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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to.
 Commission file number: 000-52073
 
 SXC HEALTH SOLUTIONS CORP.
  
 Yukon Territory
(State or other jurisdiction of 
incorporation or organization)
    
    75-2578509
(I.R.S. Employer
Identification Number)
 2441 Warrenville Road, Suite 610, Lisle, IL 60532-3642
(Address of principal executive offices, zip code)
 (800) 282-3232
(Registrants phone number, including area code)
 
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 Yes o No þ




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TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)
    
    
    3Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008
    
    
    4Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2009 and 2008
    
    
    5Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008
    
    
    6Consolidated Statements of Shareholders Equity for the Six Months Ended June 30, 2009 and 2008
    
    
    7Notes to Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    25Item 6. Exhibits
    
    
    25SIGNATURE
    
    
    26Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 10.5Exhibit 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, except share data)
 June 30,
    
    
    December 31,2009
    
    
    2008(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    96,634
    
    
    $
    67,715Restricted cash
    
    
    14,135
    
    
    
    12,498Accounts receivable, net of allowance for doubtful accounts of $3,133 (2008  $3,570)
    
    
    81,013
    
    
    
    80,531Rebates receivable
    
    
    22,512
    
    
    
    29,586Unbilled revenue
    
    
    
    
    
    
    73Prepaid expenses and other assets
    
    
    5,580
    
    
    
    4,382Inventory
    
    
    6,108
    
    
    
    6,689Income tax recoverable
    
    
    1,327
    
    
    
    1,459Deferred income taxes
    
    
    8,209
    
    
    
    10,219Total current assets
    
    
    235,518
    
    
    
    213,152Property and
equipment, net of accumulated depreciation of $23,566 (2008  $19,449)
    
    
    20,778
    
    
    
    20,756Goodwill
    
    
    143,852
    
    
    
    143,751Other
intangible assets, net of accumulated amortization of $19,339 (2008  $14,099)
    
    
    42,066
    
    
    
    46,406Deferred financing charges
    
    
    1,259
    
    
    
    1,481Deferred income taxes
    
    
    1,852
    
    
    
    1,323Other assets
    
    
    1,310
    
    
    
    1,474Total assets
    
    $
    446,635
    
    
    $
    428,343LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    8,386
    
    
    $
    8,302Customer deposits
    
    
    12,647
    
    
    
    11,875Salaries and wages payable
    
    
    12,509
    
    
    
    15,681Accrued liabilities
    
    
    25,751
    
    
    
    32,039Pharmacy benefit management rebates payable
    
    
    45,856
    
    
    
    36,326Pharmacy benefit claim payments payable
    
    
    41,940
    
    
    
    51,406Deferred revenue
    
    
    8,493
    
    
    
    7,978Current portion of long-term debt
    
    
    4,800
    
    
    
    3,720Total current liabilities
    
    
    160,382
    
    
    
    167,327Long-term debt, less current installments
    
    
    41,520
    
    
    
    43,920Deferred income taxes
    
    
    15,538
    
    
    
    15,060Deferred lease inducements
    
    
    2,986
    
    
    
    3,217Deferred rent
    
    
    1,323
    
    
    
    1,461Other liabilities
    
    
    3,103
    
    
    
    3,195Total liabilities
    
    
    224,852
    
    
    
    234,180Commitments and contingencies (Note 12)Shareholders equityCommon
stock: no par value, unlimited shares authorized; 24,639,093 shares
issued and outstanding at June 30, 2009 (2008  24,103,032 shares)
    
    
    153,320
    
    
    
    146,988Additional paid-in capital
    
    
    13,407
    
    
    
    11,854Retained earnings
    
    
    55,410
    
    
    
    35,751Accumulated other comprehensive loss
    
    
    (354
    )
    
    
    (430
    )Total shareholders equity
    
    
    221,783
    
    
    
    194,163Total liabilities and shareholders equity
    
    $
    446,635
    
    
    $
    428,343
 See accompanying notes to the consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Operations
 (in thousands, except per share data)
 Three months ended June 30,
    
    
    Six months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(unaudited)
    
    
    (unaudited)Revenue:PBM
    
    $
    293,906
    
    
    $
    204,860
    
    
    $
    561,686
    
    
    $
    204,860HCIT:Transaction processing
    
    
    15,663
    
    
    
    11,888
    
    
    
    29,390
    
    
    
    26,536Maintenance
    
    
    4,477
    
    
    
    4,130
    
    
    
    8,951
    
    
    
    8,340Professional services
    
    
    3,801
    
    
    
    3,066
    
    
    
    7,443
    
    
    
    6,857System sales
    
    
    2,982
    
    
    
    3,811
    
    
    
    4,319
    
    
    
    5,479Total revenue
    
    
    320,829
    
    
    
    227,755
    
    
    
    611,789
    
    
    
    252,072Cost of revenue:PBM
    
    
    259,376
    
    
    
    188,046
    
    
    
    498,374
    
    
    
    188,046HCIT
    
    
    14,242
    
    
    
    9,869
    
    
    
    27,020
    
    
    
    20,706Total cost of revenue
    
    
    273,618
    
    
    
    197,915
    
    
    
    525,394
    
    
    
    208,752Gross profit
    
    
    47,211
    
    
    
    29,840
    
    
    
    86,395
    
    
    
    43,320Expenses:Product development costs
    
    
    3,027
    
    
    
    2,480
    
    
    
    6,190
    
    
    
    4,939Selling, general and administrative
    
    
    21,907
    
    
    
    19,557
    
    
    
    42,704
    
    
    
    25,428Depreciation of property and equipment
    
    
    1,405
    
    
    
    1,433
    
    
    
    2,887
    
    
    
    2,194Amortization of intangible assets
    
    
    2,415
    
    
    
    2,432
    
    
    
    5,240
    
    
    
    2,82828,754
    
    
    
    25,902
    
    
    
    57,021
    
    
    
    35,389Operating income
    
    
    18,457
    
    
    
    3,938
    
    
    
    29,374
    
    
    
    7,931Interest income
    
    
    (225
    )
    
    
    (647
    )
    
    
    (471
    )
    
    
    (1,701
    )Interest expense
    
    
    1,204
    
    
    
    763
    
    
    
    2,160
    
    
    
    798Net interest expense (income)
    
    
    979
    
    
    
    116
    
    
    
    1,689
    
    
    
    (903
    )Other (income) expense
    
    
    283
    
    
    
    29
    
    
    
    (42
    )
    
    
    35Income before income taxes
    
    
    17,195
    
    
    
    3,793
    
    
    
    27,727
    
    
    
    8,799Income tax expense (benefit):Current
    
    
    4,403
    
    
    
    597
    
    
    
    6,604
    
    
    
    1,979Deferred
    
    
    815
    
    
    
    (71
    )
    
    
    1,464
    
    
    
    196Total income taxe expense (benefit)
    
    
    5,218
    
    
    
    526
    
    
    
    8,068
    
    
    
    2,175Net income
    
    $
    11,977
    
    
    $
    3,267
    
    
    $
    19,659
    
    
    $
    6,624Earnings per share:Basic
    
    $
    0.49
    
    
    $
    0.14
    
    
    $
    0.81
    
    
    $
    0.30Diluted
    
    $
    0.47
    
    
    $
    0.14
    
    
    $
    0.79
    
    
    $
    0.29Weighted average number of shares used
in computing earnings per share:Basic
    
    
    24,638,986
    
    
    
    22,948,940
    
    
    
    24,417,241
    
    
    
    21,972,315Diluted
    
    
    25,270,639
    
    
    
    23,558,446
    
    
    
    25,001,382
    
    
    
