##### 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 1934For the quarterly period ended June 30, 2010ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to .
 Commission file number: 000-52073
 
 SXC HEALTH SOLUTIONS CORP.
 (Exact name of registrant as specified in its charter)
 
 Yukon Territory
    
    75-2578509(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 2441 Warrenville Road, Suite 610, Lisle, IL 60532-3642
(Address of principal executive offices, zip code)
 (800) 282-3232
(Registrants phone number, including area code)
 
 þ o
 o 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, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009
    
    
    4Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30,
2010 and 2009
    
    
    5Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009
    
    
    6Consolidated Statements of Shareholders Equity for the Six Months Ended June 30, 2010 and 2009
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23PART 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. Reserved
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    24SIGNATURE
    
    
    25Exhibit 10.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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##### Table of Contents



Part I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Balance Sheets
 (in thousands, except share data)
 June 30,
    
    
    December 31,2010
    
    
    2009(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    352,624
    
    
    $
    304,370Restricted cash
    
    
    14,321
    
    
    
    14,169Short term investments
    
    
    
    
    
    
    4,639Accounts receivable, net of allowance for doubtful accounts of
$3,363 (2009  $2,871)
    
    
    103,938
    
    
    
    97,330Rebates receivable
    
    
    34,931
    
    
    
    17,630Prepaid expenses and other assets
    
    
    6,053
    
    
    
    4,483Inventory
    
    
    8,228
    
    
    
    7,451Deferred income taxes
    
    
    6,358
    
    
    
    9,875Total current assets
    
    
    526,453
    
    
    
    459,947Property and equipment, net of accumulated depreciation of
$31,655 (2009  $27,421)
    
    
    19,171
    
    
    
    19,880Goodwill
    
    
    141,787
    
    
    
    141,787Other intangible assets, net of accumulated amortization of $27,804
(2009  $23,831)
    
    
    33,601
    
    
    
    37,574Deferred income taxes
    
    
    1,294
    
    
    
    1,641Other assets
    
    
    252
    
    
    
    1,251Total assets
    
    $
    722,558
    
    
    $
    662,080LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    8,227
    
    
    $
    9,916Customer deposits
    
    
    15,372
    
    
    
    14,832Salaries and wages payable
    
    
    9,343
    
    
    
    12,349Accrued liabilities
    
    
    23,792
    
    
    
    30,786Pharmacy benefit management rebates payable
    
    
    59,570
    
    
    
    46,606Pharmacy benefit claim payments payable
    
    
    72,915
    
    
    
    61,669Deferred revenue
    
    
    10,435
    
    
    
    7,304Total current liabilities
    
    
    199,654
    
    
    
    183,462Deferred income taxes
    
    
    13,676
    
    
    
    13,597Deferred lease inducements
    
    
    2,511
    
    
    
    2,748Deferred rent
    
    
    1,336
    
    
    
    1,337Other liabilities
    
    
    1,753
    
    
    
    2,442Total liabilities
    
    
    218,930
    
    
    
    203,586Commitments and contingencies (Note 10)Shareholders equityCommon shares: no par value, unlimited shares authorized;
30,402,790 shares issued and outstanding at June 30, 2010
(December 31, 2009  30,057,281 shares)
    
    
    369,869
    
    
    
    361,530Additional paid-in capital
    
    
    20,010
    
    
    
    15,153Retained earnings
    
    
    113,749
    
    
    
    81,812Accumulated other comprehensive loss
    
    
    
    
    
    
    (1
    )Total shareholders equity
    
    
    503,628
    
    
    
    458,494Total liabilities and shareholders equity
    
    $
    722,558
    
    
    $
    662,080
 See accompanying notes to the unaudited consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Operations
 (in thousands, except share and per share data)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(unaudited)
    
    
    (unaudited)Revenue:PBM
    
    $
    451,295
    
    
    $
    293,906
    
    
    $
    878,797
    
    
    $
    561,686HCIT
    
    
    28,151
    
    
    
    26,923
    
    
    
    52,797
    
    
    
    50,103Total revenue
    
    
    479,446
    
    
    
    320,829
    
    
    
    931,594
    
    
    
    611,789Cost of revenue:PBM
    
    
    412,681
    
    
    
    259,376
    
    
    
    801,847
    
    
    
    498,374HCIT
    
    
    13,026
    
    
    
    14,242
    
    
    
    25,780
    
    
    
    27,020Total cost of revenue
    
    
    425,707
    
    
    
    273,618
    
    
    
    827,627
    
    
    
    525,394Gross profit
    
    
    53,739
    
    
    
    47,211
    
    
    
    103,967
    
    
    
    86,395Expenses:Product development costs
    
    
    3,021
    
    
    
    3,027
    
    
    
    6,094
    
    
    
    6,190Selling, general and administrative
    
    
    21,486
    
    
    
    21,907
    
    
    
    42,792
    
    
    
    42,704Depreciation of property and equipment
    
    
    1,537
    
    
    
    1,405
    
    
    
    3,019
    
    
    
    2,887Amortization of intangible assets
    
    
    1,978
    
    
    
    2,415
    
    
    
    3,973
    
    
    
    5,24028,022
    
    
    
    28,754
    
    
    
    55,878
    
    
    
