of 2008, the Company changed its
internal organization structure and now reports two operating segments: PBM and HCIT. The
Company evaluates segment performance based upon revenue and gross profit. Results for periods
reported prior to the three months ended September 30, 2008 were reported in one operating
segment, HCIT. Prior period results have not been restated because to do so would be
impracticable. Financial information by segment is presented below (in thousands):
 Three months ended September 30,
    
    
    Nine months ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008PBM:Revenues
    
    $
    357,473
    
    
    $
    297,178
    
    
    $
    919,158
    
    
    $
    502,038Gross profit
    
    $
    36,239
    
    
    $
    24,524
    
    
    $
    99,550
    
    
    $
    41,338Total assets at September 30
    
    $
    420,677
    
    
    $
    291,544HCIT:Revenues
    
    $
    26,056
    
    
    $
    20,923
    
    
    $
    76,161
    
    
    $
    68,135Gross profit
    
    $
    11,441
    
    
    $
    10,362
    
    
    $
    34,526
    
    
    $
    36,868Total assets at September 30
    
    $
    249,039
    
    
    $
    121,460Consolidated:Revenues
    
    $
    383,529
    
    
    $
    318,101
    
    
    $
    995,319
    
    
    $
    570,173Gross profit
    
    $
    47,680
    
    
    $
    34,886
    
    
    $
    134,076
    
    
    $
    78,206Total assets at September 30
    
    $
    669,716
    
    
    $
    413,004
 For the three-month period ended September 30, 2009, one customer accounted for 11.8% and
another for 11.2% of total revenues. For the three-month period ended September 30, 2008, one
customer accounted for 12.1% and another for 11.4% of consolidated revenue, respectively.For the nine-month period ended September 30, 2009, one customer accounted for 13.6% and
another for 12.6% of total revenue, respectively. For the nine-month period ended September
30, 2008, one customer accounted for 10.5% and another for 11.2% of consolidated revenue,
respectively.At September 30, 2009 and December 31, 2008, no one customer accounted for 10% or more of the
outstanding accounts receivable balance.
 11.
    
    Income Taxes
 The Company recognizes income taxes based on the amount of taxes payable for the current year
plus deferred tax liability and asset impacts driven by future tax consequences. The Companys
tax recognition includes both tax benefits utilized by the Company as a result of historical
net operating losses (NOLs) and tax-related timing differences. 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 September 30, 2009 and 2008 was
37.8% and 26.5%, respectively. The Companys effective tax rate for the nine months ended
September 30, 2009 and 2008 was 32.5% and 25.3%, respectively.Uncertain Tax PositionsU.S. GAAP accounting guidance for uncertain tax positions prescribes a recognition threshold
and measurement attribute criteria for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. As of September 30, 2009 and at
December 31, 2008, the Company had a long-term accrued liability of $0.3 million related to
various federal and state income tax matters on the consolidated balance sheet, the
recognition of which would impact the Companys effective tax rate.
  15




---



##### Table of Contents



Changes in the balance of the liability for tax uncertainties are as follows (in thousands):
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Beginning balance
    
    $
    321
    
    
    $
    270
    
    
    $
    297
    
    
    $
    202Effect of change in accounting position for income tax uncertainties
    
    
    (66
    )
    
    
    2
    
    
    
    (63
    )
    
    
    44Increase in interest related to tax positions taken in prior years
    
    
    10
    
    
    
    14
    
    
    
    31
    
    
    
    40Balance at September 30
    
    $
    265
    
    
    $
    286
    
    
    $
    265
    
    
    $
    286
 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 subsidiaries file income tax returns in Canadian and U.S. federal
jurisdictions, and various provincial, state and local jurisdictions. With a few exceptions,
the Company is no longer subject to tax examinations by tax authorities for years prior to
2005.
 12.
    