    22,510,153
 See accompanying notes to the consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Comprehensive Income
 (in thousands)
 Three months ended June 30,
    
    
    Six months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(unaudited)
    
    
    (unaudited)Net income
    
    $
    11,977
    
    
    $
    3,267
    
    
    $
    19,659
    
    
    $
    6,624Other comprehensive income  gain on cash flow hedges (net of income
taxes of $29 and $38 for the three and six months ended
June 30, 2009, respectively)
    
    
    47
    
    
    
    
    
    
    
    76
    
    
    
    Comprehensive income
    
    $
    12,024
    
    
    $
    3,267
    
    
    $
    19,735
    
    
    $
    6,624
 See accompanying notes to the consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Cash Flows
 (in thousands)
 Six months ended June 30,2009
    
    
    2008(unaudited)Cash flows from operating activities:Net income
    
    $
    19,659
    
    
    $
    6,624Adjustments to reconcile net income to net cash provided by operating activities:Stock-based compensation
    
    
    1,430
    
    
    
    2,104Depreciation of property and equipment
    
    
    3,944
    
    
    
    3,046Amortization of intangible assets
    
    
    5,240
    
    
    
    2,828Deferred lease inducements and rent
    
    
    (369
    )
    
    
    (107
    )Deferred income taxes
    
    
    1,464
    
    
    
    196Tax benefit on option exercises
    
    
    (2,106
    )
    
    
    (80
    )Gain on foreign exchange
    
    
    (26
    )
    
    
    (21
    )Changes in operating assets and liabilities, net of effects from acquisition:Accounts receivable
    
    
    (374
    )
    
    
    12,828Rebates receivable
    
    
    7,074
    
    
    
    1,153Restricted cash
    
    
    (1,637
    )
    
    
    (4,325
    )Unbilled revenue
    
    
    73
    
    
    
    101Prepaid expenses
    
    
    (1,164
    )
    
    
    1,322Inventory
    
    
    597
    
    
    
    (264
    )Income tax recoverable
    
    
    2,238
    
    
    
    354Accounts payable
    
    
    84
    
    
    
    1,264Accrued liabilities
    
    
    (6,016
    )
    
    
    (5,715
    )Deferred revenue
    
    
    472
    
    
    
    (254
    )Pharmacy benefit claim payments payable
    
    
    (9,466
    )
    
    
    (1,536
    )Pharmacy benefit management rebates payable
    
    
    9,530
    
    
    
    (2,448
    )Customer deposits
    
    
    772
    
    
    
    102Other
    
    
    261
    
    
    
    (131
    )Net cash provided by operating activities
    
    
    31,680
    
    
    
    17,041Cash flows from investing activities:Purchases of property and equipment
    
    
    (5,746
    )
    
    
    (3,414
    )Lease inducements received
    
    
    
    
    
    
    373Acquisitions, net of cash acquired
    
    
    (2,176
    )
    
    
    (101,670
    )Net cash used in investing activities
    
    
    (7,922
    )
    
    
    (104,711
    )Cash flows from financing activities:Issuance of long-term debt
    
    
    
    
    
    
    48,000Payment of financing costs
    
    
    
    
    
    
    (1,518
    )Proceeds from exercise of options
    
    
    4,349
    
    
    
    333Tax benefit on option exercises
    
    
    2,106
    
    
    
    80Repayment of long-term debt
    
    
    (1,320
    )
    
    
    (120
    )Net cash provided by financing activities
    
    
    5,135
    
    
    
    46,775Effect of foreign exchange on cash balances
    
    
    26
    
    
    
    21Increase (decrease) in cash and cash equivalents
    
    
    28,919
    
    
    
    (40,874
    )Cash and cash equivalents, beginning of period
    
    
    67,715
    
    
    
    90,929Cash and cash equivalents, end of period
    
    $
    96,634
    
    
    $
    50,055
 See accompanying notes to the consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated
Statements of Shareholders Equity
 (in thousands, except share data)
 Common Stock
    
    
    Additional
    
    
    Retained
    
    
    Accumulated OtherNumber
    
    
    Amount
    
    
    paid-in capital
    
    
    Earnings (deficit)
    
    
    Comprehensive Loss
    
    
    TotalBalance at December 31, 2008
    
    
    24,103,032
    
    
    $
    146,988
    
    
    $
    11,854
    
    
    $
    35,751
    
    
    $
    (430
    )
    
    $
    194,163Activity during the period (unaudited):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,659
    
    
    
    
    
    
    
    19,659Exercise of stock options
    
    
    533,562
    
    
    
    6,284
    
    
    
    (1,935
    )
    
    
    
    
    
    
    
    
    
    
    4,349Issuance of shares for acquisition
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -Vesting of restricted stock units
    
    
    2,478
    
    
    
    48
    
    
    
    (48
    )
    
    
    
    
    
    
    
    
    
    
    -Tax benefit on options exercised
    
    
    
    
    
    
    
    
    
    
    2,106
    
    
    
    
    
    
    
    
    
    
    
    2,106Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,430
    
    
    
    
    
    
    
    
    
    
    
    1,430Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76
    
    
    
    76Balance at June 30, 2009 (unaudited)
    
    
    24,639,093
    
    
    
    153,320
    
    
    
    13,407
    
    
    
    55,410
    
    
    
    (354
    )
    
    
    221,783Balance at December 31, 2007
    
    
    20,985,934
    
    
    
    103,520
    
    
    
    8,299
    
    
    
    20,638
    
    
    
    
    
    
    
    132,457Activity during the period (unaudited):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,624
    
    
    
    
    
    
    
    6,624Issuance of shares under ESPP
    
    
    2,386
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Issuance of shares for acquisition
    
    
    2,783,151
    
    
    
    40,884
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,884Costs to issue shares for acquisition
    
    
    
    
    
    
    (320
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (320
    )Exercise of stock options
    
    
    51,800
    
    
    
    521
    
    
    
    (188
    )
    
    
    
    
    
    
    
    
    
    
    333Tax benefit on options exercised
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    80Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    2,104
    
    
    
    
    
    
    
    
    
    
    
    2,104Balance at June 30, 2008 (unaudited)
    
    
    23,823,271
    
    
    $
    144,638
    
    
    $
    10,295
    
    
    $
    27,262
    
    
    $
    
    
    
    $
    182,195
 See accompanying notes to the consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    Description of Business
 SXC Health Solutions Corp. (the Company) is a leading provider of pharmacy benefits
management (PBM) services and healthcare information technology (HCIT) solutions to the
healthcare benefits management industry. The Companys product offerings and solutions combine
a wide range of software applications, application service provider processing services and
professional services designed for many of the largest organizations in the pharmaceutical
supply chain, such as federal, provincial, and state and local governments, pharmacy benefit
managers, managed care organizations, retail pharmacy chains and other healthcare
intermediaries. The Company is headquartered in Lisle, Illinois with several locations in the
U.S. and Canada. For more information please visit www.sxc.com.
 2.
    
