e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010


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: 001-33881

MEDASSETS, INC.

(Exact name of registrant as specified in its charter)


DELAWARE (State or other jurisdiction of incorporation or organization)		51-0391128 (I.R.S. Employer Identification No.)

100 North Point Center East, Suite 200
Alpharetta, Georgia		30022
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (678) 323-2500

(Former name, former address and former fiscal year, if changed since last report)
N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):


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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of October 27, 2010, the registrant had 58,055,037 shares of common stock, par value $0.01 per share, outstanding.

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

MedAssets, Inc.

Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)


	September 30,			December 31,
	2010			2009
ASSETS
Current
Cash and cash equivalents	$	8		$	5,498
Accounts receivable, net of allowances of $3,720 and $4,189 as of September 30, 2010 and December 31, 2009, respectively		75,692			67,617
Deferred tax asset, current		19,846			14,423
Prepaid expenses and other current assets		14,599			8,442

Total current assets		110,145			95,980
Property and equipment, net		61,318			54,960
Other long term assets
Goodwill		512,485			511,861
Intangible assets, net		79,529			95,589
Other		18,857			20,154

Other long term assets		610,871			627,604

Total assets	$	782,334		$	778,544


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	7,325		$	8,680
Accrued revenue share obligation and rebates		25,153			31,948
Accrued payroll and benefits		6,867			12,874
Other accrued expenses		11,409			7,410
Deferred revenue, current portion		30,514			24,498
Current portion of notes payable		2,499			13,771
Current portion of finance obligation		177			163

Total current liabilities		83,944			99,344
Notes payable, less current portion		171,016			201,390
Finance obligation, less current portion		9,557			9,694
Deferred revenue, less current portion		9,057			7,380
Deferred tax liability		28,037			19,239
Other long term liabilities		2,668			4,125

Total liabilities		304,279			341,172

Commitments and contingencies
Stockholders’ equity
Common stock, $0.01 par value, 150,000,000 shares authorized; 57,964,000 and 56,715,000 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively		580			567
Additional paid-in capital		662,133			639,315
Accumulated other comprehensive loss		(1,028	)		(1,605	)
Accumulated deficit		(183,630	)		(200,905	)

Total stockholders’ equity		478,055			437,372

Total liabilities and stockholders’ equity	$	782,334		$	778,544

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

MedAssets, Inc.

Condensed Consolidated Statements of Operations
(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(In thousands, except per share amounts)
Revenue:
Administrative fees, net	$	27,883		$	25,631		$	84,437		$	78,495
Other service fees		67,969			56,762			199,948			167,091

Total net revenue		95,852			82,393			284,385			245,586

Operating expenses:
Cost of revenue (inclusive of certain depreciation and amortization expense)		22,697			21,472			67,176			55,830
Product development expenses		4,666			4,156			14,859			15,424
Selling and marketing expenses		8,671			10,038			35,348			36,529
General and administrative expenses		29,196			23,039			91,425			77,971
Acquisition-related expenses (note 3)		2,482			—			4,351			—
Depreciation		5,235			3,125			14,068			9,020
Amortization of intangibles		5,596			7,018			17,706			21,029

Total operating expenses		78,543			68,848			244,933			215,803

Operating income		17,309			13,545			39,452			29,783
Other income (expense):
Interest (expense)		(3,247	)		(4,259	)		(10,986	)		(14,015	)
Other income		84			223			286			404

Income before income taxes		14,146			9,509			28,752			16,172
Income tax expense		5,685			3,613			11,477			6,196

Net income	$	8,461		$	5,896		$	17,275		$	9,976

Basic and diluted income per share:
Basic net income	$	0.15		$	0.11		$	0.31		$	0.18

Diluted net income	$	0.14		$	0.10		$	0.29		$	0.17

Weighted average shares — basic		56,717			54,792			56,238			54,589
Weighted average shares — diluted		59,786			57,855			59,340			57,223

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

MedAssets, Inc.