    Contingencies
 From 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 for 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.The Company provides routine indemnification to its customers against liability if the
Companys products infringe on a third partys intellectual property rights. The maximum
amount of these indemnifications cannot be reasonably estimated due to their uncertain nature.
Historically, the Company has not made payments related to these indemnifications.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 and may require renewals for the length of the contract period.
 13.
    
    Derivative Instruments and Fair Value
 The Company uses variable-rate LIBOR debt to finance its operations. These debt obligations
expose the Company to variability in interest payments on its long term-debt due to changes in
interest rates. If interest rates increase, interest expense increases. Conversely, if
interest rates decrease, interest expense also decreases.Pursuant to the terms of the Companys $48 million credit agreement, the Company entered into
interest rate contracts with notional amounts equal to 50% of the borrowed amount, or $24
million, for a three-year period from the date of issue. The Company entered into a 3-year
interest rate swap agreement with a notional amount of $14 million to fix the LIBOR rate on
$14 million of the term loan at 4.31%, resulting in an effective rate of 7.56% after adding
the 3.25% margin per the credit agreement  see Note 7 for more information. Under the
interest rate swap, the Company receives LIBOR-based variable interest rate payments and makes
fixed interest rate payments, thereby creating the equivalent to fixed-rate debt. The Company
also entered into a 3-year interest rate cap with a notional amount of $10 million to
effectively cap the LIBOR rate on $10 million of the
term loan at 4.50%, resulting in a maximum effective rate of 7.75% after adding the 3.25%
margin per the credit agreement, excluding the associated fees, to help manage exposure to
interest rate fluctuations. These instruments were designated as cash flow hedges during 2008.The two derivative instruments mentioned above were entered into to manage fluctuations in
cash flows resulting from interest rate risk attributable to changes in the benchmark interest
rate of LIBOR, and to comply with the terms of the credit agreement.As of September 30, 2009, the interest rate swap derivative instrument is out of the money
and the Company is not currently exposed to any credit risk for amounts classified on the
consolidated balance sheet should the counterparty in the agreement fail to meet its
obligations under the agreement. To manage credit risks, the Company selects counterparties
based on credit assessments, limits overall exposure to any single counterparty and monitors
the market position with each counterparty. At September 30, 2009, the Company concluded that
it was probable that the counterparty would be able to comply with the contractual terms of
the agreements and that the forecasted transactions are probable of occurring.The Company assesses interest rate cash flow risk by continually identifying and monitoring
changes in interest rate exposures that may adversely impact expected future cash flows and by
evaluating hedging opportunities. The Company does not enter into derivative instruments for
any purpose other than hedging identified exposures. That is, the Company does not speculate
using derivative instruments and has not designated any instruments as fair value hedges or
hedges of the foreign currency exposure of a net investment in foreign operations.
  16




---



##### Table of Contents



Cash flow hedge accounting may be elected only for highly effective hedges, based upon an
assessment, performed at least quarterly, of the historical and prospective future correlation
of changes in the fair value of the derivative instrument to changes in the expected future
cash flows of the hedged item. To the extent cash flow hedge accounting is applied, the
effective portion of any changes in the fair value of the derivative instruments is initially
reported as a component of accumulated other comprehensive income or loss (AOCI).
Ineffectiveness, if any, is immediately recognized in the statement of operations. The amount
in AOCI is reclassified to earnings when the forecasted transaction occurs, even if the
derivative instrument is sold, extinguished or terminated prior to the transaction occurring,
if it is still probable that the forecasted transaction will occur. If the forecasted
transaction is no longer probable of occurring, the amount in AOCI is immediately reclassified
to earnings.There was no hedge ineffectiveness subsequent to the implementation of cash flow hedge
accounting related to the interest rate swap. Derivatives and hedge accounting guidance
requires that all derivative instruments are recorded on the balance sheet at their respective
fair values.Changes in the fair value of the interest rate swaps designated as hedges of the variability
in cash flows associated with floating-rate, long-term debt obligations, subsequent to the
implementation of cash flow hedge accounting, are reported in AOCI. These amounts are
subsequently reclassified into interest expense in the same period in which the related
interest on the floating-rate debt obligations affects earnings. The amount recorded in AOCI
at September 30, 2009 was $0.4 million net of income taxes.As of September 30, 2009, approximately $0.6 million of losses in AOCI related to the interest
rate swap are expected to be reclassified into interest expense as a yield adjustment of the
hedged debt obligation within the next 12 months.Effective January 1, 2008, accounting guidance for fair value measurements was issued. The
accounting guidance defines a three-level hierarchy which prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels, with level 1 considered the
most reliable. For assets and liabilities measured at fair value on a recurring basis in the
consolidated balance sheet, the table below categorizes fair value measurements across the
three levels as of September 30, 2009 (in thousands):
 Quoted Prices in
    