    57,021Operating income
    
    
    25,717
    
    
    
    18,457
    
    
    
    48,089
    
    
    
    29,374Interest income
    
    
    (175
    )
    
    
    (225
    )
    
    
    (324
    )
    
    
    (471
    )Interest expense
    
    
    318
    
    
    
    1,204
    
    
    
    712
    
    
    
    2,160Net interest expense
    
    
    143
    
    
    
    979
    
    
    
    388
    
    
    
    1,689Other expense (income), net
    
    
    60
    
    
    
    283
    
    
    
    259
    
    
    
    (42
    )Income before income taxes
    
    
    25,514
    
    
    
    17,195
    
    
    
    47,442
    
    
    
    27,727Income tax expense:Current
    
    
    7,209
    
    
    
    4,403
    
    
    
    12,738
    
    
    
    6,604Deferred
    
    
    1,160
    
    
    
    815
    
    
    
    2,767
    
    
    
    1,4648,369
    
    
    
    5,218
    
    
    
    15,505
    
    
    
    8,068Net income
    
    $
    17,145
    
    
    $
    11,977
    
    
    $
    31,937
    
    
    $
    19,659Earnings per share:Basic
    
    $
    0.56
    
    
    $
    0.49
    
    
    $
    1.06
    
    
    $
    0.81Diluted
    
    $
    0.55
    
    
    $
    0.47
    
    
    $
    1.02
    
    
    $
    0.79Weighted average number of shares used
in computing earnings per share:Basic
    
    
    30,346,466
    
    
    
    24,638,986
    
    
    
    30,220,682
    
    
    
    24,417,241Diluted
    
    
    31,389,017
    
    
    
    25,270,639
    
    
    
    31,200,704
    
    
    
    25,001,382
 See accompanying notes to the unaudited 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 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(unaudited)
    
    
    (unaudited)Net income
    
    $
    17,145
    
    
    $
    11,977
    
    
    $
    31,937
    
    
    $
    19,659Other comprehensive income, net of taxUnrealized gain on cash flow hedges and other (net of income
tax expense of $29 for the three months ended June 30, 2009
and $1 and $38 for the six months ended June 30, 2010 and
2009, respectively)
    
    
    
    
    
    
    47
    
    
    
    1
    
    
    
    76Comprehensive income
    
    $
    17,145
    
    
    $
    12,024
    
    
    $
    31,938
    
    
    $
    19,735
 See accompanying notes to the unaudited consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Cash Flows
 (in thousands)
 Six Months Ended June 30,2010
    
    
    2009(unaudited)Cash flows from operating activities:Net income
    
    $
    31,937
    
    
    $
    19,659Items not involving cash:Stock-based compensation
    
    
    2,881
    
    
    
    1,430Depreciation of property and equipment
    
    
    4,235
    
    
    
    3,944Amortization of intangible assets
    
    
    3,973
    
    
    
    5,240Deferred lease inducements and rent
    
    
    (238
    )
    
    
    (369
    )Deferred income taxes
    
    
    2,767
    
    
    
    1,464Tax benefit on stock-based compensation plans
    
    
    (5,588
    )
    
    
    (2,106
    )Changes in operating assets and liabilities, net of effects from acquisitions:Accounts receivable
    
    
    (6,624
    )
    
    
    (374
    )Rebates receivable
    
    
    (17,301
    )
    
    
    7,074Restricted cash
    
    
    (152
    )
    
    
    (1,637
    )Prepaid expenses and other assets
    
    
    (1,571
    )
    
    
    (1,164
    )Inventory
    
    
    (1,122
    )
    
    
    597Income tax recoverable
    
    
    7,108
    
    
    
    2,238Accounts payable
    
    
    (1,685
    )
    
    
    84Accrued liabilities
    
    
    (10,696
    )
    
    
    (6,016
    )Pharmacy benefit claim payments payable
    
    
    11,246
    
    
    
    (9,466
    )Pharmacy benefit management rebates payable
    
    
    12,964
    
    
    
    9,530Deferred revenue
    
    
    3,107
    
    
    
    472Customer deposits
    
    
    540
    
    
    
    772Other
    
    
    1,020
    
    
    
    308Net cash provided by operating activities
    
    
    36,801
    
    
    
    31,680Cash flows from investing activities:Purchases of property and equipment
    
    
    (3,526
    )
    
    
    (5,746
    )Sales of short term investments
    
    
    6,828
    
    
    
    Purchases of short term investments
    
    
    (2,208
    )
    
    
    Acquisitions, net of cash acquired
    
    
    
    
    
    
    (2,176
    )Net cash provided (used) by investing activities
    
    
    1,094
    
    
    
    (7,922
    )Cash flows from financing activities:Proceeds from exercise of options
    
    
    4,727
    
    
    
    4,349Tax benefit on stock-based compensation plans
    
    
    5,588
    
    
    
    2,106Repayment of long-term debt
    
    
    
    
    
    
    (1,320
    )Net cash provided by financing activities
    
    
    10,315
    
    
    
    5,135Effect of foreign exchange on cash balances
    
    
    44
    
    
    
    26Increase in cash and cash equivalents
    
    
    48,254
    
    
    
    28,919Cash and cash equivalents, beginning of period
    
    
    304,370
    
    
    
