##### 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, 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
(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
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)
    
    
    3Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2008 and 2007
    
    
    5Consolidated Statements of Shareholders Equity for the Nine Months Ended
September 30, 2008
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    34Item 6. Exhibits
    
    
    35SIGNATURE
    
    
    36Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



Part I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Balance Sheets
 (in thousands of U.S. dollars except share data)
 September 30,
    
    
    December 31,2008
    
    
    2007(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    51,590
    
    
    $
    90,929Restricted cash
    
    
    17,790
    
    
    
    Accounts receivable, net of allowance for doubtful accounts of
$3,960 (December 31, 2007 - $605)
    
    
    80,511
    
    
    
    17,990Rebates receivable
    
    
    24,186
    
    
    
    Unbilled revenue
    
    
    1,092
    
    
    
    1,195Prepaid expenses and other assets
    
    
    3,574
    
    
    
    2,361Inventory
    
    
    6,777
    
    
    
    242Income tax recoverable
    
    
    519
    
    
    
    1,073Deferred income taxes
    
    
    4,136
    
    
    
    3,246Total current assets
    
    
    190,175
    
    
    
    117,036Property and equipment, net of accumulated depreciation of
$17,717 (December 31, 2007 - $13,004)
    
    
    20,216
    
    
    
    13,629Goodwill
    
    
    145,695
    
    
    
    15,996Other intangible assets, net of accumulated amortization of $11,011
(December 31, 2007 - $4,734)
    
    
    47,804
    
    
    
    9,661Deferred financing charges
    
    
    1,595
    
    
    
    Deferred income taxes
    
    
    6,122
    
    
    
    3,157Other assets
    
    
    1,397
    
    
    
    Total assets
    
    $
    413,004
    
    
    $
    159,479LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    7,003
    
    
    $
    1,344Customer deposits
    
    
    13,801
    
    
    
    2,506Salaries and wages payable
    
    
    11,254
    
    
    
    2,909Accrued liabilities
    
    
    26,895
    
    
    
    4,807Pharmacy benefit management rebates payable
    
    
    29,941
    
    
    
    2,766Pharmacy benefit claim payments payable
    
    
    60,812
    
    
    
    2,059Deferred revenue
    
    
    3,897
    
    
    
    4,244Current portion of long-term debt
    
    
    2,640
    
    
    
    Total current liabilities
    
    
    156,243
    
    
    
    20,635Long-term debt, less current installments
    
    
    45,120
    
    
    
    Accrued liabilities
    
    
    1,833
    
    
    
    764Deferred income taxes
    
    
    15,733
    
    
    
    1,091Deferred revenue
    
    
    177
    
    
    
    223Deferred lease inducements
    
    
    3,316
    
    
    
    3,222Deferred rent
    
    
    1,460
    
    
    
    1,087Other liabilities
    
    
    665
    
    
    
    Total liabilities
    
    
    224,547
    
    
    
    27,022Shareholders equityCommon stock: no par value, unlimited shares authorized;
24,043,382 shares issued and outstanding at September 30, 2008
(December 31, 2007 - 20,985,934)
    
    
    146,207
    
    
    
    103,520Additional paid-in capital
    
    
    11,449
    
    
    
    8,299Retained earnings
    
    
    30,801
    
    
    
    20,638Total shareholders equity
    
    
    188,457
    
    
    
    132,457Total liabilities and shareholders equity
    
    $
    413,004
    
    
    $
    159,479Commitments and contingencies (note 13)
 See accompanying notes to unaudited consolidated financial statements.
  3




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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Operations
 (in thousands of U.S. dollars except share data)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(unaudited)
    
    
    (unaudited)Revenue:PBM
    
    $
    297,178
    
    
    $
    
    
    
    $
    502,038
    
    
    $
    HCIT:Transaction processing
    
    
    11,631
    
    
    
    13,180
    
    
    
    38,167
    
    
    
    40,106Maintenance
    
    
    3,998
    
    
    
    4,142
    
    
    
    12,338
    
    
    
    12,330Professional services
    
    
    3,836
    
    
    
    3,395
    
    
    
    10,693
    
    
    
    10,002System sales
    
    
    1,458
    
    
    
    1,492
    
    
    
    6,937
    
    
    
    7,181Total revenue
    
    
    318,101
    
    
    
    22,209
    
    
    
    570,173
    
    
    
    69,619Cost of revenue:PBM
    
    
    272,654
    
    
    
    
    
    
    
    460,700
    
    
    
    HCIT
    
    
    10,561
    
    
    
    10,300
    
    
    
    31,267
    
    
    
    29,623Total cost of revenue
    
    
    283,215
    
    
    
    10,300
    
    
    
    491,967
    
    
    
