##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTER REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 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 
incorporation or organization)
    
    (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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
 Yes o No þ




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TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)
    
    
    3Consolidated
Balance Sheets as of March 31, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations for the Three Months Ended March 31, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007
    
    
    5Consolidated Statements of Shareholders Equity for the Three Months Ended March 31, 2008 and 2007
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 1A. Risk Factors
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22SIGNATURE
    
    
    23Exhibit 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)
 March 31,
    
    
    December 31,2008
    
    
    2007(unaudited)ASSETSCurrent assetsCash and cash equivalents (note 4)
    
    $
    96,562
    
    
    $
    90,929Accounts receivable, net of allowance for doubtful accounts of
$361 (December 31, 2007  $605)
    
    
    16,780
    
    
    
    17,990Unbilled revenue
    
    
    1,017
    
    
    
    1,195Prepaid expenses
    
    
    2,828
    
    
    
    2,361Inventory
    
    
    257
    
    
    
    242Income tax recoverable
    
    
    77
    
    
    
    1,073Deferred income tax asset, current
    
    
    2,657
    
    
    
    3,246Total current assets
    
    
    120,178
    
    
    
    117,036Property, plant and equipment, net of accumulated depreciation of
$14,168 
(December 31, 2007  $13,004)
    
    
    15,068
    
    
    
    13,629Goodwill
    
    
    15,996
    
    
    
    15,996Other intangible assets, net of accumulated amortization of $5,130

(December 31, 2007  $4,734)
    
    
    9,265
    
    
    
    9,661Deferred income tax asset
    
    
    3,444
    
    
    
    3,157Total assets
    
    $
    163,951
    
    
    $
    159,479LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    750
    
    
    $
    1,344Salaries and wages payable
    
    
    2,958
    
    
    
    2,909Accrued liabilities
    
    
    5,099
    
    
    
    4,807Pharmacy benefit management rebates payable
    
    
    4,178
    
    
    
    2,766Pharmacy benefit claim payments payable
    
    
    1,821
    
    
    
    2,059Deferred revenue
    
    
    6,004
    
    
    
    6,750Total current liabilities
    
    
    20,810
    
    
    
    20,635Accrued liabilities
    
    
    781
    
    
    
    764Deferred income tax liability
    
    
    1,091
    
    
    
    1,091Deferred revenue
    
    
    214
    
    
    
    223Deferred lease inducements
    
    
    3,132
    
    
    
    3,222Deferred rent
    
    
    1,113
    
    
    
    1,087Total liabilities
    
    
    27,141
    
    
    
    27,022Shareholders equityCommon stock: no par value, unlimited shares authorized;
21,014,942 issued and outstanding at March 31, 2008
(December 31, 2007  20,985,934)
    
    
    103,823
    
    
    
    103,520Additional paid-in capital
    
    
    8,992
    
    
    
    8,299Retained earnings
    
    
    23,995
    
    
    
    20,638Total shareholders equity
    
    
    136,810
    
    
    
    132,457Total liabilities and shareholders equity
    
    $
    163,951
    
    
    $
    159,479
 Commitments and contingencies (note 9)
Subsequent events (note 10)
Reconciliation of significant differences between U.S. GAAP and Canadian GAAP (note 11)
 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 endedMarch 31,2008
    
    
    2007(unaudited)Revenue:Transaction processing
    
    $
    14,648
    
    
    $
    13,832Maintenance
    
    
    4,210
    
    
    
    4,075Professional services
    
    
    3,791
    
    
    
    3,305System sales
    
    
    1,668
    
    
    
    3,110Total revenue
    
    
    24,317
    
    
    
    24,322Cost of revenue
    
    
    10,837
    
    
    
    9,675Gross profit
    
    
    13,480
    
    
    
    14,647Expenses:Product development costs
    
    
    2,458
    
    
    
    2,938Selling, general and administration
    
    
    5,871
    
    
    
    6,190Depreciation of property, plant and
equipment
    
    
    762
    
    
    
    578Amortization of intangible assets
    
    
    396
    
    
    
    3969,487
    
    
    
    10,102Income before the undernoted
    
    
    3,993
    
    
    
    4,545Interest income
    
    
    (1,053
    )
    
    
    (1,058
    )Interest expense
    
    
    34
    
    
    
    31Net interest income
    
    
    (1,019
    )
    
    
    (1,027
    )Net loss(gain) on disposal of capital assets
    
    
    
    
    
    
    133Other (income) expense
    
    
    6
    
    
    
    (1
    )Income before income taxes
    
    
    5,006
    
    
    
    5,440Income tax expense (recovery):Current
    
    
    1,382
    
    
    
    1,846Deferred
    
    
    267
    
    
    
    (139
    )1,649
    
    
    
    1,707Net income and comprehensive income
    
    $
    3,357
    
    
    $
    3,733Earnings per share:Basic
    
    $
    0.16
    
    
    $
    0.18Diluted
    
    $
    0.16
    
    
    $
    0.17Weighted average number of shares used in computing
earnings per share:Basic
    