    67,715Cash and cash equivalents, end of period
    
    $
    352,624
    
    
    $
    96,634
 See accompanying notes to unaudited consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Shareholders Equity
 (in thousands, except share data)
 Common Shares
    
    
    Additional
    
    
    Retained
    
    
    Accumulated OtherShares
    
    
    Amount
    
    
    Paid-in Capital
    
    
    Earnings
    
    
    Comprehensive Loss
    
    
    TotalBalance at December 31, 2009
    
    
    30,057,281
    
    
    $
    361,530
    
    
    $
    15,153
    
    
    $
    81,812
    
    
    $
    (1
    )
    
    $
    458,494Activity during the period (unaudited):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,937
    
    
    
    
    
    
    
    31,937Exercise of stock options
    
    
    322,780
    
    
    
    6,719
    
    
    
    (1,992
    )
    
    
    
    
    
    
    
    
    
    
    4,727Vesting of restricted stock units
    
    
    22,729
    
    
    
    1,620
    
    
    
    (1,620
    )
    
    
    
    
    
    
    
    
    
    
    -Tax benefit on options exercised
    
    
    
    
    
    
    
    
    
    
    5,588
    
    
    
    
    
    
    
    
    
    
    
    5,588Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    2,881
    
    
    
    
    
    
    
    
    
    
    
    2,881Other comprehensive income, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Balance at June 30, 2010 (unaudited)
    
    
    30,402,790
    
    
    $
    369,869
    
    
    $
    20,010
    
    
    $
    113,749
    
    
    $
    
    
    
    $
    503,628Balance at December 31, 2008
    
    
    24,103,032
    
    
    $
    146,988
    
    
    $
    11,854
    
    
    $
    35,751
    
    
    $
    (430
    )
    
    $
    194,163Activity during the period (unaudited):
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,659
    
    
    
    
    
    
    
    19,659Issuance of shares for acquisition
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    533,562
    
    
    
    6,284
    
    
    
    (1,935
    )
    
    
    
    
    
    
    
    
    
    
    4,349Vesting 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, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76
    
    
    
    76Balance at June 30, 2009 (unaudited)
    
    
    24,639,093
    
    
    $
    153,320
    
    
    $
    13,407
    
    
    $
    55,410
    
    
    $
    (354
    )
    
    $
    221,783
 See accompanying notes to the unaudited consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    Description of 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 PBM services, software applications, application service provider (ASP)
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. The Company trades on the Toronto Stock Exchange under
ticker symbol SXC and on the Nasdaq Global Market under ticker symbol SXCI. For more
information please visit www.sxc.com.
 2.
    
    Basis of Presentation
 Basis of presentation:
 The unaudited interim consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States (U.S. GAAP),
pursuant to the Securities and Exchange Commissions (SEC) rules and regulations for
reporting on Form 10-Q, and following accounting policies consistent with the Companys
audited annual consolidated financial statements for the year ended December 31, 2009. The
unaudited interim consolidated financial statements of the Company include its majority-owned
subsidiaries and all significant intercompany transactions and balances have been eliminated
in consolidation. Amounts in the unaudited interim consolidated financial statements and
notes thereto are expressed in the Companys functional currency, U.S. dollars, except where
indicated. 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, 2010 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2010. As of the issuance date of
the Companys financial statements, no subsequent events have occurred that would require
adjustment to or disclosure in these unaudited interim consolidated financial statements in
accordance with Financial Accounting Standards Boards (FASB) guidance.
 Pursuant to the SEC rules and regulations for reporting on Form 10-Q, certain information and
note disclosures normally included in the annual financial statements prepared in accordance
with U.S. GAAP have been condensed or excluded. As a result, these unaudited interim
consolidated financial statements do not contain all the disclosures required to be included
in the annual consolidated financial statements and should be read in conjunction with the
most recent audited annual consolidated financial statements and notes thereto for the year
ended December 31, 2009.
 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
 Recent accounting standards implemented are summarized below:Revenue arrangements with multiple deliverables
 Effective January 1, 2010, the Company adopted the amendment to revenue recognition guidance
for transactions with multiple deliverables. The updated accounting guidance changes the
criteria necessary for a delivered item to be considered a separate element by removing the
requirement of using objective and reliable evidence of fair value in determining the amount
of revenue to recognize. In place of having objective and reliable evidence of fair value for
delivered and undelivered elements, a company may use its best estimate of selling price to
determine the amount of revenue to recognize. The new guidance did not have a material impact
on the Companys financial results.Revenue arrangements that include software elements
 Effective January 1, 2010, the Company adopted the amended revenue recognition guidance for
transactions involving tangible products that have software components. The new accounting
guidance removes the non-software components and software elements of the tangible product
from the scope of software revenue recognition accounting guidance. The new guidance did not
have a material impact on the Companys financial results.
  8




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4.
    
    Cash and Cash Equivalents
 The components of cash and cash equivalents are as follows (in thousands):
 June 30, 2010
    
    
    December 31, 2009Cash on deposit
    
    $
    411,361
    
    
    $
    86,384Payments in transit
    
    
    (58,756
    )
    
    
    (87,500
    )U.S. money market funds
    
    
    
    
    
    
    305,453Canadian dollar deposits (June 30, 2010  Cdn. $20 at 1.0484
    
    
    19
    
    
    
    33December 31, 2009  Cdn. $35 at 1.0517)
    
    $
    352,624
    
    
    $
    304,370
 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, accordingly these instruments are considered Level 1 investments in the fair
value hierarchy.
 5.
    