    29,623Gross profit
    
    
    34,886
    
    
    
    11,909
    
    
    
    78,206
    
    
    
    39,996Expenses:Product development costs
    
    
    2,486
    
    
    
    2,419
    
    
    
    7,425
    
    
    
    7,999Selling, general and administration
    
    
    21,863
    
    
    
    7,295
    
    
    
    47,291
    
    
    
    20,501Depreciation of property and equipment
    
    
    1,222
    
    
    
    651
    
    
    
    3,416
    
    
    
    1,819Amortization of intangible assets
    
    
    3,449
    
    
    
    396
    
    
    
    6,277
    
    
    
    1,188Net loss on disposal of capital assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13329,020
    
    
    
    10,761
    
    
    
    64,409
    
    
    
    31,640Operating income
    
    
    5,866
    
    
    
    1,148
    
    
    
    13,797
    
    
    
    8,356Interest income
    
    
    (508
    )
    
    
    (1,219
    )
    
    
    (2,209
    )
    
    
    (3,435
    )Interest expense
    
    
    1,609
    
    
    
    27
    
    
    
    2,407
    
    
    
    85Net interest expense (income)
    
    
    1,101
    
    
    
    (1,192
    )
    
    
    198
    
    
    
    (3,350
    )Other income
    
    
    (50
    )
    
    
    (41
    )
    
    
    (15
    )
    
    
    (239
    )Income before income taxes
    
    
    4,815
    
    
    
    2,381
    
    
    
    13,614
    
    
    
    11,945Income tax expense (benefit):Current
    
    
    3,356
    
    
    
    (92
    )
    
    
    5,335
    
    
    
    3,033Deferred
    
    
    (2,080
    )
    
    
    (207
    )
    
    
    (1,884
    )
    
    
    (457
    )1,276
    
    
    
    (299
    )
    
    
    3,451
    
    
    
    2,576Net income and comprehensive income
    
    $
    3,539
    
    
    $
    2,680
    
    
    $
    10,163
    
    
    $
    9,369Earnings per share:Basic
    
    $
    0.15
    
    
    $
    0.13
    
    
    $
    0.45
    
    
    $
    0.45Diluted
    
    $
    0.15
    
    
    $
    0.12
    
    
    $
    0.44
    
    
    $
    0.43Weighted average number of shares used in computing
earnings per share:Basic
    
    
    23,891,438
    
    
    
    20,852,239
    
    
    
    22,616,694
    
    
    
    20,698,438Diluted
    
    
    24,346,740
    
    
    
    21,785,207
    
    
    
    23,034,651
    
    
    
    21,682,929
 See accompanying notes to unaudited consolidated financial statements.
  4




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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Cash Flows
 (in thousands of U.S. dollars)
 Nine months endedSeptember 30,2008
    
    
    2007(unaudited)Cash flows from operating activities:Net income
    
    $
    10,163
    
    
    $
    9,369Items not involving cash:Stock-based compensation
    
    
    3,006
    
    
    
    2,250Depreciation of property and equipment
    
    
    4,715
    
    
    
    2,942Amortization of intangible assets
    
    
    6,277
    
    
    
    1,188Deferred lease inducements and rent
    
    
    (206
    )
    
    
    468Loss on disposal of property and equipment
    
    
    
    
    
    
    133Deferred income taxes
    
    
    (1,884
    )
    
    
    64Tax benefit on option exercises
    
    
    (799
    )
    
    
    (2,395
    )Gain on foreign exchange
    
    
    (14
    )
    
    
    (150
    )Changes in operating assets and liabilities, net of effects from acquisition:Accounts receivable
    
    
    7,858
    
    
    
    (3,882
    )Rebates receivable
    
    
    3,017
    
    
    
    Restricted cash
    
    
    (4,660
    )
    
    
    Unbilled revenue
    
    
    103
    
    
    
    687Prepaid expenses
    
    
    915
    
    
    
    10Inventory
    
    
    (171
    )
    
    
    (22
    )Income tax recoverable
    
    
    1,618
    
    
    
    6Income taxes payable
    
    
    
    
    
    
    (594
    )Accounts payable
    
    
    496
    
    
    
    1,026Accrued liabilities
    
    
    (4,452
    )
    
    
    (255
    )Pharmacy benefit claim payments payable
    
    
    1,049
    
    
    
    (677
    )Pharmacy benefit management rebates payable
    
    
    (5,080
    )
    
    
    1,093Deferred revenue
    
    
    (393
    )
    
    
    785Customer deposits
    
    
    (1,070
    )
    
    
    (313
    )Other
    
    
    111
    
    
    
    Net cash provided by operating activities
    
    
    20,599
    
    
    