    
    Significant
    
    
    SignificantActive Markets
    
    
    Observable Inputs
    
    
    Unobservable Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssets:Interest Rate Cap Derivative
    
    $
    
    
    
    $
    11
    
    
    $
    
    
    
    $
    11Liabilities:Interest Rate Swap Derivative
    
    $
    
    
    
    $
    910
    
    
    $
    
    
    
    $
    910
 When available and appropriate, the Company uses quoted market prices in active markets to
determine fair value, and classifies such items within Level 1. Level 1 values only include
derivative instruments traded on a public exchange. Level 2 inputs are inputs other than
quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument. Level 2
inputs include quoted prices for similar assets or liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets that are not active, or
inputs other than quoted prices that are observable for the asset or liability or can be
derived principally from or corroborated by observable market data. If the Company were to
use one or more significant unobservable inputs for a model-derived valuation, the resulting
valuation would be classified in Level 3.The Company has classified derivative assets as other noncurrent assets and derivative
liabilities as other noncurrent liabilities on the consolidated balance sheet. The interest
rate contract derivatives fair values are derived from calculations using observable interest
rate inputs from a financial institution. The fair values of the derivatives are noted in the
tables above. The notional amounts of the interest rate contracts are noted previously in
this footnote. The interest rate cap derivative fair value is recorded in other assets long
term. The fair value of the interest rate swap agreement is recorded in other liabilities
long term.The following table below categorizes the fair value changes in the derivative agreements
during the three and nine months ended September 30, 2009 (in thousands):
 Amount of Gain (Loss)
    
    
    
    
    
    
    Amount of Gain (Loss)
    
    
    Location of Gain (Loss)
    
    
    Amount of Gain (Loss)Recognized in OCI
    
    
    Location of Gain
    
    
    Reclassified from AOCI
    
    
    Recognized in Income
    
    
    Recognized in Income on Derivativeon Derivative
    
    
    (Loss)
    
    
    into Income
    
    
    on Derivative
    
    
    (Ineffective portion excluded(effective portion)
    
    
    Reclassified from
    
    
    (effective portion)
    
    
    (Ineffective portion
    
    
    from effectiveness testing)For the Three
    
    
    For the Nine
    
    
    AOCI into Income
    
    
    For the Three
    
    
    For the Nine
    
    
    excluded from
    
    
    For the Three
    
    
    For the NineMonths Ended
    
    
    Months Ended
    
    
    (effective portion)
    
    
    Months Ended
    
    
    Months Ended
    
    
    effectiveness testing)
    
    
    Months Ended
    
    
    Months EndedInterest Rate
Contracts
    
    
    82
    
    
    
    (31
    )
    
    Interest Expense
    
    
    (133
    )
    
    
    (342
    )
    
    Interest Expense
    
    
    (3
    )
    
    
    (4
    )
  17




---



##### Table of Contents



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




---



##### Table of Contents



HCIT Business
   Operating Expenses
  Industry
       19




---



##### Table of Contents



Competitive Strengths
  Flexible, Customized and Independent Services:
 Leading technology and platform:
 Measurable cost savings for our customers
 Selected financial highlights for the three and nine months ended September 30, 2009 compared to
the same periods in 2008
 NMHC Acquisition
    
    
    Total revenue in 2009 was $383.5 million as compared to $318.1 million in 2008. The
increase is largely attributable to an increase in PBM revenue of $60.3 million compared to
2008. PBM revenues increased primarily due to additional services and changes in services
provided to several HCIT customers. These additional services vary by customer, but
include the use of the Companys national pharmacy network, pharmaceutical rebate
agreements, eligibility and clinical services. The addition of these services and the
additional risks and rewards of these contracts have caused the new or revised arrangements
to be accounted for under gross revenue reporting whereas previously, they were accounted
for on a net basis.
    