    Basis of Presentation
 (a)
    
    Basis of presentation:The consolidated financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP) and include its
majority-owned subsidiaries. All significant inter-company transactions and balances have
been eliminated in consolidation. Amounts in the consolidated financial statements and
notes are expressed in U.S. dollars, except where indicated, which is also the Companys
functional currency.Certain information and note disclosures normally included in the annual financial
statements prepared in accordance with U.S. GAAP have been condensed or excluded. As a
result, these unaudited interim consolidated financial statements do not contain all the
disclosures required to be included in the annual financial statements and should be read
in conjunction with the most recent audited annual consolidated financial statements and
notes thereto for the year ended December 31, 2008.These unaudited interim consolidated financial statements are prepared following accounting
policies consistent with the Companys audited annual consolidated financial statements for
the year ended December 31, 2008.The financial information included herein reflects all adjustments (consisting only of
normal recurring adjustments), which, in the opinion of management, are necessary for a
fair presentation of the results for the interim periods presented. The results of
operations for the three- and six-month periods ended June 30, 2009 are not necessarily
indicative of the results to be expected for the full year ending December 31, 2009.Effective with the acquisition of National Medical Health Card Systems, Inc. (NMHC) on
April 30, 2008, the Company began operating in two reportable segments: PBM and HCIT.
Please see Note 10 for more information.(b)
    
    Use of estimates:The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities,
and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the period. Significant items
subject to such estimates and assumptions include revenue recognition, rebates, purchase
price allocation in connection with acquisitions, valuation of property and equipment,
valuation of intangible assets acquired and related amortization periods, impairment of
goodwill, income tax uncertainties, contingencies and valuation allowances for receivables
and income taxes. Actual results could differ from those estimates.
 3.
    
    Recent Accounting Pronouncements
 FASB Statement No. 165In June 2009, the Financial Accounting Standards Board (FASB) issued Statement No. 165,
Subsequent Events(SFAS 165), which establishes general requirements of accounting and
disclosure of events that occur after the balance sheet date, but before the financial
statements are issued. SFAS 165 was effective for the Companys interim period ended June
30, 2009 and its adoption did not have a material impact to the Companys consolidated
financial statements. As of the issuance date of the Companys financial statements, no
subsequent events have occurred that would require disclosure in accordance with SFAS 165.FASB Statement No. 161In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments
and Hedging Activities-an amendment of FASB Statement No. 133(SFAS 161), which amends
and expands the disclosure requirements of SFAS 133. SFAS 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative disclosures
about fair value amounts and gains and losses on derivative instruments, and disclosures
about credit-risk-related contingent features in derivative agreements. SFAS 161 was
effective for the Companys fiscal year beginning January 1, 2009, and its adoption did not
have a material impact to the Company.
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FASB Statement No. 141(R)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.FASB Statement No. 160In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements  an amendment of ARB No. 51(SFAS 160), which
establishes accounting and reporting standards for entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. A
noncontrolling interest (previously referred to as a minority interest) is the portion of
equity in a subsidiary not attributable, directly or indirectly, to a parent. SFAS 160 was
effective for the Companys fiscal year beginning January 1, 2009, and will be applied
prospectively to all noncontrolling interests, including those that arose before the
effective date, and its adoption did not have a material impact to the Company.
 4.
    
    Business Combinations
 NMHC AcquisitionEffective April 30, 2008, the Company completed the acquisition of NMHC, a pharmacy benefit
management company, in an exchange offer of (i) 0.217 of a common share of the Companys
common stock and (ii) $7.70 in cash for each outstanding NMHC common share. Total deal
consideration approximated $143.8 million, which included the issuance of 2,785,981 shares of
the Companys common stock. The value of the stock issued was based on the guidance of EITF
Issue No. 99-12, Determination of the Measurement Date for the Market Price of Acquirer
Securities Issued in a Purchase Business Combination. This EITF
provides that the value of shares issued is based on the average market price of the acquirers stock from a few days
before to a few days after the agreement is agreed to and announced. To fund the transaction,
the Company entered into a six-year $48.0 million term loan agreement. The Company also
signed a $10.0 million senior secured revolving credit agreement. NMHC results of operations
are included in the consolidated financial statements from the date of acquisition.Prior to the acquisition, the Company and one of NMHCs subsidiaries, NMHCRX, Inc., were
parties to a consulting agreement and software license and maintenance agreements pursuant to
which the Company licensed, and provided consulting and support services in connection with,
certain computer software for one of NMHCRX, Inc.s claims adjudication systems.The Company and NMHC have similar missions and core values, and the Company believes the
synergies gained from this business combination will create long term value for customers,
vendors and shareholders, as well as opportunities for new and existing employees by making
the Company better positioned to compete in the changing PBM environment.The purchase price of the acquired operations was comprised of the following (in thousands):
 Cash payment to NMHC shareholders
    
    $
    98,711Value assigned to shares issued
    
    
    40,626Direct costs of the acquisition
    
    
    4,114Total purchase price
    
    $
    143,451
 Direct Costs of the AcquisitionDirect costs of the acquisition include investment banking fees, legal and accounting fees and
other external costs directly related to the acquisition.Purchase Price AllocationThe acquisition was accounted for under the purchase method of accounting with the Company
treated as the acquiring entity in accordance with SFAS No. 141, Business Combinations.
Accordingly, the consideration paid by the Company to complete the acquisition has been
allocated to the assets acquired and liabilities assumed based upon their estimated fair
values as of the date of acquisition. The excess of the purchase price over the estimated
fair values of the net assets acquired and liabilities assumed was recorded as goodwill.
Goodwill is non-amortizing for financial statement purposes and is not tax deductible. The
changes in goodwill from December 31, 2008 to June 30, 2009 are primarily due to deferred tax
adjustments, changes in the estimated fair value of acquired fixed assets and revisions to the
estimated fair values of assumed liabilities related to the NMHC acquisition. The purchase
price allocation is considered final as of June 30, 2009 in accordance with SFAS 141.
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The following summarizes the estimates of the fair values of the assets acquired and
liabilities assumed at the acquisition date (in thousands):
 Current assets
    
    $
    115,864Property and equipment
    
    
    3,495Goodwill
    
    
    124,194Intangible assets
    
    
    44,420Other assets
    
    
    1,258Total assets acquired
    
    
    289,231Current liabilities
    
    
    132,618Deferred income taxes
    
    
    12,566Other liabilities
    
    
    296Total liabilities assumed
    
    
    145,480Net assets acquired
    
    $
    143,751
 During the three and six months ended June 30, 2009, the Company recognized $1.9 million and
$4.2 million of amortization expense from intangible assets acquired, respectively.
Amortization for the remainder of 2009 is expected to be $3.4 million. Amortization for 2010
and 2011 is expected to be $6.0 million and $5.3 million, respectively. The
estimated fair values and useful lives of intangible assets acquired are as follows (in
thousands):
 Fair value
    
    
    Useful LifeTrademarks/Trade names
    
    $
    1,120
    
    
    6 monthsCustomer relationships
    
    
    39,700
    
    
    8 yearsNon-compete agreements
    
    
    1,480
    
    
    1 yearSoftware
    
    
    1,120
    
    
    1 yearLicenses
    
    
    1,000
    
    
    15 yearsTotal
    
    $
    44,420
 Unaudited Pro Forma Financial InformationThe following unaudited pro forma financial information presents the combined historical
results of the operations of the Company and NMHC as if the acquisition had occurred on the
first day of the period presented. Certain adjustments have been made to reflect changes in
depreciation, amortization and income taxes based on the Companys estimates of fair values
recognized in the application of purchase accounting, and interest expense on borrowings to
finance the acquisition.Unaudited pro forma results of operations are as follows (in thousands, except per share
data):
 Three months ended June
    
    
    Six months ended June30,
    
    
    30,2008
    
    
    2008Sales
    
    $
    321,233
    
    
    $
    631,139Gross profit
    
    $
    32,863
    
    
    $
    66,011Income (loss)
    
    $
    (976
    )
    
    $
    288Income (loss) per share:Basic
    
    $
    (0.04
    )
    
    $
    0.01Diluted
    
    $
    (0.04
    )
    
    $
    0.01Weighted average shares outstandingBasic
    
    
    23,808,512
    
    
    