    
    20,995,688
    
    
    
    20,552,304Diluted
    
    
    21,489,156
    
    
    
    21,747,608
 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)
 Three months endedMarch 31,2008
    
    
    2007(unaudited)Cash flow from operations:Net income
    
    $
    3,357
    
    
    $
    3,733Items not involving cash, net of effects from acquisition:Stock-based compensation
    
    
    779
    
    
    
    403Depreciation of property, plant and equipment
    
    
    1,164
    
    
    
    939Amortization of intangible assets
    
    
    396
    
    
    
    396Deferred lease inducements and rent
    
    
    (64
    )
    
    
    189Loss on disposal of property, plant & equipment
    
    
    
    
    
    
    133Deferred income taxes
    
    
    302
    
    
    
    381Loss (gain) on foreign exchange
    
    
    14
    
    
    
    (13
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    1,210
    
    
    
    (1,411
    )Unbilled revenue
    
    
    178
    
    
    
    (597
    )Prepaid expenses
    
    
    (467
    )
    
    
    522Inventory
    
    
    (15
    )
    
    
    (23
    )Income tax recoverable
    
    
    996
    
    
    
    Income taxes payable
    
    
    
    
    
    
    1,677Accounts payable
    
    
    (594
    )
    
    
    1,304Accrued liabilities
    
    
    358
    
    
    
    (2,300
    )Deferred revenue
    
    
    (755
    )
    
    
    370Pharmacy benefit claim payments payable
    
    
    (238
    )
    
    
    2,755Pharmacy benefit management rebates payable
    
    
    1,412
    
    
    
    1,349Net cash provided by operations
    
    
    8,033
    
    
    
    9,807Cash flow from investing activities:Purchase of property, plant and equipment
    
    
    (2,603
    )
    
    
    (4,890
    )Lease inducements received
    
    
    
    
    
    
    247Proceeds from disposal of property, plant and equipment
    
    
    
    
    
    
    9Net cash used in investing activities
    
    
    (2,603
    )
    
    
    (4,634
    )Cash flow from financing activities:Proceeds from exercise of options
    
    
    195
    
    
    
    838Tax benefit on option exercises
    
    
    22
    
    
    
    Net cash provided by financing activities
    
    
    217
    
    
    
    838Effect of foreign exchange on cash balances
    
    
    (14
    )
    
    
    13Increase in cash and cash equivalents
    
    
    5,633
    
    
    
    6,024Cash and cash equivalents, beginning of period
    
    
    90,929
    
    
    
    70,943Cash and cash equivalents, end of period
    
    $
    96,562
    
    
    $
    76,967
 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,357
    
    
    
    3,357Exercise of stock options
    
    
    29,008
    
    
    
    303
    
    
    
    (108
    )
    
    
    
    
    
    
    195Tax benefit on options exercised
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    22Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    779
    
    
    
    
    
    
    
    779Balance at March 31, 2008 (unaudited)
    
    
    21,014,942
    
    
    $
    103,823
    
    
    $
    8,992
    
    
    $
    23,995
    
    
    $
    136,810Balance at December 31, 2006
    
    
    20,444,490
    
    
    $
    99,840
    
    
    $
    4,003
    
    
    $
    7,647
    
    
    $
    111,490Change in accounting for income
tax uncertainties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (155
    )
    
    
    (155
    )Balance at December 31, 2006, as adjusted
    
    
    20,444,490
    
    
    
    99,840
    
    
    
    4,003
    
    
    
    7,492
    
    
    
    111,335Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,733
    
    
    
    3,733Exercise of stock options
    
    
    146,750
    
    
    
    1,227
    
    
    
    (389
    )
    
    
    
    
    
    
    838Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    403
    
    
    
    
    
    
    
    403Balance at March 31, 2007 (unaudited)
    
    
    20,591,240
    
    
    $
    101,067
    
    
    $
    4,017
    
    
    $
    11,225
    
    
    $
    116,309
 See accompanying notes to the unaudited consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1.
    
    Description of BusinessSXC Health Solutions Corp. (the Company) is a leading provider of pharmacy benefits
management (PBM) services and healthcare information technology 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
Scottsdale, Arizona; Warminster, Pennsylvania; Alpharetta, Georgia; Milton, Ontario and
Victoria, British Columbia.On April 30, 2008, the Company completed the previously announced acquisition of National
Medical Health Card Systems, Inc. (NMHC). See Note 10.2.
    