    The Company reported net income of $11.2 million, or $0.43 per share (fully-diluted),
for the three months ended September 30, 2009, compared to $3.5 million, or $0.15 per share
(fully-diluted), for the same period in 2008. The increase is driven by higher gross
profit caused by an increase
in revenues, as well as control over SG&A costs. These increases are partially offset by
increases in cost of revenues, interest expense and income taxes.
  
    
    Total revenue in 2009 was $995.3 million as compared to $570.2 million in 2008. The
increase is largely attributable to the acquisition of NMHC and the inclusion of a full
nine months of revenue from the Companys new PBM segment for the nine months ended
September 30, 2009 as compared to only five months for the same period last year.
    
    The Company reported net income of $30.9 million, or $1.22 per share (fully-diluted),
for the nine months ended September 30, 2009 compared to $10.2 million, or $0.44 per share
(fully-diluted), for the same period in 2008. Net income is higher for the nine months
ended September 30, 2009 as compared to the same period in 2008 due to higher gross profit
as a result of having a full nine months of the PBM segment activity in 2009 versus five
months in 2008, as well as additional gross margin generated from new customers added
during 2009. The higher gross profit is offset by higher operating expenses in 2009,
mostly due to a full nine months of the PBM segment costs compared to five months in 2008,
plus higher interest expense and income taxes in 2009.
  20




---



##### Table of Contents



Results of Operations
 Three months ended September 30, 2009 as compared to the three months ended September 30, 2008
 Three months ended September 30,In thousands, except per share data
    
    2009
    
    
    2008Revenue
    
    $
    383,529
    
    
    $
    318,101Gross profit
    
    
    47,680
    
    
    
    34,886Product development costs
    
    
    2,833
    
    
    
    2,486SG&A
    
    
    22,153
    
    
    
    21,863Depreciation of property and equipment
    
    
    1,467
    
    
    
    1,222Amortization of intangible assets
    
    
    2,238
    
    
    
    3,449Interest expense, net
    
    
    987
    
    
    
    1,101Other income, net
    
    
    (20
    )
    
    
    (50
    )Income before income taxes
    
    
    18,022
    
    
    
    4,815Income tax expense
    
    
    6,813
    
    
    
    1,276Net income
    
    $
    11,209
    
    
    $
    3,539Diluted earnings per share
    
    $
    0.43
    
    
    $
    0.15
 Revenue
  Cost of Revenue
  Gross Profit
  Product Development Costs
  SG&A Costs
   Depreciation
  Amortization
   21




---



##### Table of Contents



Interest Income and Expense
  Income Taxes
  Net Income
  Segment Analysis
  PBM
    
    
    HCIT
    
    
    Consolidated2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue
    
    $
    357,473
    
    
    $
    297,178
    
    
    $
    26,056
    
    
    $
    20,923
    
    
    $
    383,529
    
    
    $
    318,101Gross profit
    
    $
    36,239
    
    
    $
    24,524
    
    
    $
    11,441
    
    
    $
    10,362
    
    
    $
    47,680
    
    
    $
    34,886Gross profit %
    
    
    10.1
    %
    
    
    8.3
    %
    
    
    43.9
    %
    
    
    49.5
    %
    
    
    12.4
    %
    
    
    11.0
    %
 PBM
      22




---



##### Table of Contents



HCIT
  2009
    
    
    2008RecurringTransaction processing
    
    $
    16,461
    
    
    $
    11,631Maintenance
    
    
    4,733
    
    
    