    23,793,677Diluted
    
    
    24,418,018
    
    
    
    24,331,515
 This unaudited pro forma financial information is not intended to represent or be indicative
of what would have occurred if the transaction had taken place on the date presented and is
not indicative of what the Companys actual results of operations would have been had the
acquisition been completed at the beginning of the period indicated above. Further, the pro
forma combined results do not reflect one-time costs to fully merge and operate the combined
organization more efficiently, or anticipated synergies expected to result from the
combination and should not be relied upon as being indicative of the future results that the
Company will experience.
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Other AcquisitionsOn December 22, 2008, the Company announced that it had acquired substantially all of the
assets of Zynchros, a privately-owned leader in formulary management solutions, in a cash
transaction effective December 19, 2008. Founded in 2000, Zynchros provides a suite of
on-demand formulary management tools to approximately 45 health plan and PBM customers. The
zynchros.com platform helps payers to effectively manage their formulary programs, and to
maintain Medicare Part D compliance of their programs. The Company recorded identifiable
intangible assets of $1.7 million with estimated useful lives of 4 to 5 years and goodwill of
$2.7 million associated with the acquisition. The goodwill acquired was allocated to the
Companys HCIT segment. Zynchros results of operations are included in the consolidated
statement of operations as of the effective date of the acquisition and were not material to
the Companys results of operations on a pro forma basis.In the second quarter of 2009, the Company completed the acquisition of substantially all of
the assets of a small pharmacy system vendor in a cash transaction, effective June 11, 2009.
The Company recorded identifiable intangible assets of $0.9 million with estimated useful
lives of 1 to 10 years and goodwill of $1.1 million associated with the acquisition. The
goodwill acquired was allocated to the Companys HCIT segment. The results of operations are
included in the consolidated statement of operations as of the effective date of the
acquisition and were not material to the Companys results of operations on a pro forma basis.
 5.
    
    Cash and Cash Equivalents
 The components of cash and cash equivalents are as follows (in thousands):
 June 30, 2009
    
    
    December 31, 2008(unaudited)Cash on deposit
    
    $
    75,076
    
    
    $
    46,532Payments in transit
    
    
    (52,515
    )
    
    
    (55,559
    )U.S. money market funds
    
    
    74,043
    
    
    
    76,713Canadian dollar deposits (June 30, 2009  Cdn. $35 at 1.1554;
    
    
    30
    
    
    
    29December 31, 2008  Cdn. $35 at 1.2168)
    
    $
    96,634
    
    
    $
    67,715
 In estimating the fair value of its financial instruments, the Company determined the carrying
amount reported in the consolidated balance sheets as cash and cash equivalents approximates
fair value because of the short maturities of these instruments and are considered Level 1
investments in the fair value hierarchy.
 6.
    
    Goodwill and Other Intangible Assets
 Goodwill and indefinite-lived intangible assets are reviewed for impairment annually, or more
frequently if impairment indicators arise. The Company allocates goodwill to both the PBM and
HCIT segments. There were no impairments of goodwill or indefinite-lived intangible assets
during the six months ended June 30, 2009 and 2008.During the second quarter of 2009, the Company recorded an additional $0.9 million in
identifiable intangible assets which was allocated to the Companys HCIT segment. See Note 4
for more information.Definite-lived intangible assets are amortized over the useful lives of the related assets.
The components of intangible assets were as follows (in thousands):
 June 30, 2009
    
    
    December 31, 2008Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    53,760
    
    
    $
    (14,065
    )
    
    $
    39,695
    
    
    $
    53,100
    
    
    $
    10,043
    
    
    $
    43,057Acquired software
    
    
    3,765
    
    
    
    (2,563
    )
    
    
    1,202
    
    
    
    3,565
    
    
    
    1,903
    
    
    
    1,662Trademarks/Trade names
    
    
    1,370
    
    
    
    (1,153
    )
    
    
    217
    
    
    
    1,360
    
    
    
    1,122
    
    
    
    238Non-compete agreements
    
    
    1,510
    
    
    
    (1,480
    )
    
    
    30
    
    
    
    1,480
    
    
    
    987
    
    
    
    493Licenses
    
    
    1,000
    
    
    
    (78
    )
    
    
    922
    
    
    
    1,000
    
    
    
    44
    
    
    
    956Total
    
    $
    61,405
    
    
    $
    (19,339
    )
    
    $
    42,066
    
    
    $
    60,505
    
    
    $
    14,099
    
    
    $
    46,406
 Amortization associated with intangible assets at June 30, 2009 is estimated to be $4.5
million for the remainder of 2009, $7.9 million in 2010, $7.1 million in 2011, $6.5 million in
2012, $5.7 million in 2013 and $5.2 million in 2014.
 7.
    
    Long Term Debt
 On April 25, 2008, the Companys U.S. subsidiary, SXC Health Solutions, Inc. (US Corp.),
entered into a credit agreement (the Credit Agreement) providing for up to $58 million of
borrowings, consisting of (i) a $10 million senior secured revolving credit facility
(including borrowing capacity available for letters of credit and for borrowings on same-day
notice) referred to as a swing loan (the Revolving Credit
Facility) and (ii) a $48 million senior secured term loan (the Term Loan Facility and,
together with the Revolving Credit Facility, the Credit Facilities). On April 29, 2008, US
Corp. borrowed $48 million under the Term Loan Facility to pay a portion of the consideration
in connection with the acquisition of NMHC and certain transaction fees and expenses related
to the acquisition.
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The interest rates applicable to the loans under the Credit Facilities are based on a
fluctuating rate measured by reference to either, at US Corp.s option, (i) a base rate, plus
an applicable margin, subject to adjustment, or (ii) an adjusted London interbank offered rate
(adjusted for the maximum reserves)(LIBOR), plus an applicable margin. The initial rate for
all borrowings is prime plus 2.25% with respect to base rate borrowings or LIBOR plus 3.25%.
During an event of default, default interest is payable at a rate that is 2% higher than the
rate otherwise applicable. The interest rate on the loan at June 30, 2009 was 3.85%. In
addition to paying interest on outstanding principal under the Credit Facilities, US Corp. is
required to pay an unused commitment fee to the lenders in respect of any unutilized
commitments under the Revolving Credit Facility at a rate of 0.50% per annum. US Corp. is
also required to pay customary letter of credit fees. In addition, pursuant to the terms of
its credit agreement, the Company entered into interest rate contracts for 50% of the borrowed
amount, or $24 million, to provide protection against fluctuations in interest rates for a
three-year period from the date of issue. See Note 13 for more information.The Credit Facilities require US Corp. to prepay outstanding loans, subject to certain
exceptions, with:
 
    
    50% of the net proceeds arising from the issuance or sale by the Company of its own
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.
 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, which commenced on June 30,
2008, in aggregate annual amounts equal to 1% (year 1), 10% (years 2 and 3), 15% (years 4 and
5), and 49% (year 6) of the original funded principal amount of such facility. Principal
repayments will be $3.7 million in 2009, $4.8 million in 2010, $6.6 million in 2011, $7.2
million in 2012, $19.4 million in 2013 and $5.9 million in 2014. Principal amounts
outstanding under the Revolving Credit Facility are due and payable in full on April 30, 2013.The Company and all material U.S. subsidiaries of US Corp. guarantee the obligations under the
Credit Agreement. All future material U.S. subsidiaries of the Company, as well as certain
future Canadian subsidiaries, will guarantee the obligations under the Credit Agreement as
well. In addition, the Credit Facilities and the guarantees are secured by the capital stock
of US Corp. and certain other subsidiaries of the Company and substantially all other tangible
and intangible assets owned by the Company, US Corp. and each subsidiary that guarantees the
obligations of US Corp. under the Credit Facilities, subject to certain specified exceptions.The Credit Agreement also contains certain restrictive covenants including financial covenants
that require the Company to maintain (i) a maximum consolidated leverage ratio, (ii) a minimum
consolidated fixed charge coverage ratio and (iii) a maximum capital expenditure level. As of
June 30, 2009, the Company is in compliance with its covenants.In connection with the Term Loan Facility, the Company incurred approximately $1.8 million in
financing costs. The financing costs are presented on the consolidated balance sheet as
deferred financing charges and are being amortized into interest expense over the life of the
loan using the effective-interest method.The fair value of the Companys debt at June 30, 2009 is $46.3 million, which approximates its
carrying value. The estimated fair value of the Companys variable-rate debt approximates the
carrying value of the debt since the variable interest rates are market-based, and the Company
believes such debt could be refinanced on materially similar terms.Interest expense relates to the following (in thousands):
 Three months ended June 30,
    