    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
wholly-owned subsidiary, SXC Health Solutions, Inc., a Texas Corporation. All significant
inter-company transactions and balances have been eliminated on consolidation. Amounts in
the consolidated financial statements 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 the changes set out in Note 3(a).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-month period ended March 31, 2008 are not necessarily indicative
of the results to be expected for the full year ending December 31, 2008.Effective January 1, 2008, the Company elected to make U.S. GAAP its primary source of
accounting principles. Previously, the consolidated financial statements of the Company
had been prepared in accordance with accounting principles generally accepted in Canada
(Canadian GAAP). As a result of the change, the Company is required to include a
reconciliation to Canadian GAAP for two years, ending with the 2009 annual report on Form
10-K. This reconciliation is included in Note 11 of this Form 10-Q.(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, plant 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.
    
    New Accounting Pronouncements
 (a)
    
    Recently Adopted Accounting Standards:FASB Statement No. 157In September 2006, the 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. The Company
adopted the provisions of SFAS 157 on January 1, 2008. In February 2008, FSP FAS 157-2 was
issued which defers the effective date of SFAS 157 to fiscal years beginning after November
15, 2008 for nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in an entitys financial statements on a recurring
basis. The adoption of SFAS 157 did not have a significant impact on the Companys
consolidated financial statements.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.
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(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 or 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 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 impact the Company with respect to future business combinations
entered into on or after January 1, 2009.
 4.
    
    Cash and cash equivalentsThe components of cash and cash equivalents are as follows (in thousands):
 March 31, 2008
    
    
    December 31, 2007(unaudited)Cash on deposit
    
    $
    33,693
    
    
    $
    28,674U.S. money market funds
    
    
    62,835
    
    
    
    62,219Canadian dollar deposits (March 31, 2008 - Cdn. $35 at 1.0264;December 31, 2007 - Cdn. $35 at 0.9809)
    
    
    34
    
    
    
    36Total
    
    $
    96,562
    
    
    $
    90,929
 5.
    
    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.(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 months ended March 31, 2008
and 2007, no common shares were issued under the ESPP.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 March 31, 2008, the Company had outstanding common shares of 21,014,942 and stock
options outstanding of 2,215,044. At December 31, 2007, the Company had outstanding common
 shares of 20,985,934 and stock options outstanding of 1,988,602. As of March 31, 2008,
stock options outstanding consisted of 1,422,594 options at a weighted average exercise
price of Canadian $9.60 and 792,450 options at a weighted average exercise price of $18.43.
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6.
    
    Stock-based compensationDuring the three month periods ended March 31, 2008 and 2007, the Company recorded stock-based
compensation expense of $0.8 million and $0.4 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:
 Three months ended March 31,2008
    
    
    2007Total stock options granted:Canadian dollar stock options
    
    
    
    
    
    
    6,000U.S. dollar stock options
    
    
    257,450
    
    
    
    Volatility
    
    
    49.6  52.4%
    
    
    
    44.4%Risk-free interest rate
    
    
    1.67  2.37%
    
    
    
    4.81  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
    
   
    $4.91
    
    
    
    
 The Company allocated stock-based compensation costs to the same income statement line item as
the cash compensation to those employees. Accordingly, the allocation of the compensation
costs is as follows for the three months ended March 31, 2008 and 2007 (in thousands):
 2008
    
    
    2007Cost of revenue
    
    $
    131
    
    
    $
    51Product development costs
    
    
    78
    
    
    
    52Selling, general and administration
    
    
    570
    
    
    
    300Total stock-based compensation
    
    $
    779
    
    
    $
    403
 7.
    
    Segment informationThe Company operates in a single reportable operating segment, which provides transaction
processing solutions to the pharmaceutical benefits industry. The Company operates in two
geographic areas as follows (in thousands):
 Three months ended March 31,Revenue
    
    2008
    
    
    2007United States
    
    $
    23,104
    
    
    $
    23,166Canada
    
    
    1,213
    
    
    
    1,156Total
    
    $
    24,317
    
    
    $
    24,322Net assets
    
    March 31, 2008
    
    
    December 31, 2007United States
    
    $
    134,016
    
    
    $
    129,045Canada
    
    
    2,794
    
    
    
    3,412Total
    
    $
    136,810
    
    
    $
    132,457
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The Companys revenue breaks down into the following components (in thousands):
 Three months ended March 31,2008
    
    
    2007RecurringTransaction Processing
    
    $
    14,648
    
    
    $
    13,832Maintenance
    
    
    4,210
    
    
    
    4,075Total Recurring
    
    $
    18,858
    
    
    $
    17,907Non-RecurringProfessional Services
    
    $
    3,791
    
    
    $
    3,305System Sales
    
    
    1,668
    
    
    
    3,110Total Non-Recurring
    
    $
    5,459
    
    
    $
    6,415Total Revenue
    
    $
    24,317
    
    
    $
    24,322
 Cost of revenue applicable to each category of revenue is as follows (in thousands):
 Three months ended March 31,2008
    
    
    2007RecurringRevenue
    
    $
    18,858
    
    
    $
    17,907Cost of Revenue
    
    
    8,495
    
    
    
    7,219Gross margin
    
    $
    10,363
    
    
    $
    10,688Non-RecurringRevenue
    
    $
    5,459
    
    
    $
    6,415Cost of Revenue
    
    
    2,342
    
    
    
    2,456Gross margin
    
    $
    3,117
    
    
    $
    3,959
 For the three-month periods ended March 31, 2008 and 2007, one customer accounted for 10.7%
and 13.3% of total revenue, respectively.At March 31, 2008 and December 31, 2007, one customer accounted for 13% and 12% of the total
accounts receivable balance.8.
    