    11,733Cash flows from investing activities:Purchases of property and equipment
    
    
    (5,970
    )
    
    
    (6,710
    )Lease inducements received
    
    
    373
    
    
    
    391Acquisition
    
    
    (102,562
    )
    
    
    Proceeds from disposal of property and equipment
    
    
    
    
    
    
    9Net cash used in investing activities
    
    
    (108,159
    )
    
    
    (6,310
    )Cash flows from financing activities:Issuance of long-term debt
    
    
    48,000
    
    
    
    Payment of financing costs
    
    
    (1,792
    )
    
    
    Repayment of long-term debt
    
    
    (240
    )
    
    
    Proceeds from exercise of options
    
    
    1,440
    
    
    
    2,203Tax benefit on option exercises
    
    
    799
    
    
    
    2,395Net cash provided by financing activities
    
    
    48,207
    
    
    
    4,598Effect of foreign exchange on cash balances
    
    
    14
    
    
    
    150(Decrease) increase in cash and cash equivalents
    
    
    (39,339
    )
    
    
    10,171Cash and cash equivalents, beginning of period
    
    
    90,929
    
    
    
    70,943Cash and cash equivalents, end of period
    
    $
    51,590
    
    
    $
    81,114
 See
accompanying notes to unaudited consolidated financial statements.
  5




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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Shareholders Equity
 (in thousands of U.S. dollars except share data)
 (unaudited)
 Common Stock
    
    
    Additional
    
    
    RetainedNumber
    
    
    Amount
    
    
    Paid-in Capital
    
    
    Earnings
    
    
    TotalBalance at December 31, 2007
    
    
    20,985,934
    
    
    $
    103,520
    
    
    $
    8,299
    
    
    $
    20,638
    
    
    $
    132,457Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,163
    
    
    
    10,163Exercise of stock options
    
    
    269,426
    
    
    
    2,095
    
    
    
    (655
    )
    
    
    
    
    
    
    1,440Issuance 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
    )Tax benefit on options exercised
    
    
    
    
    
    
    
    
    
    
    799
    
    
    
    
    
    
    
    799Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    3,006
    
    
    
    
    
    
    
    3,006Balance at September 30, 2008
    
    
    24,043,382
    
    
    $
    146,207
    
    
    $
    11,449
    
    
    $
    30,801
    
    
    $
    188,457
 See accompanying notes to the unaudited consolidated financial statements.
  6




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SXC HEALTH SOLUTIONS CORP.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    Description of Business
 www.sxc.com
 2.
    
    Basis of Presentation
 (a)
    
    Basis of presentation:
      (b)
    
    Use of estimates:
  3.
    
    Summary of Significant Accounting Policies
 (a)
    
    Restricted Cash:
  (b)
    
    Rebates:
    7




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(c)
    
    Customer Deposits:
  (d)
    
    Derivatives:
 Accounting for Derivative Instruments and Hedging
Activities Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an Amendment of SFAS No. 133
 (e)
    
    Revenue Recognition:
   Revenue Arrangements
with Multiple Deliverables ,
   Transaction processing revenue:
   System sales revenue: Software Revenue Recognition as amended by SOP 98-9 Modification of SOP No. 97-2,
Software Revenue Recognition with Respect to Certain Transactions.
  8




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Accounting for Performance of Construction-Type and Certain Production-Type Contracts, as
prescribed by SOP 97-2
  Maintenance revenue:
 Professional services revenue:
 PBM revenue
  Reporting Gross Revenue as a Principal vs. Net as an Agent
  9




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(f)
    
    Cost of Revenue:
  4.
    
    Recent Accounting Pronouncements
 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
 FASB Statement No. 161
 Disclosures about Derivative Instruments
and Hedging Activities-an amendment of FASB Statement No. 133
 FASB Statement No. 141(R)
 Business Combinations
 FASB Statement No. 160
 Noncontrolling Interests in
Consolidated Financial Statements  an amendment of ARB No. 51
 5.
    
    Business Combination
 Determination of the Measurement Date for the Market Price of Acquirer
Securities Issued in a Purchase Business Combination
  10




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Cash payment to NMHC shareholders
    
    $
    98,711Shares issued
    
    
    40,921Direct costs of the acquisition
    
    
    3,851Total purchase price
    
    $
    143,483
 Direct Costs of the Acquisition
  Preliminary Purchase Price Allocation
 Business Combinations
  Current assets
    
    $
    115,879Property and equipment
    
    
    5,447Goodwill
    
    
    129,699Intangible assets
    
    
    44,420Other assets
    
    
    1,258Total assets acquired
    
    
    296,703Current liabilities
    
    
    136,422Deferred income taxes
    
    
    16,502Other liabilities
    
    
    296Total liabilities assumed
    
    
    153,220Net assets acquired
    
    $
    143,483
  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
   11




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Unaudited Pro Forma Financial Information
   Three months endedSeptember 30,
    