    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 three or six months ended June 30, 2010 and 2009.
 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, 2010
    
    
    December 31, 2009Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    53,760
    
    
    $
    21,805
    
    
    $
    31,955
    
    
    $
    53,760
    
    
    $
    18,116
    
    
    $
    35,644Acquired software
    
    
    3,765
    
    
    
    3,145
    
    
    
    620
    
    
    
    3,765
    
    
    
    2,932
    
    
    
    833Trademarks/Trade names
    
    
    1,370
    
    
    
    1,222
    
    
    
    148
    
    
    
    1,370
    
    
    
    1,188
    
    
    
    182Non-compete agreements
    
    
    1,510
    
    
    
    1,488
    
    
    
    22
    
    
    
    1,510
    
    
    
    1,484
    
    
    
    26Licenses
    
    
    1,000
    
    
    
    144
    
    
    
    856
    
    
    
    1,000
    
    
    
    111
    
    
    
    889Total
    
    $
    61,405
    
    
    $
    27,804
    
    
    $
    33,601
    
    
    $
    61,405
    
    
    $
    23,831
    
    
    $
    37,574
 Amortization associated with intangible assets at June 30, 2010 is estimated to be $3.9
million for the remainder of 2010, $7.1 million in 2011, $6.5 million in 2012, $5.7 million in
2013, $5.2 million in 2014, and $5.2 million in total for years after 2014.
 6.
    
    Shareholders equity
 (a)
    
    Stock incentive plans:Effective on March 11, 2009, the Board of Directors of the Company adopted the SXC Health
Solutions Corp. Long-Term Incentive Plan (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
previous stock option plan, and no further grants or awards will be issued under the
previous stock option plan. The LTIP provides for a maximum of 1,070,000 common shares of
the Company to be issued in addition to the common shares that remained available for
issuance under the previous stock option plan.There were 1,261,650 stock options outstanding as of June 30, 2010 issued under the LTIP or
the Companys previous stock option plan.(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 to require the common shares
available for purchase under the ESPP to be drawn from reacquired common shares purchased
on behalf of the Company in the open market. During the six months ended June 30, 2010 and
2009, there were 2,043 and 3,720 shares issued under the ESPP, respectively.The ESPP is not considered compensatory as its purchase discount is not greater than 5%,
the plan is available to substantially all employees, and the plan does not incorporate
option features. Accordingly, no portion of the cost related to ESPP purchases is
included in the Companys stock-based compensation expense.
  9




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##### Table of Contents



(c)
    
    Outstanding shares and stock options:At June 30, 2010, the Company had outstanding common shares of 30,402,790 and stock options
outstanding of 1,261,650. At December 31, 2009, the Company had outstanding common shares
of 30,057,281 and stock options outstanding of 1,532,664. As of June 30, 2010, stock
options outstanding consisted of 259,781 options at a weighted-average exercise price of
Canadian $11.67 and 1,001,869 options at a weighted-average exercise price of U.S. $22.03.(d)
    
    Restricted stock units:During the six months ended June 30, 2010, the Company granted 58,860 time-based restricted
stock units (RSUs) and 44,440 performance based RSUs to its employees and non-employee
directors with a weighted average grant date fair value of $60.70 per share. At June 30,
2010, there were 177,616 time-based RSUs and 114,710 performance-based RSUs outstanding.Time-based RSUs vest on a straight-line basis over a range of three to four years and
performance-based RSUs cliff vest based upon reaching agreed upon three-year performance
conditions.
 7.
    
    Stock-based compensation
 During the six-month periods ended June 30, 2010 and 2009, the Company recorded stock-based
compensation expense of $2.9 million and $1.4 million, respectively. The Black-Scholes
option-pricing model was used to estimate the fair value of the stock options at the grant
date based on the following assumptions:
 Six months ended June 30,2010
    
    
    2009Total stock options granted
    
    
    69,340
    
    
    
    184,107Volatility
    
    
    48.0-48.5
    %
    
    
    47.1-47.2
    %Risk-free interest rate
    
    
    2.07-2.39
    %
    
    
    1.96-2.56
    %Expected life
    
    4.5 years
    
    
    4.5 yearsDividend yield
    
    
    
    
    
    
    Weighted-average grant date fair value
    
    $
    25.93
    
    
    $
    10.67
 8.
    