    
    Six months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Long-term debt
    
    $
    550
    
    
    $
    590
    
    
    $
    995
    
    
    $
    590Finacing charges
    
    
    110
    
    
    
    79
    
    
    
    222
    
    
    
    79Other
    
    
    544
    
    
    
    94
    
    
    
    943
    
    
    
    129Total
    
    $
    1,204
    
    
    $
    763
    
    
    $
    2,160
    
    
    $
    798
 8.
    
    Shareholders equity
 (a)
    
    Stock incentive plans:The Company maintains a stock option plan (the Option Plan), as amended, under which
there were outstanding 1,734,989 stock options as of June 30, 2009. Effective on March
11, 2009, the Board of Directors of the Company adopted the SXC Health Solutions Corp.
Long-Term Incentive Plan (the LTIP), which was approved by the shareholders of the
Company at the Annual and Special Meeting of Shareholders on May 13, 2009. The LTIP
provides for the grant of stock option awards, stock appreciation rights, restricted stock
awards, restricted stock unit awards, performance awards and other stock-based awards to
eligible persons, including executive officers and directors of the Company. The purpose
of the LTIP is to advance the interests of the Company by attracting and retaining high
caliber employees and other key individuals who perform services for the Company, a
subsidiary or an affiliate; align the interests of the Companys shareholders and
recipients of awards under the LTIP by increasing the proprietary interest of such
recipients in the Companys growth and success; and motivate award recipients to act in the
best long-term interest of the Company and its shareholders. The LTIP replaced the Option
Plan, and no further grants or awards will be issued under the Option Plan. The LTIP
provides for a maximum of 1,070,000 common shares of the Company to be issued in addition
to the common shares available that remained available for issuance under the Option Plan.
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(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.During the first quarter of 2009, the ESPP was amended so that the common shares available
for purchase under the ESPP are drawn from reacquired common shares purchased on behalf of
the Company in the open market. During the six months ended June 30, 2009 and 2008, there
were 3,720 and nil shares issued under the ESPP, respectively.The ESPP is not considered compensatory under the provisions of SFAS No. 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 and stock options:At June 30, 2009, the Company had outstanding common shares of 24,639,093 and stock options
outstanding of 1,734,989. At December 31, 2008, the Company had outstanding common shares
of 24,103,032 and stock options outstanding of 2,093,194. As of June 30, 2009, stock
options outstanding consisted of 624,582 options at a weighted-average exercise price of
Canadian $11.28 and 1,110,407 options at a weighted-average exercise price of U.S. $18.64.(d)
    
    Restricted stock units:The Company assumed 170,500 restricted stock units (RSUs) of NMHC after the acquisition,
which converted into 126,749 RSUs of the Company. In September 2008, the Company issued an
additional 51,000 RSUs with a grant date fair value of $15.90 per share to certain new
employees who were previous employees of NMHC.During the six months ended June 30, 2009, the Company granted a total of 168,205 RSUs to
its employees and non-employee directors with a grant date fair value per share of $25.54.Substantially all RSUs vest on a straight-line basis over a range of three to four years.
Certain additional RSUs granted to senior management cliff vest based upon reaching agreed
upon three-year performance conditions.At June 30, 2009, there were 266,633 restricted stock units outstanding.
 9.
    
    Stock-based compensation
 During the three and six month periods ended June 30, 2009, the Company recorded stock-based
compensation expense of $0.8 million and $1.4 million, respectively. During the three and six
month periods ended June 30, 2008, the Company recorded stock-based compensation expense of
$1.3 million and $2.1 million, respectively. The Black-Scholes option-pricing model was used
to estimate the fair value of the stock options at the grant date based on the following
assumptions:
 Six months ended June 30,2009
    
    2008Total U.S. dollar stock options granted
    
    184,107
    
    267,450Volatility
    
    47.1  47.2%
    
    49.6  52.4%Risk-free interest rate
    
    1.96  2.56%
    
    1.67  3.00%Expected life
    
    4.5 years
    
    2.5  4.5 yearsDividend yield
    
    
    
    Weighted-average grant date fair value
    
    $10.67
    
    $4.94
 There were no Canadian dollar stock options granted during the six months ended June 30, 2009
and 2008.
 10.
    
    Segment information
 The Company operates in two geographic areas as follows (in thousands):
 Three mon ths ended June 30,
    
    
    Six month s ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008RevenueUnited States
    
    $
    320,264
    
    
    $
    226,545
    
    
    $
    610,731
    
    
    $
    249,649Canada
    
    
    565
    
    
    
    1,210
    
    
    
    1,058
    
    
    
    2,423Total
    
    $
    320,829
    
    
    $
    227,755
    
    
    $
    611,789
    
    
    $
    252,072
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June 30, 2009
    
    
    December 31, 2008Net assetsUnited States
    
    $
    206,526
    
    
    $
    182,105Canada
    
    
    15,257
    
    
    
    12,058Total
    
    $
    221,783
    
    
    $
    194,163
 With the acquisition of NMHC during the second quarter of 2008, the Company changed its
internal organization structure and now reports two operating segments: PBM and HCIT. The
Company evaluates segment performance based upon revenue and gross profit. Results for
periods reported prior to the three months ended June 30, 2008 were reported in one operating
segment, HCIT. Prior period results have not been restated because to do so would be
impracticable. Financial information by segment is presented below (in thousands):
 Three months ended June 30,
    
    
    Six months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008PBM:Revenues
    
    $
    293,906
    
    
    $
    204,860
    
    
    $
    561,686
    
    
    $
    204,860Gross profit
    
    $
    34,530
    
    
    $
    16,814
    
    
    $
    63,312
    
    
    $
    16,814Total assets at June 30
    
    $
    300,169
    
    
    $
    303,834HCIT:Revenues
    
    $
    26,923
    
    
    $
    22,895
    
    
    $
    50,103
    
    
    $
    47,212Gross profit
    
    $
    12,681
    
    
    $
    13,026
    
    
    $
    23,083
    
    
    $
    26,506Total assets at June 30
    
    $
    146,466
    
    
    $
    118,457Consolidated:Revenues
    
    $
    320,829
    
    
    $
    227,755
    
    
    $
    611,789
    
    
    $
    252,072Gross profit
    
    $
    47,211
    
    
    $
    29,840
    
    
    $
    86,395
    
    
    $
    43,320Total assets at June 30
    
    $
    446,635
    
    
    $
    422,291
 For the three-month period ended June 30, 2009, one customer accounted for 14.2% of total
revenue. For the three-month period ended June 30, 2008, one customer accounted for 11.1%
and another for 10.4% of consolidated revenue, respectively.For the six-month period ended June 30, 2009, one customer accounted for 14.7% of total
revenue. For the six-month period ended June 30, 2008, one customer accounted for 10.0% of
consolidated revenue.At June 30, 2009 and December 31, 2008 no one customer accounted for 10% or more of the
outstanding accounts receivable balance.
 11.
    