    
    Nine months ended September 30,2007
    
    
    2008
    
    
    2007Sales
    
    $
    293,554
    
    
    $
    951,842
    
    
    $
    864,853Gross profit
    
    $
    31,282
    
    
    $
    103,493
    
    
    $
    101,303Net income (loss)
    
    $
    (3,465
    )
    
    $
    6,157
    
    
    $
    (3,373
    )Earnings (loss) per share:Basic
    
    $
    (0.15
    )
    
    $
    0.26
    
    
    $
    (0.14
    )Diluted
    
    $
    (0.15
    )
    
    $
    0.25
    
    
    $
    (0.14
    )Weighted average shares outstandingBasic
    
    
    23,637,875
    
    
    
    23,828,989
    
    
    
    23,484,074Diluted
    
    
    24,570,843
    
    
    
    24,246,946
    
    
    
    24,468,565
  6.
    
    Cash and Cash Equivalents
  September 30, 2008
    
    
    December 31, 2007(unaudited)Cash on deposit
    
    $
    26,715
    
    
    $
    28,674U.S. money market funds
    
    
    24,842
    
    
    
    62,219Canadian
dollar deposits (September 30, 2008 - Cdn. $35 at 1.0656; 
December 31, 2007 - Cdn. $35 at 0.9809)
    
    
    33
    
    
    
    36$
    51,590
    
    
    $
    90,929
 7.
    
    Goodwill and Other Intangible Assets
   September 30, 2008
    
    
    December 31, 2007Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    52,650
    
    
    $
    7,890
    
    
    $
    44,760
    
    
    $
    12,950
    
    
    $
    3,874
    
    
    $
    9,076Acquired software
    
    
    2,565
    
    
    
    1,543
    
    
    
    1,022
    
    
    
    1,445
    
    
    
    860
    
    
    
    585Trademarks/Trade names
    
    
    1,120
    
    
    
    933
    
    
    
    187
    
    
    
    
    
    
    
    
    
    
    
    Non-compete agreements
    
    
    1,480
    
    
    
    617
    
    
    
    863
    
    
    
    
    
    
    
    
    
    
    
    Licenses
    
    
    1,000
    
    
    
    28
    
    
    
    972
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    58,815
    
    
    $
    11,011
    
    
    $
    47,804
    
    
    $
    14,395
    
    
    $
    4,734
    
    
    $
    9,661
   12




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8.
    
    Long Term Debt
    
    
    50% of the net proceeds arising from the issuance or sale by the Company of its own
stock;
    
    100% of the net proceeds of an incurrence of debt, other than proceeds from the
debt permitted under the Credit Facilities; and
    
    100% of the net proceeds of certain asset sales and casualty events, subject to a
right to reinvest the proceeds.
       Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Long-term debt
    
    $
    782
    
    
    $
    
    
    
    $
    1,372
    
    
    $
    Financing charges
    
    
    118
    
    
    
    
    
    
    
    197
    
    
    
    Other (including fair value adjustments of
derivative instruments)
    
    
    709
    
    
    
    27
    
    
    
    838
    
    
    
    85Total
    
    $
    1,609
    
    
    $
    27
    
    
    $
    2,407
    
    
    $
    85
 9.
    
    Shareholders equity
 (a)
    
    Stock option plan:
   13




---



##### Table of Contents



(b)
    
    Employee Stock Purchase Plan:
    (c)
    
    Outstanding shares:
  (d)
    
    Restricted stock units:
  10.
    
    Stock-based compensation
  Nine months ended September 30,2008
    
    2007Total stock options granted:Canadian dollar stock options
    
    
    
    6,000U.S. dollar stock options
    
    474,950
    
    534,500Volatility
    
    49.6  52.4%
    
    40.7  49.2%Risk-free interest rate
    
    1.67  3.27%
    
    4.16  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
    
    $5.69
    
    $9.39
  Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Cost of revenue
    
    $
    146
    
    
    $
    116
    
    
    $
    420
    
    
    $
    215Product development costs
    
    
    56
    
    
    
    84
    
    
    
    188
    
    
    
    198Selling, general and administration
    
    
    700
    
    
    
    901
    
    
    
    2,398
    
    
    
    1,837Total stock-based compensation
    
    $
    902
    
    
    $
    1,101
    
    
    $
    3,006
    
    
    $
    2,250
  14




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##### Table of Contents



11.
    