    Segment information
 The Company reports in two operating segments: PBM and HCIT. The Company evaluates segment
performance based upon revenue and gross profit. Financial information by segment is
presented below (in thousands):
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009PBM:Revenues
    
    $
    451,295
    
    
    $
    293,906
    
    
    $
    878,797
    
    
    $
    561,686Cost of revenue
    
    
    412,681
    
    
    
    259,376
    
    
    
    801,847
    
    
    
    498,374Gross profit
    
    $
    38,614
    
    
    $
    34,530
    
    
    $
    76,950
    
    
    $
    63,312Total assets at June 30
    
    $
    473,046
    
    
    $
    300,169HCIT:Revenues
    
    $
    28,151
    
    
    $
    26,923
    
    
    $
    52,797
    
    
    $
    50,103Cost of revenue
    
    
    13,026
    
    
    
    14,242
    
    
    
    25,780
    
    
    
    27,020Gross profit
    
    $
    15,125
    
    
    $
    12,681
    
    
    $
    27,017
    
    
    $
    23,083Total assets at June 30
    
    $
    249,512
    
    
    $
    146,466Consolidated:Revenues
    
    $
    479,446
    
    
    $
    320,829
    
    
    $
    931,594
    
    
    $
    611,789Cost of revenue
    
    
    425,707
    
    
    
    273,618
    
    
    
    827,627
    
    
    
    525,394Gross profit
    
    $
    53,739
    
    
    $
    47,211
    
    
    $
    103,967
    
    
    $
    86,395Total assets at June 30
    
    $
    722,558
    
    
    $
    446,635
 For the three and six-month periods ended June 30, 2010, no one customer accounted for 10%
or more of total revenues. For the three-month period ended June 30, 2009, one customer
accounted for 14.2% of total revenues. For the six-month period ended June 30, 2009, one
customer accounted for 14.7% of total revenues.
 At June 30, 2010 and December 31, 2009, no one customer accounted for 10% or more of the
outstanding accounts receivable balance.
 9.
    
    Income Taxes
 The Companys effective tax rate for the three months ended June 30, 2010 and 2009 was
32.8% and 30.3%, respectively. The Companys effective tax rate for the six months ended June
30, 2010 and 2009 was 32.7% and 29.1%, respectively. The effective tax rate increased during
the three and six months ended June 30, 2010 compared to the same periods in 2009, primarily
due to the difference in the proportion of overall income among jurisdictions.
  10




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The Company and its subsidiaries file income tax returns in Canadian and U.S. federal
jurisdictions, and various provincial, state and local jurisdictions. With a few exceptions,
the Company is no longer subject to tax examinations by tax authorities for years prior to
2005.
 10.
    
    Commitments and 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, 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 potential indemnification liability cannot be reasonably estimated due to its
uncertain nature. Historically, the Company has not made payments related to these
indemnification provisions.
 11.
    
    Derivative Instruments and Fair Value
 The Company used variable rate debt to assist in financing its acquisition of National Medical
Health Card Systems, Inc. (NMHC) in 2008. Prior to extinguishing the variable rate debt in
December 2009, the Company was subject to interest rate risk related to the variable rate
debt. When interest rates increased, interest expense could increase. Conversely, when
interest rates decreased, interest expense could also decrease.
 In order to manage fluctuations in cash flows resulting from interest rate risk attributable
to changes in the benchmark interest rates 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 variable London Inter-Bank Offered Rate
(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. 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. Additionally, the Company
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. These interest rate contract derivative instruments were designated as cash flow hedges
during 2008. After the Company repaid all of its long-term debt in the fourth quarter of
2009, the cash flow hedge treatment was discontinued as the future transactions that the
interest rate contracts were hedging were no longer probable of occurring.
 As of June 30, 2010, the interest rate contract 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. The Company does not anticipate the instruments coming out
of the money prior to their expiration in 2011. 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. 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.
  11




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Accounting guidance for fair value measurements 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 sheets, the table below
categorizes fair value measurements across the three levels as of June 30, 2010 and December
31, 2009 (in thousands):
 June 30, 2010Quoted Prices in
    
    
    Significant Observable
    
    
    SignificantActive Markets
    
    
    Inputs
    
    
    Unobservable Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalLiabilities:Interest Rate Contract Derivatives
    
    $
    
    
    
    $
    507
    
    
    $
    
    
    
    $
    507
 December 31, 2009Quoted Prices in
    
    
    Significant Observable
    
    
    SignificantActive Markets
    
    
    Inputs
    
    
    Unobservable Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssets:Corporate debt securities
    
    $
    
    
    
    $
    2,490
    
    
    $
    
    
    
    $
    2,490Other short term investments
    
    $
    
    
    
    $
    2,149
    
    
    $
    
    
    
    $
    2,149Liabilities:Interest Rate Contract Derivatives
    
    $
    
    
    
    $
    695
    
    
    $
    
    
    
    $
    695
 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
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 liabilities on the consolidated balance sheets within
accrued liabilities at June 30, 2010, and as other noncurrent liabilities at December 31,
2009. The interest rate contract derivatives fair values are derived from calculations using
observable interest rate inputs from a financial institution. The notional amounts of the
interest rate contracts are noted previously in this footnote. The total fair value
adjustment for the interest rate contract derivatives was insignificant for the three months
ended June 30, 2010, and $0.1 million for the six months ended June 30, 2010. The fair value
adjustments were recognized as other expense in the consolidated statements of operations.
Prior to December 2009, the Company was still applying hedge accounting to the interest rate
contract derivatives, and accordingly reclassified $0.1 and $0.2 million during the three and
six months ended June 30, 2009, respectively, into interest expense from accumulated other
comprehensive income for the effective portion of the loss on the interest rate contracts.
 The corporate debt securities are recorded in short-term investments in the consolidated
balance sheet at December 31, 2009; the Company does not hold any corporate debt securities as
of June 30, 2010. The fair values of these securities were based on quoted market prices for
the specific securities held based on a matrix of valuations received from several pricing
sources. Other short-term investments represent certificates of deposits and treasury bills
that mature in over 90 days. These are recorded in short-term investments in the consolidated
balance sheet at December 31, 2009; the Company does not hold these securities as of June 30,
2010. The fair values of the other short-term investments are based on quoted market prices
for the specific securities held based on a matrix of valuations received from several pricing
sources. The amortized cost for the debt securities and other short-term investments was $4.6
million as of December 31, 2009.
  12