    3,998Total recurring
    
    
    21,194
    
    
    
    15,629Non-RecurringProfessional services
    
    
    3,187
    
    
    
    3,836System sales
    
    
    1,675
    
    
    
    1,458Total non-recurring
    
    
    4,862
    
    
    
    5,294Total revenue
    
    $
    26,056
    
    
    $
    20,923
  Recurring Revenue :
   Non-Recurring Revenue:
   Cost of Revenue:
  Gross Profit:
  23




---



##### Table of Contents



Nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008
 Nine months ended September 30,In thousands, except per share data
    
    2009
    
    
    2008Revenue
    
    $
    995,318
    
    
    $
    570,173Gross profit
    
    
    134,076
    
    
    
    78,206Product development costs
    
    
    9,024
    
    
    
    7,425SG&A
    
    
    64,857
    
    
    
    47,291Depreciation of property and equipment
    
    
    4,354
    
    
    
    3,416Amortization of intangible assets
    
    
    7,478
    
    
    
    6,277Interest expense, net
    
    
    2,676
    
    
    
    198Other income, net
    
    
    (62
    )
    
    
    (15
    )Income before income taxes
    
    
    45,749
    
    
    
    13,614Income tax expense
    
    
    14,881
    
    
    
    3,451Net income
    
    $
    30,868
    
    
    $
    10,163Diluted earnings per share
    
    $
    1.22
    
    
    $
    0.44
 Revenue
  Cost of Revenue
  Gross Profit
  Product Development Costs
  SG&A Costs
   Depreciation
  Amortization
   24




---



##### Table of Contents



Interest Income and Expense
  Income Taxes
  Net Income
  Segment Analysis
  PBM
    
    
    HCIT
    
    
    Consolidated2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue
    
    $
    919,158
    
    
    $
    502,038
    
    
    $
    76,160
    
    
    $
    68,135
    
    
    $
    995,318
    
    
    $
    570,173Gross profit
    
    $
    99,550
    
    
    $
    41,338
    
    
    $
    34,526
    
    
    $
    36,668
    
    
    $
    134,076
    
    
    $
    78,206Gross profit %
    
    
    10.8
    %
    
    
    8.2
    %
    
    
    45.3
    %
    
    
    53.8
    %
    
    
    13.5
    %
    
    
    13.7
    %
 PBM
     HCIT
  2009
    
    
    2008RecurringTransaction processing
    
    $
    45,852
    
    
    $
    38,167Maintenance
    
    
    13,684
    
    
    
    12,338Total recurring
    
    
    59,536
    
    
    
    50,505Non-RecurringProfessional services
    
    
    10,630
    
    
    
    10,693System sales
    
    
    5,994
    
    
    
    6,937Total non-recurring
    
    
    16,624
    
    
    
    17,630Total revenue
    
    $
    76,160
    
    
    $
    68,135
  25




---



##### Table of Contents



Recurring Revenue :
   Non-Recurring Revenue:
   Cost of Revenue:
  Gross Profit:
 Liquidity and Capital Resources
   Credit Agreement
    26




---



##### Table of Contents




    
    50% of the net proceeds arising from the issuance or sale by the Company of its own common
shares;
    
    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
   
    
    Restricted cash totaling $12.4 million relates to cash balances required to be
maintained in accordance with various state statutes, contractual terms with customers
and other customer restrictions related to the PBM business. The Company continues to
monitor changes in balance requirements that may release restrictions and allow the
funds to be used for general corporate purposes.
    
    Rebates receivable of $20.6 million relate to billed and unbilled PBM receivables
from pharmaceutical manufacturers in connection with the administration of the rebate
program where the Company is the principal contracting party. The receivable and
related payables are based on estimates, which are subject to final settlement.
Rebates receivable decreased $9.0 million from $29.6 million at December 31, 2008, due
primarily to improved collections of rebates.
    