    Segment information
  Three months ended September 30,
    
    
    Nine months ended September 302008
    
    
    2007
    
    
    2008
    
    
    2007RevenueUnited States
    
    $
    317,122
    
    
    $
    21,265
    
    
    $
    566,772
    
    
    $
    66,267Canada
    
    
    979
    
    
    
    944
    
    
    
    3,401
    
    
    
    3,352Total
    
    $
    318,101
    
    
    $
    22,209
    
    
    $
    570,173
    
    
    $
    69,619
 September 30, 2008
    
    
    December 31, 2007Net assetsUnited States
    
    $
    179,087
    
    
    $
    129,045Canada
    
    
    9,370
    
    
    
    3,412Total
    
    $
    188,457
    
    
    $
    132,457
  Three months ended September 30,
    
    

Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007PBM:Revenues
    
    $
    297,178
    
    
    $
    
    
    
    $
    502,038
    
    
    $
    Gross profit
    
    $
    24,524
    
    
    $
    
    
    
    $
    41,338
    
    
    $
    Total assets at September 30, 2008
    
    $
    291,544HCIT:Revenues
    
    $
    20,923
    
    
    $
    22,209
    
    
    $
    68,135
    
    
    $
    69,619Gross profit
    
    $
    10,362
    
    
    $
    11,909
    
    
    $
    36,868
    
    
    $
    39,996Total assets at September 30, 2008
    
    $
    121,460Consolidated:Revenues
    
    $
    318,101
    
    
    $
    22,209
    
    
    $
    570,173
    
    
    $
    69,619Gross profit
    
    $
    34,886
    
    
    $
    11,909
    
    
    $
    78,206
    
    
    $
    39,996Total assets at September 30, 2008
    
    $
    413,004
  15




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##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007RecurringTransaction processing
    
    $
    11,631
    
    
    $
    13,180
    
    
    $
    38,167
    
    
    $
    40,106Maintenance
    
    
    3,998
    
    
    
    4,142
    
    
    
    12,338
    
    
    
    12,330Total recurring
    
    
    15,629
    
    
    
    17,322
    
    
    
    50,505
    
    
    
    52,436Non-RecurringProfessional services
    
    
    3,836
    
    
    
    3,395
    
    
    
    10,693
    
    
    
    10,002System sales
    
    
    1,458
    
    
    
    1,492
    
    
    
    6,937
    
    
    
    7,181Total non-recurring
    
    
    5,294
    
    
    
    4,887
    
    
    
    17,630
    
    
    
    17,183Total revenue
    
    $
    20,923
    
    
    $
    22,209
    
    
    $
    68,135
    
    
    $
    69,619
  Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007RecurringRevenue
    
    $
    15,629
    
    
    $
    17,322
    
    
    $
    50,505
    
    
    $
    52,436Cost of revenue
    
    
    8,002
    
    
    
    8,120
    
    
    
    23,536
    
    
    
    22,589Gross profit
    
    $
    7,627
    
    
    $
    9,202
    
    
    $
    26,969
    
    
    $
    29,847Gross profit %
    
    
    49
    %
    
    
    53
    %
    
    
    53
    %
    
    
    57
    %Non-RecurringRevenue
    
    $
    5,294
    
    
    $
    4,887
    
    
    $
    17,630
    
    
    $
    17,183Cost of revenue
    
    
    2,559
    
    
    
    2,180
    
    
    
    7,731
    
    
    
    7,034Gross profit
    
    $
    2,735
    
    
    $
    2,707
    
    
    $
    9,899
    
    
    $
    10,149Gross profit %
    
    
    52
    %
    
    
    55
    %
    
    
    56
    %
    
    
    59
    %
   12.
    
    Income Taxes
 Accounting
for Income Taxes
  Uncertain Tax Positions
   16




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##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Beginning balance
    
    $
    270
    
    
    $
    155
    
    
    $
    202
    
    
    $
    Effect of change in accounting position for income tax uncertainties
    
    
    2
    
    
    
    
    
    
    
    44
    
    
    
    155Increase in interest related to tax positions taken in prior years
    
    
    14
    
    
    
    
    
    
    
    40
    
    
    
    Balance at September 30
    
    $
    286
    
    
    $
    155
    
    
    $
    286
    
    
    $
    155
   13.
    
    Contingencies
   14.
    