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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
 Certain information in this MD&A, in various filings with regulators, in reports to shareholders
and in other communications is forward-looking within the meaning of certain securities laws and is
subject to important risks, uncertainties and assumptions. This forward-looking information
includes, amongst others, information with respect to the Companys objectives and the strategies
to achieve those objectives, as well as information with respect to the Companys beliefs, plans,
expectations, anticipations, estimates and intentions. There are a number of important factors that
could cause actual results to differ materially from those indicated by such forward-looking
statements. Such factors include, but may not be limited to, the ability of the Company to
adequately address: the risks associated with further market acceptance of the Companys products
and services; its ability to manage its growth effectively; its reliance on and ability to retain
key customers and key personnel; industry conditions such as consolidation of customers,
competitors and acquisition targets; the Companys ability to acquire a company and manage
integration and potential dilution associated therewith; the impact of technology changes on its
products/service offerings, including impact on the intellectual property rights of others; the
effects of regulatory and legislative changes in the healthcare industry; and the sufficiency and
fluctuations of its liquidity and capital needs.
 When relying on forward-looking information to make decisions, investors and others should
carefully consider the foregoing factors and other uncertainties and potential events. In making
the forward-looking statements contained in this MD&A, the Company does not assume any significant
acquisitions, dispositions or one-time items. It does assume, however, the renewal of certain
customer contracts. Every year, the Company has major customer contracts that come up for renewal.
In addition, the Company also assumes new customer contracts. In this regard, the Company is
pursuing large opportunities that present a very long and complex sales cycle which substantially
affects its forecasting abilities. The Company has assumed certain timing for the realization of
these opportunities which it thinks is reasonable but which may not be achieved. Furthermore, the
pursuit of these larger opportunities does not ensure a linear progression of revenue and earnings
since they may involve significant up-front costs followed by renewals and cancellations of
existing contracts. The Company has assumed certain revenues which may not be realized. The
Company has also assumed that the material factors referred to in the previous paragraph will not
cause such forward-looking information to differ materially from actual results or events. The
foregoing list of factors is not exhaustive and is subject to change and there can be no assurance
that such assumptions will reflect the actual outcome of such items or factors. For additional
information with respect to certain of these and other factors, refer to the Risk Factors section
contained in Item 1A of the Companys 2009 Annual Report on Form 10-K .
 THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS MD&A REPRESENTS THE COMPANYS CURRENT
EXPECTATIONS AND, ACCORDINGLY, IS SUBJECT TO CHANGE. HOWEVER, THE COMPANY EXPRESSLY DISCLAIMS ANY
INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING INFORMATION, WHETHER AS A RESULT OF
NEW INFORMATION, FUTURE EVENTS OR OTHERWISE, EXCEPT AS REQUIRED BY APPLICABLE LAW.
 Overview
 PBM Business
      13




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##### Table of Contents



HCIT Business
   Operating Expenses
  Industry Overview
       14




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##### Table of Contents



Competitive Strengths
  Flexible, customized and independent services:
  Leading technology and platform:
  Measurable cost savings for customers
 Selected financial highlights for the three and six months ended June 30, 2010 compared to the same
periods in 2009
  
    
    Total revenue in the three months ended June 30, 2010 was $479.4 million as compared to
$320.8 million for the same period in 2009. The increase is largely attributable to an
increase in PBM revenue of $157.4 million compared to the same period in 2009. PBM
revenues increased primarily due to growth in the customer base throughout 2010 and the
second half of 2009. The increased customer base was complemented by additional services
sold to existing customers.
 
    
    Operating income increased $7.2 million, or 39.3%, in the second quarter of 2010 to
$25.7 million as compared to $18.5 million for the same period in 2009. This increase was
driven by increased gross profits from operations coupled with a decrease in operating
expenses as compared to the same period in 2009.
 
    
    The Company reported net income of $17.1 million, or $0.55 per share (fully-diluted),
for the three months ended June 30, 2010, compared to $12.0 million, or $0.47 per share
(fully-diluted), for the same period in 2009. The increase is driven by higher gross
profit attributable to an increase in PBM revenues, operating cost savings from synergies
obtained after the successful integration of NMHC, and lower interest expense due to
extinguishing the Companys long-term debt in December 2009. These increases are partially
offset by an increase in income taxes.
  15




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##### Table of Contents




    
    Total revenue in the six months ended June 30, 2010 was $931.6 million as compared to
$611.8 million for the same period in 2009. The increase is largely attributable to an
increase in PBM revenue of $317.1 million compared to the same period in 2009. PBM
revenues increased primarily due to growth in the customer base throughout 2010 and the
second half of 2009. The increased customer base was complemented by additional services
sold to existing customers.
 