    Prepaid expenses and other assets increased $0.3 million to $4.7 million at
September 30, 2009 compared to $4.4 million at December 31, 2008, due primarily to the
renewal of the Companys annual corporate insurance policies in the second quarter of
2009 which expire in 2010, offset by the amortization of the prepayments during 2009.
    
    The Companys inventory balance of $7.0 million consists predominately of
prescription drugs and medical supplies at its Mail Service and Specialty Service
pharmacies. Changes in the inventory balance from period to period are caused by some
seasonality in certain products, taking advantage of buying opportunities and changing
inventory levels to properly support sales.
    
    Other assets of $1.3 million consist primarily of security deposits related to the
Companys distribution facilities.
    
    Customer deposits payable of $12.6 million relate to deposits required by the
Company from certain customers in order to satisfy liabilities incurred on the
customers behalf for the adjudication of pharmacy claims, and is related to the
restricted cash balances outlined above.
    
    Pharmacy benefit management rebates payable of $43.8 million represents amounts owed
to customers for rebates from pharmaceutical manufacturers where the Company
administers the rebate program on the customers behalf, and the Company is the
principal contracting party. The payables are based on estimates, which are subject to
final settlement. Pharmacy benefit management rebates payable increased $7.5 million
from $36.3 million at December 31, 2008 due to increased rebate volumes driven by
increased prescription drug sales transactions.
    
    Pharmacy benefit claim payments payable of $51.8 million predominantly relates to
amounts owed to retail pharmacies for prescription drug costs and dispensing fees in
connection with prescriptions dispensed by the pharmacies to the Companys customers
when the Company is the principal contracting party with the pharmacy.
    
    Total long-term debt decreased $2.5 million to $45.1 million at September 30, 2009
from $47.6 million at December 31, 2008 due to quarterly installment payments made in
2009.
    
    Accrued liabilities decreased $4.3 million to $27.7 million at September 30, 2009
from $32.0 million at December 31, 2008 due primarily to final adjustments made to the
fair values of assumed liabilities related to the NMHC acquisition. In addition, the
decrease is due to payments on previously recorded liabilities related to the NMHC
acquisition.
  27




---



##### Table of Contents



Cash flows from operating activities:
      Cash flows from investing activities
    Cash flows from financing activities
    Future Capital Requirements
     28




---



##### Table of Contents



Contingencies
    Contractual Obligations
  Outstanding Securities
  Critical Accounting Estimates
  Recent Accounting Standards
  
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
   
 ITEM 4. Controls and Procedures
    29




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
      
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
   30




---



##### Table of Contents



ITEM 4. Submission of Matters to a Vote of Security Holders
  
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
 ExhibitNumber
    
    Description of Document
    
    Reference10.1
    
    Underwriting Agreement
dated September 17, 2009,
among SXC Health Solutions
Corp. and J.P. Morgan
Securities Inc., as
representative of the
several underwriters named
therein, J.P. Morgan
Securities Canada Inc.,
Paradigm Capital Inc. and
Versant Partners Inc.
    
    Incorporated by
reference to Exhibit 1.1
to SXC Health Solutions
Corps Current Report on
Form 8-K filed on
September 18, 2009.31.1
    
    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
  31




---



##### Table of Contents



SIGNATURE
  SXC Health Solutions Corp.November 5, 2009
    By:
    /s/ Jeffrey ParkJeffrey ParkChief Financial Officer
(on behalf of the registrant and
as Chief Accounting Officer)  32




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Document
    
    Reference10.1
    
    Underwriting Agreement
dated September 17, 2009,
among SXC Health Solutions
Corp. and J.P. Morgan
Securities Inc., as
representative of the
several underwriters named
therein, J.P. Morgan
Securities Canada Inc.,
Paradigm Capital Inc. and
Versant Partners Inc.
    
    Incorporated by
reference to Exhibit 1.1
to SXC Health Solutions
Corps Current Report on
Form 8-K filed on
September 18, 2009.31.1
    
    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
  33