    Fair Value
         17




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##### Table of Contents



SignificantQuoted Prices in
    
    
    Significant
    
    
    UnobservableActive Markets
    
    
    Observable Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssets:Derivatives
    
    $
    
    
    
    $
    86
    
    
    $
    
    
    
    $
    86Liabilities:Derivatives
    
    $
    
    
    
    $
    310
    
    
    $
    
    
    
    $
    310
   
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Caution Concerning Forward-Looking Statements
    18




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##### Table of Contents



Overview
 PBM Business
     Industry
    Competitive Strengths
  Flexible, Customized and Independent Services.
 Information-Based Cost-Containment Methods.
  19




---



##### Table of Contents



HCIT Business
   Operating Expenses
  Selected financial highlights for the three and nine months ended September 30, 2008 compared to
the same periods in 2007
 NMHC Acquisition
     
    
    Total revenue in 2008 was $318.1 million, which included $297.2 million of revenue from
the Companys new PBM segment, which is largely attributable to the acquisition of NMHC in
April 2008, as compared to $22.2 million in 2007.
 
    
    The Company reported net income of $3.5 million, or $0.15 per share (fully-diluted), for
the three months ended September 30, 2008 compared to $2.7 million, or $0.12 per share
(fully-diluted), for the same period in 2007.
  
    
    Total revenue in 2008 was $570.2 million, which included $502.0 million of revenue from
the Companys new PBM segment, which is largely attributable to the acquisition of NMHC in
April 2008, as compared to $69.6 million in 2007.
 
    
    The Company reported net income of $10.2 million, or $0.44 per share (fully-diluted),
for the nine months ended September 30, 2008 compared to $9.4 million, or $0.43 per share
(fully-diluted), for the same period in 2007.
  20




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##### Table of Contents



Results of Operations
 Three months ended September 30, 2008 as compared to the three months ended September 30, 2007
 Three months ended September 30,In thousands, except per share data
    
    2008
    
    
    2007Revenue
    
    $
    318,101
    
    
    $
    22,209Gross profit
    
    
    34,886
    
    
    
    11,909Product development costs
    
    
    2,486
    
    
    
    2,419SG&A
    
    
    21,863
    
    
    
    7,295Depreciation of property and equipment
    
    
    1,222
    
    
    
    651Amortization of inangible assets
    
    
    3,449
    
    
    
    396Interest expense (income), net
    
    
    1,101
    
    
    
    (1,192
    )Other income, net
    
    
    (50
    )
    
    
    (41
    )Income before income taxes
    
    
    4,815
    
    
    
    2,381Income tax expense (benefit)
    
    
    1,276
    
    
    
    (299
    )Net income
    
    $
    3,539
    
    
    $
    2,680Diluted earnings per share
    
    $
    0.15
    
    
    $
    0.12
 Revenue
  Gross Profit
  Product Development Costs
   SG&A Costs
   Depreciation
   Amortization
   21




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##### Table of Contents



Interest Income and Expense
  Income Taxes
  Net Income
  Segment Analysis
  PBM
    
    
    HCIT
    
    
    Consolidated2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue
    
    $
    297,178
    
    
    $
    
    
    
    $
    20,923
    
    
    $
    22,209
    
    
    $
    318,101
    
    
    $
    22,209Gross profit
    
    $
    24,524
    
    
    $
    
    
    
    $
    10,362
    
    
    $
    11,909
    
    
    $
    34,886
    
    
    $
    11,909Gross profit %
    
    
    8.3
    %
    
    
    0.0
    %
    
    
    49.5
    %
    
    
    53.6
    %
    
    
    11.0
    %
    
    
    53.6
    %
 PBM
     HCIT
  2008
    
    
    2007RecurringTransaction processing
    
    $
    11,631
    
    
    $
    13,180Maintenance
    
    
    3,998
    
    
    
    4,142Total recurring
    
    
    15,629
    
    
    
    17,322Non-RecurringProfessional services
    
    
    3,836
    
    
    
    3,395System sales
    
    
    1,458
    
    
    
    1,492Total non-recurring
    
    
    5,294
    
    
    
    4,887Total revenue
    
    $
    20,923
    
    
    $
    22,209
  22




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##### Table of Contents



2008
    
    
    2007RecurringRevenue
    
    $
    15,629
    
    
    $
    17,322Cost of revenue
    
    
    8,002
    
    
    
    8,120Gross profit
    
    $
    7,627
    
    
    $
    9,202Gross profit %
    
    
    49
    %
    
    
    53
    %Non-RecurringRevenue
    
    $
    5,294
    
    
    $
    4,887Cost of revenue
    
    
    2,559
    
    
    
    2,180Gross profit
    
    $
    2,735
    
    
    $
    2,707Gross profit %
    
    
    52
    %
    
    
    55
    %
  Recurring Revenue :
   Non-Recurring Revenue:
   Cost of Revenue:
  Gross Profit:
  23




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##### Table of Contents



Nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007
 Nine months ended September 30,In thousands, except per share data
    
    2008
    
    
    2007Revenue
    
    $
    570,173
    
    
    $
    69,619Gross profit
    
    
    78,206
    
    
    