    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 March 31, 2008 and 2007 was 33%
and 31%, respectively.Uncertain Tax PositionsAs a result of the implementation of FIN 48, the Company recognized an adjustment in the
liability for unrecognized income tax benefits of $0.2 million as a reduction in the balance
of retained earnings at January 1, 2007. As of March 31, 2008 and at December 31, 2007, the
Company had a long-term accrued liability of $0.2 million 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.Changes in the balance of the liability for tax uncertainties are as follows (in thousands):
 Three months ended March 31,2008
    
    
    2007Beginning balance
    
    $
    202
    
    
    $
    Effect of change in accounting for income tax uncertainties
    
    
    
    
    
    
    155Increase in interest related to tax positions taken in prior years
    
    
    17
    
    
    
    Balance at March 31
    
    $
    219
    
    
    $
    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.
  10




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9.
    
    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 processing the pricing of prescription drug claims, failure to meet performance measures
within certain contracts relating to its services performed 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 against 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 financial statements where required.10.
    
    Subsequent Events
 (a)
    
    NMHC AcquisitionOn April 29, 2008, the Company, through its indirect wholly-owned subsidiary, Comet Merger
Corporation, completed its previously announced exchange offer for any and all of the
outstanding shares of NMHC. Approximately 11,729,145 shares of NMHC common stock were
exchanged in the offer at a per share price of (i) $7.70 in cash, without interest, and
(ii) 0.217 of a common share of the Company.On April 30, 2008, the Company completed the acquisition of NMHC through a merger of Comet
Merger Corporation, with and into NMHC, pursuant to the short-form merger procedure
available under Delaware law. As a result of the merger NMHC became an indirect,
wholly-owned subsidiary of SXC and each share of NMHC common stock outstanding immediately
prior to the merger (other than shares of NMHC common stock held in NMHCs treasury or
owned by NMHC, SXC or any of its subsidiaries and shares for which dissenters rights were
perfected) were converted into the right to receive $7.70 in cash, without interest, and
0.217 of a common share of SXC. In addition, 170,500 NMHC restricted stock units were
assumed by the Company and converted into 126,731 SXC restricted stock units and all NMHC
stock options outstanding at the effective time of the merger were converted into the right
to receive merger consideration based on the intrinsic value, if any, of such options.In connection with exchange offer and the merger, the Company issued approximately 2.8
million common shares and paid, through its subsidiaries, approximately $100 million in
cash in exchange for all of the outstanding shares of NMHC common stock. Of the cash paid,
approximately $54 million was cash on hand and $46 million was funds borrowed from the new
term loan facility described below. The total consideration given up is estimated to be
$143 million including cash of $100 million, common shares valued at the announcement date
of approximately $41 million and approximately $2 million in costs related to the closing
of the acquisition.(b)
    
    Credit AgreementOn 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 $58 million,
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 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 of interest 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 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 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.
 The foregoing mandatory prepayments will be applied first to the Term Loan Facility
and second to the Revolving Credit Facility.The Term Loan Facility will amortize in quarterly installments commencing 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
amounts outstanding under the Revolving Credit Facility are due and payable in full on
April 30, 2013.
  11




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##### Table of Contents



The Company and certain of its US subsidiaries, including 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. In addition, within 60 days the Company is required to enter into and
maintain interest rate contracts to provide protection against fluctuations in interest
rates for at least 50% of the borrowed amount. The impact of entering into the interest
rate contract on the Companys consolidated financial statements is not known at this time.
 11.
    
    Reconciliation of significant differences between accounting principles generally accepted in
the United States and CanadaThe Companys consolidated financial statements are prepared in accordance with U.S. GAAP,
which differ in certain respects from Canadian GAAP.
 (a)
    