    Income Taxes
 Tax benefits utilized by the Company as a result of historical net operating losses (NOLs)
and tax-related timing differences are recognized in accordance with SFAS No. 109, Accounting
for Income Taxes. In assessing the realizability of deferred tax assets (DTAs), management
considers whether it is more likely than not that some portion or all of the DTAs will be
realized. The ultimate realization of DTAs is dependent upon the generation of future taxable
income during the period in which those temporary differences become deductible, in addition
to managements tax planning strategies. In consideration of net losses incurred, the Company
has provided a valuation allowance to reduce the net carrying value of DTAs. The amount of
this valuation allowance is subject to adjustment by the Company in future periods based upon
its assessment of evidence supporting the degree of probability that DTAs will be realized.The Companys effective tax rate for the three months ended June 30, 2009 and 2008 was 30% and
14%, respectively.Uncertain Tax PositionsFASB Interpretation No. 48 (FIN 48) prescribes a recognition threshold and measurement
attribute criteria for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. As of June 30, 2009 and at December 31, 2008,
the Company had a long-term accrued liability of $0.3 million related to various federal and
state income tax matters on the consolidated balance sheet, the recognition of all of which
would impact the Companys effective tax rate.
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Changes in the balance of the liability for tax uncertainties are as follows (in thousands):
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Beginning balance
    
    $
    308
    
    
    $
    219
    
    
    $
    297
    
    
    $
    202Effect of change in accounting position for income tax uncertainties
    
    
    3
    
    
    
    42
    
    
    
    3
    
    
    
    42Increase in interest related to tax positions taken in prior years
    
    
    10
    
    
    
    9
    
    
    
    21
    
    
    
    26Balance at June 30
    
    $
    321
    
    
    $
    270
    
    
    $
    321
    
    
    $
    270
 The Company recognizes interest and penalties related to uncertain tax positions in income
tax expense. The Company does not expect the liability to change significantly in the next
twelve months.The Company and its subsidiaries file income tax returns in Canadian and U.S. federal
jurisdictions, and various provincial, state and local jurisdictions. With a few exceptions,
the Company is no longer subject to tax examinations by tax authorities for years prior to
2004.
 12.
    
    Contingencies
 From time to time in connection with its operations, the Company is named as a defendant in
actions for damages and costs allegedly sustained by the plaintiffs. The Company has
considered these proceedings and disputes in determining the necessity of any reserves for
losses that are probable and reasonably estimable. In addition, various aspects of the
Companys business may subject it to litigation and liability for damages arising from errors
in the processing of prescription drug claims, failure to meet performance measures within
certain contracts relating to its services or its ability to obtain certain levels of
discounts for rebates on prescription purchases from retail pharmacies and drug manufacturers
or other actions or omissions. The Companys recorded reserves are based on estimates
developed with consideration given to the potential merits of claims or quantification of any
performance obligations. The Company takes into account its history of claims, the
limitations of any insurance coverage, advice from outside counsel, and managements strategy
with regard to the settlement or defense of such claims and obligations. While the ultimate
outcome of those claims, lawsuits or performance obligations cannot be predicted with
certainty, the Company believes, based on its understanding of the facts of these claims and
performance obligations, that adequate provisions have been recorded in the consolidated
financial statements where required.The Company provides routine indemnification to its customers against liability if the
Companys products infringe on a third partys intellectual property rights. The maximum
amount of these indemnifications cannot be reasonably estimated due to their uncertain nature.
Historically, the Company has not made payments related to these indemnifications.During the routine course of securing new clients, the Company is sometimes required to
provide payment and performance bonds to cover client transaction fees and any funds and
pharmacy benefit claim payments provided by the client in the event that the Company does not
perform its duties under the contract. The terms of these payment and performance bonds are
typically one year in duration and may require renewals for the length of the contract period.
 13.
    
    Derivative Instruments and Fair Value
 The Company uses variable-rate LIBOR debt to finance its operations. These debt obligations
expose the Company to variability in interest payments on its long term-debt due to changes in
interest rates. If interest rates increase, interest expense increases. Conversely, if
interest rates decrease, interest expense also decreases.Pursuant to the terms of the Companys $48 million credit agreement, the Company entered into
interest rate contracts with notional amounts equal to 50% of the borrowed amount, or $24
million, for a three-year period from the date of issue. The Company entered into a 3-year
interest rate swap agreement with a notional amount of $14 million to fix the LIBOR rate on
$14 million of the term loan at 4.31%, resulting in an effective rate of 7.56% after adding
the 3.25% margin per the credit agreement  see Note 7 for more information. Under the
interest rate swap, the Company receives LIBOR-based variable interest rate payments and makes
fixed interest rate payments, thereby creating the equivalent to fixed-rate debt. The Company
also entered into a 3-year interest rate cap with a notional amount of $10 million to
effectively cap the LIBOR rate on $10 million of the term loan at 4.50%, resulting in a
maximum effective rate of 7.75% after adding the 3.25% margin per the credit agreement,
excluding the associated fees, to help manage exposure to interest rate fluctuations. These
instruments were designated as cash flow hedges during 2008.The two derivative instruments mentioned above were entered into to manage fluctuations in
cash flows resulting from interest rate risk attributable to changes in the benchmark interest
rate of LIBOR, and to comply with the terms of the credit agreement.As of June 30, 2009, both derivative instruments are out of the money and the Company is not
currently exposed to any credit risk for amounts classified on the consolidated balance sheet
should the counterparty in the agreement fail to meet its obligations under the agreement. To
manage credit risks, the Company selects counterparties based on credit assessments, limits
overall exposure to any single counterparty and monitors the market position with each
counterparty. At June 30, 2009, the Company concluded that it was probable that the
counterparty would be able to comply with the contractual terms of the agreements and that the
forecasted transactions are probable of occurring.
  15




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##### Table of Contents



The Company assesses interest rate cash flow risk by continually identifying and monitoring
changes in interest rate exposures that may adversely impact expected future cash flows and by
evaluating hedging opportunities. The Company does not enter into derivative instruments for
any purpose other than hedging identified exposures. That is, the Company does not speculate
using derivative instruments and has not designated any instruments as fair value hedges or
hedges of the foreign currency exposure of a net investment in foreign operations.Cash flow hedge accounting may be elected only for highly effective hedges, based upon an
assessment, performed at least quarterly, of the historical and prospective future correlation
of changes in the fair value of the derivative instrument to changes in the expected future
cash flows of the hedged item. To the extent cash flow hedge accounting is applied, the
effective portion of any changes in the fair value of the derivative instruments is initially
reported as a component of accumulated other comprehensive income or loss
(AOCI). Ineffectiveness, if any, is immediately recognized in the statement of
operations. The amount in AOCI is reclassified to earnings when the forecasted transaction
occurs, even if the derivative instrument is sold, extinguished or terminated prior to the
transaction occurring, if it is still probable that the forecasted transactions will
occur. If the forecasted transaction is no longer probable of occurring, the amount in AOCI
is immediately reclassified to earnings.There was no hedge ineffectiveness subsequent to the implementation of cash flow hedge
accounting related to the interest rate swap. SFAS No. 133 and SFAS No. 138 require that all
derivative instruments are recorded on the balance sheet at their respective fair values.Changes in the fair value of the interest rate swaps designated as hedging instruments of the
variability of cash flows associated with floating-rate, long-term debt obligations subsequent
to the implementation of cash flow hedge accounting are reported in AOCI. These amounts are
subsequently reclassified into interest expense in the same period in which the related
interest on the floating-rate debt obligations affects earnings. The amount recorded in AOCI
at June 30, 2009 was $0.4 million before income taxes.As of June 30, 2009, approximately $0.5 million of losses in AOCI related to the interest rate
swap are expected to be reclassified into interest expense as a yield adjustment of the hedged
debt obligation within the next 12 months.Effective January 1, 2008, SFAS No. 157 defines a three-level hierarchy which prioritizes the
inputs to valuation techniques used to measure fair value into three broad levels, with level
1 considered the most reliable. For assets and liabilities measured at fair value on a
recurring basis in the consolidated balance sheet, the table below categorizes fair value
measurements across the three levels as of June 30, 2009 (in thousands):
 SignificantQuoted Prices in
    