    39,996Product development costs
    
    
    7,425
    
    
    
    7,999SG&A
    
    
    47,291
    
    
    
    20,501Depreciation of property and equipment
    
    
    3,416
    
    
    
    1,819Amortization of intangible assets
    
    
    6,277
    
    
    
    1,188Interest expense (income), net
    
    
    198
    
    
    
    (3,350
    )Other income, net
    
    
    (15
    )
    
    
    (106
    )Income before income taxes
    
    
    13,614
    
    
    
    11,945Income tax expense
    
    
    3,451
    
    
    
    2,576Net income
    
    $
    10,163
    
    
    $
    9,369Diluted earnings per share
    
    $
    0.44
    
    
    $
    0.43
 Revenue
  Gross Profit
  Product Development Costs
   SG&A Costs
   Depreciation
  Amortization
  Interest Income and Expense
  Income Taxes
   24




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##### Table of Contents



Net Income
  Segment Analysis
  PBM
    
    
    HCIT
    
    
    Consolidated2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue
    
    $
    502,038
    
    
    $
    
    
    
    $
    68,135
    
    
    $
    69,619
    
    
    $
    570,173
    
    
    $
    69,619Gross profit
    
    $
    41,338
    
    
    $
    
    
    
    $
    36,868
    
    
    $
    39,996
    
    
    $
    78,206
    
    
    $
    39,996Gross profit %
    
    
    8.2
    %
    
    
    0.0
    %
    
    
    54.1
    %
    
    
    57.4
    %
    
    
    13.7
    %
    
    
    57.4
    %
 PBM
     HCIT
  2008
    
    
    2007RecurringTransaction processing
    
    $
    38,167
    
    
    $
    40,106Maintenance
    
    
    12,338
    
    
    
    12,330Total recurring
    
    
    50,505
    
    
    
    52,436Non-RecurringProfessional services
    
    
    10,693
    
    
    
    10,002System sales
    
    
    6,937
    
    
    
    7,181Total non-recurring
    
    
    17,630
    
    
    
    17,183Total revenue
    
    $
    68,135
    
    
    $
    69,619
  25




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##### Table of Contents



2008
    
    
    2007RecurringRevenue
    
    $
    50,505
    
    
    $
    52,436Cost of revenue
    
    
    23,536
    
    
    
    22,589Gross profit
    
    $
    26,969
    
    
    $
    29,847Gross profit %
    
    
    53
    %
    
    
    57
    %Non-RecurringRevenue
    
    $
    17,630
    
    
    $
    17,183Cost of revenue
    
    
    7,731
    
    
    
    7,034Gross profit
    
    $
    9,899
    
    
    $
    10,149Gross profit %
    
    
    56
    %
    
    
    59
    %
  Recurring Revenue:
   Non-Recurring Revenue:
   Cost of Revenue:
  Gross Profit:
 Liquidity and Capital Resources
    26




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##### Table of Contents



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
   
    
    Restricted cash totaling $17.8 million relates to cash balances required to be
maintained in accordance with various state statues, contractual terms with customers
and other customer restrictions. 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 $24.2 million relate to billed and unbilled PBM receivables
from pharmaceutical manufacturers in connection with the administration of the rebate
program in which the Company is the principal contracting party. The receivable and
related payables are based on estimates, which are subject to final settlement.
 
    
    The Companys inventory balance of $6.8 million consists predominately of finished
goods of prescription drugs and medical supplies at its Mail Service and Specialty
Service pharmacies.
 
    
    Other assets of $1.4 million consist primarily of security deposits totaling $1.0
million related to the Companys inventory facilities.
 
    
    Customer deposits payable of $13.8 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.
 Cash flows from operating activities:
   27




---



##### Table of Contents



Cash flows from investing activities
    Cash flows from financing activities
    Future Capital Requirements
    Contingencies
   28




---



##### Table of Contents



Contractual Obligations
  Less than
    
    
    
    
    
    
    
    
    
    
    More than1 year
    
    
    Years 1-3
    
    
    Years 4-5
    
    
    5 years
    
    
    TotalLong-term debt
    
    $
    2,640
    
    
    $
    10,800
    
    
    $
    22,560
    
    
    $
    11,760
    
    
    $
    47,760Operating leases acquired
    
    
    1,301
    
    
    
    1,244
    
    
    
    
    
    
    
    
    
    
    
    2,545Capital leases acquired
    
    
    791
    
    
    
    610
    
    
    
    54
    
    
    
    
    
    
    
    1,455$
    4,732
    
    
    $
    12,654
    
    
    $
    22,614
    
    
    $
    11,760
    
    
    $
    51,760
 Outstanding Securities
  Critical Accounting Policies
  Revenue Recognition
   Revenue Arrangements with Multiple Deliverables ,
   Transaction processing revenue:
    29