    The following summarizes the material differences between U.S. GAAP and Canadian
GAAP:Stock-based compensation:Under U.S. GAAP, the Company accounts for stock-based compensation to employees and
directors in accordance with FASB Statement No. 123R, Share-Based Payment(SFAS123R).
For a complete description of this policy, refer to Note 2(n) of the Companys annual
report on Form 10-K.Under Canadian GAAP, the Company accounts for stock-based compensation to employees and
directors under CICA Handbook Section 3870, Stock-Based Compensation and other Stock-Based
Payments. For stock options issued to employees and directors, compensation cost related
to those awards is measured based on the fair value of the options on the date of the grant
that is determined by using the Black-Scholes-Merton option-pricing model. The
compensation cost of the options is recognized straight-line over the service period as
compensation expense and contributed surplus. The Company has assumed no forfeiture rate,
as adjustments for actual forfeitures are made in the period they occur in accordance with
Canadian GAAP. Compensation cost related to forfeited, unvested options is reversed on the
cancellation date.For the three months ended March 31, 2008 and 2007, in accordance with Canadian GAAP, the
Company recorded stock compensation expense totalling $0.8 million and $0.4 million,
respectively. This differs slightly from stock compensation expense recorded in accordance
with U.S. GAAP as a result of the requirement to apply a forfeiture rate under SFAS123R.
See section (b) of this note for the effect on the consolidated financial statements.FASB Interpretation No. 48As a result of the implementation of FIN 48 effective January 1, 2007, the Company
recognized an adjustment in the liability for unrecognized income tax benefits of $155,000
as a reduction in the beginning balance of retained earnings in accordance with U.S. GAAP.
As of March 31, 2008 and December 31, 2007, the Company would have a liability of $0.2
million related to various federal and state income tax matters, all of which would impact
the Companys effective tax rate. The change in the liability is a result of recognizing
accrued interest and penalties related to the liability for tax uncertainties. The
accounting for uncertain tax liabilities in accordance with FIN 48 results in a measurement
difference between Canadian and U.S. GAAP.Investment tax creditsUnder Canadian GAAP, Scientific Research & Education (SRED) credits are a reduction of
product development costs on the consolidated statements of operations as compared to a
direct reduction of income tax expense under U.S. GAAP. There would be no difference in
net income between Canadian and U.S. GAAP resulting from the utilization of these credits.
During the three months ended March 31, 2008 and 2007, there were no SRED credits utilized
that would result in a measurement difference between Canadian and U.S. GAAP.Financial instrumentsIn January 2005, the CICA issued Section 3855, Financial Instruments-
Recognition and measurement.Section 3855 establishes standards for recognition and
measurement of financial assets, financial liabilities and non-financial derivatives.
Effective January 1, 2007, the Company adopted this standard retroactively, without
restatement.The standard requires that financial instruments within scope, including
derivatives, be included on the Companys balance sheet and measured at fair value,
except for loans and receivables, held-to-maturity financial assets and other
financial liabilities which are measured at cost or amortized cost. Held-for-trading
financial assets and financial liabilities are measured at fair value and subsequent
changes in fair value are recognized in the consolidated statements of operations in
the period in which they arise. Available-for-sale financial assets are measured at
fair value, with unrealized gains and losses, including changes in foreign exchange
rates, recognized in other comprehensive income until the financial asset is
derecognized or impaired, at which time any unrealized gains or losses are recorded in
the consolidated statements of operations.The Company has categorized its cash and cash equivalents as held-for-trading.
The Companys amounts receivable are categorized as loans and receivables and its
amounts payable and accrued liabilities are classified as other liabilities, both
measured at amortized cost. Due to the immediate or short-term maturity of these
financial instruments, their carrying values are estimated to approximate their fair
values.
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##### Table of Contents



Under U.S. GAAP, the above categories of financial instruments are not applicable and would
cause a measurement difference if the fair values of the financial instruments did not
equal their carrying values. At March 31, 2008, there are no measurement differences
between U.S. GAAP and Canadian GAAP with regards to the adoption of Section 3855 as the
carrying value of all financial instruments noted above approximate their fair values.(b)
    
    The following summarizes the impact of material differences between Canadian GAAP
and U.S. GAAP on the Companys consolidated financial statements:
 (i)
    
    Consolidated statements of operations (in thousands except per share data):
 Three months ended March 31,2008
    
    
    2007Net income in accordance with U.S. GAAP
    
    $
    3,357
    
    
    $
    3,733Adjustment for:Removal of FIN 48
    
    
    17
    
    
    
    Stock-based compensation
    
    
    (38
    )
    
    
    (1
    )Net income in accordance with Canadian GAAP
    
    $
    3,336
    
    
    $
    3,732The basic and diluted earnings per share under Canadian GAAP are as follows:Basic
    
    $
    0.16
    
    
    $
    0.18Diluted
    
    $
    0.16
    
    
    $
    0.17
 (ii)
    
    Consolidated statement of changes in shareholders equity (in thousands):
 AdditionalCommon
    
    
    Paid-in
    
    
    RetainedMarch 31, 2008
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    TotalBalance in accordance with U.S. GAAP
    
    $
    103,823
    
    
    $
    8,992
    
    
    $
    23,995
    
    
    $
    136,810Adjustment for:2004 stock-based compensation
    
    
    
    
    
    
    295
    
    
    
    (295
    )
    
    
    2006 stock-based compensation
    
    
    
    
    
    
    120
    
    
    
    (120
    )
    
    
    2007 stock-based compensation
    
    
    
    
    
    
    29
    
    
    
    (29
    )
    
    
    2008 stock-based compensation
    
    
    
    
    
    
    38
    
    
    