    
    Significant
    
    
    UnobservableActive Markets
    
    
    Observable Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssets:Derivatives
    
    $
    
    
    
    $
    14
    
    
    $
    
    
    
    $
    14Liabilities:Derivatives
    
    $
    
    
    
    $
    829
    
    
    $
    
    
    
    $
    829
 When available and appropriate, the Company uses quoted market prices in active markets to
determine fair value, and classifies such items within Level 1. Level 1 values only include
derivative instruments traded on a public exchange. Level 2 inputs are inputs other than
quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument. Level 2
inputs include quoted prices for similar assets or liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets that are not active, or
inputs other than quoted prices that are observable for the asset or liability or can be
derived principally from or corroborated by observable market data. If the Company were to
use one or more significant unobservable inputs for a model-derived valuation, the resulting
valuation would be classified in Level 3.The Company has classified derivative assets as other noncurrent assets and derivative
liabilities as other noncurrent liabilities on the consolidated balance sheet. The fair
values represent quoted prices from a financial institution. Derivative assets relate to the
interest rate cap for which the Company paid $0.2 million upon entering into the agreement.
At June 30, 2009, the fair value of the asset was insignificant. Derivative liabilities
relate to the interest rate swap, which had a fair value of $0.8 million at June 30, 2009.The following table below categorizes the fair value changes in the derivative agreements
during the current period (in thousands):
 Effective portion of loss oninterest rate contracts duringEffective portion of gain on
    
    Ineffective portion of loss on
    
    Total change in fair
    
    term of hedging relationshipinterest rate contracts
    
    interest rate contracts
    
    value of interest rate
    
    reclassed into interest expenseincluded in AOCI
    
    included in interest expense
    
    contracts
    
    during the current period$114
    
    $1
    
    $113
    
    $209
  16




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##### Table of Contents



ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
  Caution Concerning Forward-Looking Statements
   Overview
 PBM Business
      13




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##### Table of Contents



HCIT Business
   Operating Expenses
  Industry
       14




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##### Table of Contents



Competitive Strengths
  Flexible, Customized and Independent Services.
 Information-Based Cost-Containment Methods.
 Selected financial highlights for the three and six months ended June 30, 2009 compared to the same
periods in 2008
 NMHC Acquisition
    
    
    Total revenue in 2009 was $320.8 million as compared to $227.8 million in 2008. The
increase is largely attributable to an $89.0 million increase in the Companys new PBM
segment which included a full three months of activity in the second quarter of 2009 as
compared to only two months of activity for the second quarter of 2008. Revenue from the
PBM segment is a result of the acquisition of NMHC in April 2008.
    
    The Company reported net income of $12.0 million, or $0.47 per share (fully-diluted),
for the three months ended June 30, 2009, compared to $3.3 million, or $0.14 per share
(fully-diluted), for the same period in 2008. The increase is related to higher gross
profit and control over SG&A costs, partially offset by increases in interest expense and
income taxes.
  
    
    Total revenue in 2009 was $611.8 million as compared to $252.1 million in 2008. The
increase is largely attributable to the acquisition of NMHC and the inclusion of a full six
months of revenue from the Companys new PBM segment for the six months ended June 30, 2009
as compared to only two months for the same period last year.
    
    The Company reported net income of $19.7 million, or $0.79 per share (fully-diluted),
for the six months ended June 30, 2009 compared to $6.6 million, or $0.29 per share
(fully-diluted), for the same period in 2008. The 2009 period included $5.2 million of
expense related to the amortization of intangible assets compared to $2.8 million in the
2008 period. The increase is related to higher gross profit and control over SG&A costs,
partially offset by increases in interest expense and income taxes.
  15




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##### Table of Contents



Results of Operations
 Three months ended June 30, 2009 as compared to the three months ended June 30, 2008
 Three months ended June 30,In thousands, except per share data
    
    2009
    
    
    2008Revenue
    
    $
    320,829
    
    
    $
    227,755Gross profit
    
    
    47,211
    
    
    
    29,840Product development costs
    
    
    3,027
    
    
    
    2,480SG&A
    
    
    21,907
    
    
    
    19,557Depreciation of property and equipment
    
    
    1,405
    
    
    
    1,433Amortization of inangible assets
    
    
    2,415
    
    
    
    2,432Interest expense, net
    
    
    979
    
    
    
    116Other expense (income), net
    
    
    283
    
    
    
    29Income before income taxes
    
    
    17,195
    
    
    
    3,793Income tax expense
    
    
    5,218
    
    
    
    526Net income
    
    $
    11,977
    
    
    $
    3,267Diluted earnings per share
    
    $
    0.47
    
    
    $
    0.14
 Revenue
  Cost of Revenue
  Gross Profit
  Product Development Costs
  SG&A Costs
   Depreciation
  Amortization
  Interest Income and Expense
   16




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##### Table of Contents



Income Taxes
  Net Income
  Segment Analysis
  PBM
    
    
    HCIT
    
    
    Consolidated2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue
    
    $
    293,906
    
    
    $
    204,860
    
    
    $
    26,923
    
    
    $
    22,895
    
    
    $
    320,829
    
    
    $
    227,755Gross profit
    
    $
    34,530
    
    
    $
    16,814
    
    
    $
    12,681
    
    
    $
    13,026
    
    
    $
    47,211
    
    
    $
    29,840Gross profit %
    
    
    11.7
    %
    
    
    8.2
    %
    
    
    47.1
    %
    
    
    56.9
    %
    
    
    14.7
    %
    
    
    13.1
    %
 PBM
     HCIT
  2009
    
    
    2008RecurringTransaction processing
    
    $
    15,663
    
    
    $
    11,888Maintenance
    
    
    4,477
    
    
    
    4,130Total recurring
    
    
    20,140
    
    
    
    16,018Non-RecurringProfessional services
    
    
    3,801
    
    
    
    3,066System sales
    
    
    2,982
    
    
    
    3,811Total non-recurring
    
    
    6,783
    
    
    
    6,877Total revenue
    
    $
    26,923
    
    
    $
    22,895
   17




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##### Table of Contents



Recurring Revenue :
   Non-Recurring Revenue:
   Cost of Revenue:
  Gross Profit:
 Six months ended June 30, 2009 as compared to the six months ended June 30, 2008
 Six months ended June 30,In thousands, except per share data
    
    2009
    
    
    2008Revenue
    
    $
    611,789
    
    
    $
    252,072Gross profit
    
    
    86,395
    
    
    
    43,320Product development costs
    
    
    6,190
    
    
    
    4,939SG&A
    
    
    42,704
    
    
    
    25,428Depreciation of property and equipment
    
    
    2,887
    
    
    
    2,194Amortization of inangible assets
    
    
    5,240
    
    
    
    2,828Interest expense (income), net
    
    
    1,689
    
    
    