---



##### Table of Contents



System sales revenue: Software Revenue
Recognition Modification of SOP No. 97-2, Software Revenue Recognition
with Respect to Certain Transactions.
  Accounting for
Performance of Construction-Type and Certain Production-Type Contracts,
  Maintenance revenue:
 Professional services revenue:
 PBM revenue
  Reporting
Gross Revenue as a Principal vs. Net as an Agent
  30




---



##### Table of Contents



Rebates
  Recent 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
 FASB Statement No. 161
 Disclosures about Derivative Instruments and
Hedging Activities-an amendment of FASB Statement No. 133
 FASB Statement No. 141(R)
 Business Combinations
 FASB Statement No. 160
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
  31




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##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
   
 ITEM 4. Controls and Procedures
    
 PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  Due to complex calculations within our customer contracts, we may be required to issue significant
credit memos to our customers that could adversely affect our business, profitability and growth
prospects.
  Failure of our health plan customers to pay for prescription claims or a delay in payment of those
claims could have a material adverse effect on our profitability.
  Due to the complex laws and regulations governing the Medicare program in which we participate, our
recorded estimates may materially change in the future, and our failure to fully comply with such
laws and regulations may adversely impact our business and financial results.
    32




---



##### Table of Contents



Uncertainty regarding the impact of Medicare Part D may adversely impact our business and financial
results.
   We are subject to a number of existing laws, regulations and industry initiatives, non-compliance
with which could adversely affect our business, financial condition and results of operations.
   
    
    health care fraud and abuse laws and regulations, which prohibit certain types of
payments and referrals as well as false claims made in connection with health benefit
programs;
 
    
    privacy and confidentiality laws and regulations, including those under HIPAA;
 
    
    ERISA and related regulations, which regulate many health care plans;
 
    
    potential regulation of the PBM industry by the FDA;
 
    
    the Medicare prescription drug coverage law and CMS regulations;
 
    
    consumer protection and unfair trade practice laws and regulations;
 
    
    various licensure laws, such as state insurance, managed care and third party
administrator licensure laws;
 
    
    pharmacy laws and regulations;
 
    
    antitrust lawsuits challenging PBM pricing practices;
 
    
    state legislation regulating PBMs or imposing fiduciary status on PBMs;
 
    
    drug pricing legislation, including most favored nation pricing and unitary pricing
legislation;
 
    
    other Medicare and Medicaid reimbursement regulations;
 
    
    pending legislation regarding importation of drug products into the United States;
 
    
    legislation imposing benefit plan design restrictions, which limit how our customers can
design their drug benefit plans;
 
    
    network pharmacy access laws, including any willing provider and due process
legislation, that affect aspects of our pharmacy network contracts; and
 
    
    formulary development and disclosure laws.
  
 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
   33




---



##### Table of Contents



ITEM 5. Other Information
 Employment Agreement with John Romza
    Employment Agreement with Mike Bennof
    34




---



##### Table of Contents



ITEM 6. Exhibits
 ExhibitNumber
    
    Description of Document
    
    Reference10.1
    
    
    Amended and Restated 2000 Restricted
Stock Grant Plan of September 16, 2008
    
    Filed herewith10.2
    
    
    Employment agreement, effective as of
November 6, 2008, between SXC Health
Solutions Corp. and John Romza
    
    Filed herewith10.3
    
    
    Employment agreement, effective as of
November 6, 2008, between SXC Health
Solutions Corp. and Mike Bennof
    
    Filed herewith10.4
    
    
    Employment agreement, effective as of
November 6, 2008, between SXC Health
Solutions Corp. and B. Greg Buscetto
    
    Filed herewith31.1
    
    
    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
  35




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##### Table of Contents



SIGNATURE
  SXC Health Solutions Corp.November 6, 2008
    By:
    /s/ Jeffrey ParkJeffrey ParkChief Financial Officer
(on behalf of the registrant and
as Chief Accounting Officer)  36




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description of Document
    
    Reference10.1
    
    
    Amended and Restated 2000 Restricted
Stock Grant Plan of September 16, 2008
    
    Filed herewith10.2
    
    
    Employment agreement, effective as of
November 6, 2008, between SXC Health
Solutions Corp. and John Romza
    
    Filed herewith10.3
    
    
    Employment agreement, effective as of
November 6, 2008, between SXC Health
Solutions Corp. and Mike Bennof
    
    Filed herewith10.4
    
    
    Employment agreement, effective as of
November 6, 2008, between SXC Health
Solutions Corp. and B. Greg Buscetto
    
    Filed herewith31.1
    
    
    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
  37