    (38
    )
    
    
    FIN 48
    
    
    
    
    
    
    
    
    
    
    219
    
    
    
    219Balance in accordance with Canadian GAAP
    
    $
    103,823
    
    
    $
    9,474
    
    
    $
    23,732
    
    
    $
    137,029
 AdditionalCommon
    
    
    Paid-in
    
    
    RetainedDecember 31, 2007
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    TotalBalance in accordance with U.S. GAAP
    
    $
    103,520
    
    
    $
    8,299
    
    
    $
    20,638
    
    
    $
    132,457Adjustment for:2004 stock-based compensation
    
    
    
    
    
    
    295
    
    
    
    (295
    )
    
    
    2006 stock-based compensation
    
    
    
    
    
    
    120
    
    
    
    (120
    )
    
    
    2007 stock-based compensation
    
    
    
    
    
    
    29
    
    
    
    (29
    )
    
    
    FIN 48
    
    
    
    
    
    
    
    
    
    
    202
    
    
    
    202Balance in accordance with Canadian GAAP
    
    $
    103,520
    
    
    $
    8,743
    
    
    $
    20,396
    
    
    $
    132,659
 (c)
    
    Recently adopted accounting standardsInventories:In June 2007, the CICA issued new Handbook Section 3031, Inventories, which prescribes the
accounting treatment for inventories. Section 3031 provides guidance on the determination
of cost and its subsequent recognition as an expense, including any write-down to net
realizable value. The standard also provides guidance on the cost formulas that are used
to assign costs to inventories. The Company adopted this standard effective on January 1,
2008 with no impact on the Companys consolidated financial statements.Going Concern:In June 2007, the CICA amended Handbook Section 1400, General Standards of Financial
Statement Presentation, regarding going concern which states that, when preparing financial
statements, management shall make an assessment of a Companys ability to continue as a
going concern. The amendment requires financial statements to be prepared on a going
concern basis and that any uncertainties regarding the Companys ability to continue as a
going concern be disclosed. The amendment became effective for the Company on January 1,
2008 and did not have a material impact on the Companys consolidated financial statements.
  13




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##### Table of Contents



Financial Instruments:In December 2006, the CICA issued Handbook Section 3862, Financial Instruments 
Disclosures, which modifies the disclosure requirements of Section 3861, Financial
Instruments  Disclosures and Presentation and Section 3863, Financial Instruments 
Presentations, which carries forward unchanged the presentation requirements for financial
instruments of Section 3861. Section 3862 requires entities to provide disclosures in their
financial statements that enable users to evaluate the significance of financial
instruments on the entitys financial position and its performance, and the nature and
extent of risks arising from financial instruments to which the entity is exposed during
the period and at the balance sheet date, and how the entity manages those risks. Section
3863 establishes standards for presentation of financial instruments and non-financial
derivatives. It deals with the classification of related interest, dividends, losses and
gains, and circumstances in which financial assets and financial liabilities are offset.
This disclosure standard became effective for the Company on January 1, 2008. Additional
disclosures are set out in Note 11(e) below.Capital Disclosures:In December 2006, the CICA issued Section 1535, Capital Disclosures, which requires a
company to disclose information that enables users of its financial statements to evaluate
the companys objectives, policies and processes for managing capital. The disclosure
section became effective for the Company on January 1, 2008. Additional disclosures are
set out in Note 11(f) below.(d)
    
    Accounting standards yet to be adopted:Goodwill and Intangible Assets:In February 2008, the CICA issued Section 3064, Goodwill and Intangible Assets, which
establishes standards for the recognition, measurement, presentation and disclosure of
goodwill and intangible assets by profit-oriented enterprises. This section is effective
for the Company January 1, 2009. The Company will evaluate the impact this section will
have on its consolidated financial statements.(e)
    
    Financial instruments and risk management
 (i)
    
    Recognition and measurement: Upon adoption of CICA Handbook Section 3855,
Financial Instruments- Recognition and measurement, effective January 1, 2007, the
Company has categorized its cash and cash equivalents as held-for-trading. The
Companys amounts receivables are categorized as loans and receivables and its amounts
payable and accrued liabilities are classified as other liabilities, both measured at
amortized cost. Due to the immediate or short-term maturity of these financial
instruments, their carrying values are estimated to approximate their fair values.The estimated fair value of the Companys financial instruments has been determined
based on the Companys assessment of available market information and appropriate
valuation methodologies.  However, these estimates may not necessarily be indicative of
the amounts that the Company could realize in a current market exchange.  The Companys
cash and cash equivalents, accounts receivable, unbilled revenue, accounts payable,
salaries and wages payable, accrued liabilities (current portion), pharmacy benefit
management rebates payable and pharmacy benefit claim payments payable are considered
financial instruments.  The Company has determined that it is not meaningful to
calculate the fair value of the non-current accrued liabilities as these amounts
represent an accrual for tax uncertainties.(ii)
    