    
    Operating income increased $18.7 million, or 63.7%, for the six months ended June 30,
2010 to $48.1 million as compared to $29.4 million for the same period in 2009. This
increase was driven by increased gross profits from operations coupled with a decrease in
operating expenses as compared to the same period in 2009.
 
    
    The Company reported net income of $31.9 million, or $1.02 per share (fully-diluted),
for the six months ended June 30, 2010, compared to $19.7 million, or $0.79 per share
(fully-diluted), for the same period in 2009. The increase is driven by higher gross
profit attributable to an increase in PBM revenues, operating cost savings from synergies
obtained after the successful integration of NMHC, and lower interest expense due to
extinguishing the Companys long-term debt in December 2009. These increases are partially
offset by an increase in income taxes.
 
    
    The Company generated $36.8 million in cash from operations for the six months ended
June 30, 2010, an increase of $5.1 million from the same period in 2009, driven by an
increase in net income.
 
    
    On March 4, 2010, the Company announced a new agreement with HealthSpring Inc. pursuant
to which the Companys informedRx subsidiary will provide HealthSpring with its full suite
of PBM services, and therefore manage significant drug spend.  The initial term of the
agreement is three years with provisions for two additional one-year
extensions.  HealthSpring will deploy mail and specialty pharmacy services beginning in
mid-2010, with implementation of the full PBM services on January 1, 2011.  For financial
statement reporting purposes with respect to the agreement, the Company expects that
margins related to this agreement will be materially lower than historical margins because
of the volume related to this agreement.
 Results of Operations
 Three months ended June 30, 2010 as compared to the three months ended June 30, 2009
 Three months ended June 30,In thousands, except per share data
    
    2010
    
    
    2009Revenue
    
    $
    479,446
    
    
    $
    320,829Cost of revenue
    
    
    425,707
    
    
    
    273,618Gross profit
    
    
    53,739
    
    
    
    47,211Product development costs
    
    
    3,021
    
    
    
    3,027SG&A
    
    
    21,486
    
    
    
    21,907Depreciation of property and equipment
    
    
    1,537
    
    
    
    1,405Amortization of intangible assets
    
    
    1,978
    
    
    
    2,415Operating income
    
    
    25,717
    
    
    
    18,457Net interest expense
    
    
    143
    
    
    
    979Other expense (income), net
    
    
    60
    
    
    
    283Income before income taxes
    
    
    25,514
    
    
    
    17,195Income tax expense
    
    
    8,369
    
    
    
    5,218Net income
    
    $
    17,145
    
    
    $
    11,977Diluted earnings per share
    
    $
    0.55
    
    
    $
    0.47
 Revenue
  Cost of Revenue
  Gross Profit
   16




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##### Table of Contents



Product Development Costs
  SG&A Costs
  Depreciation
  Amortization
  Interest Income and Expense
  Income Taxes
  Segment Analysis
  PBM
    
    
    HCIT
    
    
    Consolidated2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue
    
    $
    451,295
    
    
    $
    293,906
    
    
    $
    28,151
    
    
    $
    26,923
    
    
    $
    479,446
    
    
    $
    320,829Cost of revenue
    
    
    412,681
    
    
    
    259,376
    
    
    
    13,026
    
    
    
    14,242
    
    
    
    425,707
    
    
    
    273,618Gross profit
    
    $
    38,614
    
    
    $
    34,530
    
    
    $
    15,125
    
    
    $
    12,681
    
    
    $
    53,739
    
    
    $
    47,211Gross profit %
    
    
    8.6
    %
    
    
    11.7
    %
    
    
    53.7
    %
    
    
    47.1
    %
    
    
    11.2
    %
    
    
    14.7
    %
 PBM
    17




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##### Table of Contents



HCIT
       Six months ended June 30, 2010 as compared to the six months ended June 30, 2009
 Six months ended June 30,In thousands, except per share data
    
    2010
    
    
    2009Revenue
    
    $
    931,594
    
    
    $
    611,789Cost of revenue
    
    
    827,627
    
    
    
    525,394Gross profit
    
    
    103,967
    
    
    
    86,395Product development costs
    
    
    6,094
    
    
    
    6,190SG&A
    
    
    42,792
    
    
    
    42,704Depreciation of property and equipment
    
    
    3,019
    
    
    
    2,887Amortization of intangible assets
    
    
    3,973
    
    
    
    5,240Operating income
    
    
    48,089
    
    
    
    29,374Net interest expense
    
    
    388
    
    
    
    1,689Other expense (income), net
    
    
    259
    
    
    
    (42
    )Income before income taxes
    
    
    47,442
    
    
    
    27,727Income tax expense
    
    
    15,505
    
    
    
    8,068Net income
    
    $
    31,937
    
    
    $
    19,659Diluted earnings per share
    
    $
    1.02
    
    
    $
    0.79
  18




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##### Table of Contents



Revenue
  Cost of Revenue
  Gross Profit
  Product Development Costs
  SG&A Costs
  Depreciation
  Amortization
  Interest Income and Expense
  Income Taxes
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##### Table of Contents



Segment Analysis
  PBM
    
    
    HCIT
    
    
    Consolidated2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue
    
    $
    878,797
    
    
    $
    561,686
    
    
    $
    52,797
    
    
    $
    50,103
    
    
    $
    931,594
    
    
    $
    611,789Cost of revenue
    
    
    801,847
    
    
    