    (903
    )Other expense (income), net
    
    
    (42
    )
    
    
    35Income before income taxes
    
    
    27,727
    
    
    
    8,799Income tax expense
    
    
    8,068
    
    
    
    2,175Net income
    
    $
    19,659
    
    
    $
    6,624Diluted earnings per share
    
    $
    0.79
    
    
    $
    0.29
 Revenue
  Cost of Revenue
  Gross Profit
   18




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##### Table of Contents



Product Development Costs
   SG&A Costs
   Depreciation
  Amortization
  Interest Income and Expense
  Income Taxes
  Net Income
  Segment Analysis
  PBM
    
    
    HCIT
    
    
    Consolidated2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue
    
    $
    561,686
    
    
    $
    204,860
    
    
    $
    50,103
    
    
    $
    47,212
    
    
    $
    611,789
    
    
    $
    252,072Gross profit
    
    $
    63,312
    
    
    $
    16,814
    
    
    $
    23,083
    
    
    $
    26,506
    
    
    $
    86,395
    
    
    $
    43,320Gross profit %
    
    
    11.3
    %
    
    
    8.2
    %
    
    
    46.1
    %
    
    
    56.1
    %
    
    
    14.1
    %
    
    
    17.2
    %
 PBM
     19




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##### Table of Contents



HCIT
  2009
    
    
    2008RecurringTransaction processing
    
    $
    29,390
    
    
    $
    26,536Maintenance
    
    
    8,951
    
    
    
    8,340Total recurring
    
    
    38,341
    
    
    
    34,876Non-RecurringProfessional services
    
    
    7,443
    
    
    
    6,857System sales
    
    
    4,319
    
    
    
    5,479Total non-recurring
    
    
    11,762
    
    
    
    12,336Total revenue
    
    $
    50,103
    
    
    $
    47,212
  Recurring Revenue :
   Non-Recurring Revenue:
   Cost of Revenue:
  Gross Profit:
 Liquidity and Capital Resources
    20




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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 $14.1 million relates to cash balances required to be
maintained in accordance with various state statutes, contractual terms with customers
and other customer restrictions related to the PBM business. The Company continues to
monitor changes in balance requirements that may release restrictions and allow the
funds to be used for general corporate purposes.

    
    Rebates receivable of $22.5 million relate to billed and unbilled PBM receivables
from pharmaceutical manufacturers in connection with the administration of the rebate
program where the Company is the principal contracting party. The receivable and
related payables are based on estimates, which are subject to final settlement.
Rebates receivable decreased $7.1 million from $29.6 million at December 31, 2008, due
primarily to improved collections of rebates.

    
    Prepaid expenses and other assets increased $1.2 million to $5.6 million at June 30,
2009 compared to $4.4 million at December 31, 2008, due primarily to the renewal of the
Companys corporate insurance policies in the second quarter of 2009 which expire in
2010.

    
    The Companys inventory balance of $6.1 million consists predominately of
prescription drugs and medical supplies at its Mail Service and Specialty Service
pharmacies. Changes in the inventory balance from period to period are caused by some
seasonality in certain products, taking advantage of buying opportunities and changing
inventory levels to properly support sales.

    
    Other assets of $1.3 million consist primarily of security deposits related to the
Companys inventory facilities.

    
    Customer deposits payable of $12.6 million relate to deposits required by the
Company from certain customers in order to satisfy liabilities incurred on the
customers behalf for the adjudication of pharmacy claims, and is related to the
restricted cash balances outlined above.

    
    Total long-term debt decreased $1.3 million to $46.3 million at June 30, 2009 from
$47.6 million at December 31, 2008 due to quarterly installment payments made in 2009.

    
    Accrued liabilities decreased $6.2 million to $25.8 million at June 30, 2009 from
$32.0 million at December 31, 2008 due primarily to final adjustments made to the fair
values of assumed liabilities related to the NMHC acquisition. In addition, the
decrease is due to payments on previously recorded liabilities related to the NMHC
acquisition.
  21




---



##### Table of Contents



Cash flows from operating activities:
      Cash flows from investing activities
    Cash flows from financing activities
    Future Capital Requirements
     22




---



##### Table of Contents



Contingencies
    Contractual Obligations
  Outstanding Securities
  Critical Accounting Estimates
  Recent Accounting Standards
 FASB Statement No. 165
 Subsequent Events
 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
  23




---



##### 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
  
 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
   24




---



##### Table of Contents



Nominee
    
    For
    
    WithheldTerrence C. Burke
    
    
    21,723,278
    
    
    
    61,955William J. Davis
    
    
    21,723,278
    
    
    
    61,955Philip R. Reddon
    
    
    21,723,278
    
    
    
    61,955Mark A. Thierer
    
    
    21,723,278
    
    
    
    61,955Steven Cosler
    
    
    21,723,278
    
    
    
    61,955Curtis Thorne
    
    
    21,723,278
    
    
    
    61,955Anthony Masso
    
    
    21,723,278
    
    
    
    61,955
   For
    
    Withheld21,587,491
    
    197,743
 
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
 ExhibitNumber
    
    Description of Document
    
    Reference10.1
    
    SXC Health Solutions Corp. Long-Term Incentive Plan
    
    Incorporated by
reference to
Exhibit 10.1 to SXC
Health Solutions
Corp.s Current
Report on Form 8-K
filed on May 19,
2009.10.2
    
    Form of SXC Health Solutions Corp. Stock Option
Agreement for certain Employees under the SXC Health
Solutions Corp. Long-Term Incentive Plan
    
    Filed herewith10.3
    
    Form of SXC Health Solutions Corp. Time-Vesting
Restricted Stock Unit Award Agreement for certain
Employees under the SXC Health Solutions Corp.
Long-Term Incentive Plan
    
    Filed herewith10.4
    
    Form of SXC Health Solutions Corp. Time-Vesting
Restricted Stock Unit Award Agreement for
Non-Employee Directors under the SXC Health
Solutions Corp. Long-Term Incentive Plan
    
    Filed herewith10.5
    
    Form of SXC Health Solutions Corp. Performance-Based
Restricted Stock Unit Award Agreement for certain
Employees under the SXC Health Solutions Corp.
Long-Term Incentive Plan
    
    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
  25




---



##### Table of Contents



SIGNATURE
  SXC Health Solutions Corp.August 6, 2009
    By:
    /s/ Jeffrey ParkJeffrey ParkChief Financial Officer
(on behalf of the registrant and
as Chief Accounting Officer)  26




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Document
    
    Reference10.1
    
    SXC Health Solutions Corp. Long-Term Incentive Plan
    
    Incorporated by
reference to
Exhibit 10.1 to SXC
Health Solutions
Corp.s Current
Report on Form 8-K
filed on May 19,
2009.10.2
    
    Form of SXC Health Solutions Corp. Stock Option
Agreement for certain Employees under the SXC Health
Solutions Corp. Long-Term Incentive Plan
    
    Filed herewith10.3
    
    Form of SXC Health Solutions Corp. Time-Vesting
Restricted Stock Unit Award Agreement for certain
Employees under the SXC Health Solutions Corp.
Long-Term Incentive Plan
    
    Filed herewith10.4
    
    Form of SXC Health Solutions Corp. Time-Vesting
Restricted Stock Unit Award Agreement for
Non-Employee Directors under the SXC Health
Solutions Corp. Long-Term Incentive Plan
    
    Filed herewith10.5
    
    Form of SXC Health Solutions Corp. Performance-Based
Restricted Stock Unit Award Agreement for certain
Employees under the SXC Health Solutions Corp.
Long-Term Incentive Plan
    
    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
  27