    The Company has exposure to credit risk, liquidity risk and market risk
(which consists of foreign exchange risk and interest rate risk) from its use of
financial instruments. This note presents information about the Companys exposure to
each of these risks. The Companys management reviews these risks regularly as a
result of changes in the market conditions as well as the Companys activities.Credit risk: Credit risk is the risk of financial loss if a customer or counterparty
to a financial instrument fails to meet its contractual obligations. The Company is
subject to concentrations of credit risk through its accounts receivable and is
influenced primarily by the individual characteristics of the customer, which
management periodically assesses through its policy for valuation of allowance for
doubtful accounts as described in Note 2(h) of the 2007 annual report on Form 10-K.
The demographics of the Companys accounts receivable, including the industry and
country in which customers operate, have less influence on credit risk. For the
three-month periods ended March 31, 2008 and 2007, one customer accounted for 10.7% and
13.3% of total revenue, respectively. At March 31, 2008 and December 31, 2007, one
customer accounted for 13% and 12% of the total accounts receivable balance. At March
31, 2008, $9.0 million of the total accounts receivable balance is past due based on
contractual terms, of which the Company has recorded a provision of $0.4 million.In addition, the Companys total allowance for doubtful accounts decreased $0.2 million
to $0.4 million at March 31, 2008 from $0.6 million at December 31, 2007 due to a
reduction in bad debt expense as a result of collection efforts during the first three
months of 2008.Liquidity risk: Liquidity risk is the risk that the Company will not be able to meet
its financial obligations as they fall due. The Companys sources of liquidity have
primarily been cash provided by operating activities and proceeds from its public
offerings. The Companys principal uses of cash have been to fund working capital,
finance capital expenditures, satisfy contractual obligations and to meet investment
needs. The Company anticipates that these uses will continue to be the principal
demands of cash in the future. The Company believes that its cash on hand, together
with cash generated from operating activities will be sufficient to support planned
operations through the foreseeable future.Foreign exchange risk: The Company is subject to foreign exchange risk related to its
operations in Canada. The Company does not enter into derivative instruments to
mitigate this risk. Exposure to fluctuations in Canadian-dollar denominated
transactions is partially offset by Canadian dollar-denominated assets and liabilities.
The realized foreign exchange gains and losses for each of the periods presented were
insignificant.Interest rate risk: The Company has significant cash and cash equivalents which are
exposed to market risks, primarily changes in the U.S. and Canadian interest rates.
Declines in interest rates over time will reduce interest income from these
investments. Cash and cash equivalents consist of cash on hand, deposits in banks,
money market funds and bank term deposits with original maturities of 90 days or less.
Changes in the Companys cash and cash equivalents as a result of interest rates are
recorded in the consolidated financial statements as interest income. The Company does
not enter into derivative instruments to mitigate this risk.
  14




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##### Table of Contents



(f)
    
    Capital ManagementThe Companys objective is to maintain a strong capital base so as to maintain investor,
creditor and market confidence and to sustain future development of the business.
Management defines capital as the Companys shareholders equity. Management and the Board
of Directors do not establish quantitative return on capital criteria, but rather promote
year over year sustainable profitable growth. The Company manages the capital structure
and makes adjustments to it in light of changes in economic conditions and the risk of
characteristics of the underlying assets. The Company and its subsidiaries are not subject
to externally imposed capital requirements.(g)
    
    Comparative figures:The Company has allocated the depreciation expense related to the data center operations to
cost of revenue to reduce any differences from the U.S. GAAP presentation. Accordingly,
depreciation expense totalling $0.4 million for each of the three month periods ended March
31, 2008 and 2007 has been included in cost of revenue on the consolidated statements of
operations.
 
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Caution Concerning Forward-Looking Statements
   Overview
    15




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##### Table of Contents



Selected financial highlights for the first three months of 2008 compared to the first three months
of 2007
  
    
    Total revenue remained consistent at $24.3 million for the three months ended March 31,
2008 and 2007.
    
    Recurring revenue (consisting of transaction processing and maintenance revenue) for the
three months ended March 31, 2008 represented 78% of total revenue as compared to 74% for
the same period in 2007. Recurring revenue increased 5% to $18.9 million for the three
months ended March 31, 2008 from $17.9 million for the same period in 2007.
 
    
    Transaction processing revenue for the three months ended March 31, 2008 increased
$0.8 million, or 6%, to $14.6
million as compared to the same period in 2007.
    
    Maintenance revenue, which consists of maintenance contracts on system sales,
increased $0.1 million, or 3%, to $4.2
million for the three months ended March 31, 2008 compared to the same period in 2007.
 
    
    Non-recurring revenue (consisting of professional services and systems sales revenue)
decreased $1.0 million for the three months ended March 31, 2008 to $5.5 million,
representing 22% of total revenue, as compared to $6.4 million, or 26% of total revenue for
the same period in 2007.
    