    498,374
    
    
    
    25,780
    
    
    
    27,020
    
    
    
    827,627
    
    
    
    525,394Gross profit
    
    $
    76,950
    
    
    $
    63,312
    
    
    $
    27,017
    
    
    $
    23,083
    
    
    $
    103,967
    
    
    $
    86,395Gross profit %
    
    
    8.8
    %
    
    
    11.3
    %
    
    
    51.2
    %
    
    
    46.1
    %
    
    
    11.2
    %
    
    
    14.1
    %
 PBM
     HCIT
       20




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##### Table of Contents



Liquidity and Capital Resources
    Consolidated Balance Sheets
  
    
    Cash and cash-equivalents totaled $352.6 million, up $48.3 million from $304.4
million at December 31, 2009. The increase was primarly driven by profitable
operations of the Company. The Companys cash is primarily held in deposit accounts
with major financial institutions with high credit ratings.
 
    
    Accounts receivable are made up of trade accounts receivable from both the PBM and
HCIT segment customers. Accounts receivable increased $6.6 million to $103.9 million
at June 30, 2010 from $97.3 million at December 31, 2009, driven by increases in
revenue during the six month-period ended June 30, 2010. The accounts receivable
balance is impacted by changes in revenues, as well as timing of collections, and is
continually monitored by the Company to ensure timely collections and to assess the
need for any changes to the allowance for doubtful accounts.
 
    
    Rebates receivable of $34.9 million relate to billed and unbilled PBM receivables
from pharmaceutical manufacturers and third party administrators 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 increased $17.3 million from $17.6 million at
December 31, 2009, due primarily to increased rebate volumes driven by increased
prescription drug sales transactions, as well as an increase in the amount paid per
rebate transaction due to renegotiated contract terms with pharmaceutical manufacturers
and third party administrators.
 
    
    The Companys inventory balance of $8.2 million consists predominantly 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 new customers.
 
    
    Pharmacy benefit management rebates payable represents amounts owed to customers for
rebates from pharmaceutical manufacturers and third party administrators where the
Company administers the rebate program on the customers behalf, and the Company is the
principal contracting party. The payables are based on estimates, which are subject to
final settlement. Pharmacy benefit management rebates payable increased $13.0 million
to $59.6 million from $46.6 million at December 31, 2009 due to increased rebate
volumes driven by increased prescription drug sales transactions. The rebate amounts
payable are also higher due to an increase in the amount of rebates received per rebate
transaction as a result of renegotiated contract terms with pharmaceutical
manufacturers and third party administrators. As the amount of rebates receivable
increases, the amounts due to customers will also increase.
 
    
    Pharmacy benefit claim payments payable of $72.9 million predominantly relates to
amounts owed to retail pharmacies for prescription drug costs and dispensing fees in
connection with prescriptions dispensed by the retail pharmacies to the Companys
customers when the Company is the principal contracting party with the pharmacy.
 
    
    Deferred revenue increased $3.1 million to $10.4 million from $7.3 million as of
December 31, 2009, due to an increase of payments received in advance of services
provided. Deferred revenues mostly relate to payments secured in advance for
professional services, ASP processing, or annual software maintenance. Deferred
revenues are released to income once professional services have been performed or as
ASP and maintenance services are provided.
 
    
    Accrued liabilities decreased $7.0 million to $23.8 million at June 30, 2010 from
$30.8 million at December 31, 2009 due primarily to the timing of payments made to
customers in relation to contract performance guarantees and payments made related to
assumed liabilities from the NMHC acquisition.
  21




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##### Table of Contents




    
    Salaries and wages payable decreased $3.0 million to $9.3 million at June 30, 2010
as compared to $12.3 million at December 31, 2009 due to timing of payroll payments
relative to the period end. Salaries and wages payable will fluctuate based on the
timing of the period end relative to the Companys payment period. Payment periods
that fall closer to the end of a period will cause the salaries and wages payable
account to decrease; whereas, when the payment period falls further from the period
end, the balance will be higher.
 Cash flows from operating activities:
      Cash flows from investing activities
    Cash flows from financing activities
    Future Capital Requirements
   22




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##### Table of Contents



Contingencies
    Contractual Obligations
  Outstanding Securities
  Critical Accounting Estimates
  Recent Accounting Standards
  
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
   
 ITEM 4. Controls and Procedures
   23




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Reserved
  
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
 ExhibitNumber
    
    Description of Document
    
    Reference10.1
    
    
    Employment Agreement, effective as of
June 22, 2010, among SXC Health
Solutions Inc., and Joel Saban.
    
    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
 
    
    Indicates management contract or compensatory plan.  24




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##### Table of Contents



SIGNATURE
  SXC Health Solutions Corp.August 5, 2010
    By:
    /s/ Jeffrey ParkJeffrey ParkChief Financial Officer
(on behalf of the registrant and
as Chief Accounting Officer)  25




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Document
    
    Reference10.1
    
    
    Employment Agreement, effective as of
June 22, 2010, among SXC Health
Solutions Inc., and Joel Saban.
    
    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
 
    
    Indicates management contract or compensatory plan.  26