    The Company reported net income of $3.4million, or $0.16 per share (fully-diluted) for
the three months ended March 31, 2008 compared to $3.7 million, or $0.17 per share (fully
diluted) for the same period in 2007.
 NMHC Acquisition
   16




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##### Table of Contents



Results of Operations
 Three months ended March 31, 2008 as compared to the three months ended March 31, 2007
 Revenue
  2008
    
    
    2007RecurringTransaction Processing
    
    $
    14,648
    
    
    $
    13,832Maintenance
    
    
    4,210
    
    
    
    4,075Total Recurring
    
    
    18,858
    
    
    
    17,907Non-RecurringProfessional Services
    
    
    3,791
    
    
    
    3,305System Sales
    
    
    1,668
    
    
    
    3,110Total Non-Recurring
    
    
    5,459
    
    
    
    6,415Total Revenue
    
    $
    24,317
    
    
    $
    24,322RecurringRevenue
    
    $
    18,858
    
    
    $
    17,907Cost of revenue
    
    
    8,495
    
    
    
    7,219Gross Margin
    
    $
    10,363
    
    
    $
    10,688Gross Margin %
    
    
    55
    %
    
    
    60
    %Non-RecurringRevenue
    
    $
    5,459
    
    
    $
    6,415Cost of Revenue
    
    
    2,342
    
    
    
    2,456Gross Margin
    
    $
    3,117
    
    
    $
    3,959Gross Margin %
    
    
    57
    %
    
    
    62
    %
  Recurring Revenue:
   Non-Recurring Revenue:
   17




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##### Table of Contents



Cost of Revenue
   Gross Profit
  Product Development Costs
   Selling, General and Administration (SG&A) Costs
   Depreciation
  Interest Income and Expense
  Income Taxes
   Net Income
   18




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##### Table of Contents



Liquidity and Capital Resources
    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
      19




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##### Table of Contents



Cash flows from operating activities
   Cash flows from investing activities
   Cash flows from financing activities
   Future Capital Requirements
    Contingencies
  Contractual Obligations
  Less than 1
    
    
    
    
    
    
    
    
    
    
    More than 5year
    
    
    Years 1-3
    
    
    Years 4-5
    
    
    years
    
    
    TotalLong-term debt
    
    $
    480
    
    
    $
    9,600
    
    
    $
    14,400
    
    
    $
    23,520
    
    
    $
    48,000
  20




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##### Table of Contents



Outstanding Securities
  Recently Adopted Accounting Standards
 FASB Statement No. 157
 Fair Value Measurements .
 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
     21




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##### 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
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
  
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
 ExhibitNumber
    
    Description of Document
    
    Reference2.1
    
    
    Agreement and Plan of Merger,
dated as of February 25, 2008,
by and among SXC Health
Solutions Corp., SXC Health
Solutions, Inc., Comet Merger
Corporation and National
Medical Health Card Systems,
Inc.
    
    Incorporated herein by
reference to Exhibit 2.1 to
the Current Report on Form
8-K filed by SXC with the
Securities and Exchange
Commission (SEC) on
February 27, 20082.2
    
    
    Amendment to Agreement and Plan
of Merger, dated as of April
29, 2008, by and among SXC
Health Solutions Corp., SXC
Health Solutions, Inc., Comet
Merger Corporation, and
National Medical Health Card
Systems, Inc.
    
    Incorporated herein by
reference to Exhibit (d)(6)
to Amendment No. 1 to the
Schedule TO filed by SXC
with the SEC on April 30,
20084.1
    
    
    Registration Rights Agreement,
dated as of February 25, 2008,
by and between SXC Health
Solutions Corp., New Mountain
Partners, L.P., and New
Mountain Affiliated Investors,
L.P.
    
    Incorporated by reference to
Exhibit 4.1 to the Current
Report on Form 8-K filed by
SXC with the SEC on February
27, 200810.1
    
    
    Stockholder Agreement dated as
of February 25, 2008, by and
among SXC Health Solutions
Corp., New Mountain Partners,
L.P. and National Medical
Health Card Systems, Inc.
    
    Incorporated by reference to
Exhibit 10.1 to the Current
Report on Form 8-K filed by
SXC with the SEC on February
27, 200810.2
    
    
    Stockholder Agreement dated as
of February 25, 2008, by and
among SXC Health Solutions
Corp., New Mountain Affiliated
Investors, L.P. and National
Medical Health Card Systems,
Inc.
    
    Incorporated by reference to
Exhibit 10.2 to the Current
Report on Form 8-K filed by
SXC with the SEC on February
27, 200810.3
    
    
    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, 200831.1
    
    
    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
  22




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##### Table of Contents



SIGNATURE
  SXC Health Solutions Corp.May 9, 2008
    By:
    /s/ Jeffrey ParkJeffrey ParkChief Financial Officer

(on behalf of the registrant and
as Chief Accounting Officer)  23




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Document
    
    Reference31.1
    
    
    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
  24