Condensed Consolidated Statements of Cash Flows
(Unaudited)


	Nine Months Ended September 30,
	2010			2009
	(In thousands)
Operating activities
Net income	$	17,275		$	9,976
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Bad debt expense		643			3,823
Depreciation		16,236			10,858
Amortization of intangibles		18,216			21,585
Loss on sale of assets		91			147
Noncash stock compensation expense		8,653			12,911
Excess tax benefit from exercise of equity awards		(5,097	)		(6,073	)
Amortization of debt issuance costs		1,372			1,382
Noncash interest expense, net		399			1,049
Deferred income tax expense (benefit)		3,408			(36	)
Changes in assets and liabilities:
Accounts receivable		(8,718	)		(4,536	)
Prepaid expenses and other assets		(6,159	)		(1,480	)
Other long-term assets		(1,189	)		(3,580	)
Accounts payable		3,743			5,110
Accrued revenue share obligations and rebates		(6,795	)		(4,998	)
Accrued payroll and benefits		(6,007	)		(4,090	)
Other accrued expenses		3,341			(2,773	)
Deferred revenue		7,693			676

Cash provided by operating activities		47,105			39,951


Investing activities
Purchases of property, equipment and software		(9,577	)		(9,233	)
Capitalized software development costs		(11,897	)		(12,268	)
Acquisitions, net of cash acquired		(3,160	)		(18,275	)

Cash used in investing activities		(24,634	)		(39,776	)


Financing activities
Proceeds from notes payable		—			71,797
Repayment of notes payable		(41,646	)		(86,638	)
Repayment of finance obligations		(493	)		(494	)
Excess tax benefit from exercise of equity awards		5,097			6,073
Issuance of common stock		9,081			8,333

Cash used in financing activities		(27,961	)		(929	)


Net decrease in cash and cash equivalents		(5,490	)		(754	)
Cash and cash equivalents, beginning of period		5,498			5,429

Cash and cash equivalents, end of period	$	8		$	4,675

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share amounts)

Unless the context indicates otherwise, references in this Quarterly Report to “MedAssets,” the “Company,” “we,” “our” and “us” mean MedAssets, Inc., and its subsidiaries and predecessor entities.

1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION

We provide technology-enabled products and services which together deliver solutions designed to improve operating margin and cash flow for hospitals, health systems and other ancillary healthcare providers. Our customer-specific solutions are designed to efficiently analyze detailed information across the spectrum of revenue cycle and spend management processes. Our solutions integrate with existing operations and enterprise software systems of our customers and provide financial improvement with minimal upfront costs or capital expenditures. Our operations and customers are primarily located throughout the United States and to a lesser extent, Canada.

The accompanying unaudited Condensed Consolidated Financial Statements, and Condensed Consolidated Balance Sheet as of December 31, 2009, derived from audited financial statements, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and as required by Regulation S-X, Rule 10-01 of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements. Actual results could differ materially from those estimates. Operating results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2010.

The accompanying unaudited Condensed Consolidated Financial Statements and notes thereto should be read in conjunction with the audited Consolidated Financial Statements for the year ended December 31, 2009 included in our Form 10-K as filed with the SEC on March 1, 2010. These financial statements include the accounts of MedAssets, Inc. and our wholly owned subsidiaries. All significant intercompany accounts have been eliminated in consolidation.

Cash and Cash Equivalents

All of our highly liquid investments with original maturities of three months or less at the date of purchase are carried at cost which approximates fair value and are considered to be cash equivalents. Currently, our excess cash is voluntarily used to repay our swing-line credit facility, if any, on a daily basis and applied against our revolving credit facility on a routine basis when our swing-line credit facility is undrawn. In addition, we may periodically make voluntary repayments on our term loan. Cash and cash equivalents were $8 and $5,498 as of September 30, 2010 and December 31, 2009, respectively, and our revolver and swing-line balances were zero during those reporting periods. In the event our cash balance is zero at the end of a period, any outstanding checks are recorded as accrued expenses. See Note 5 for immediately available cash under our revolving credit facility.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Revenue Recognition

In October 2009, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update for multiple-deliverable revenue arrangements. The update addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. The update also addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. The amendments in the update significantly expand the disclosures related to a vendor’s multiple-deliverable revenue arrangements with the objective of providing information about the significant judgments made and changes to those judgments and how the application of the relative selling-price method of determining stand-alone value affects the timing or amount of revenue recognition. The accounting standards update is applicable for annual periods beginning after June 15, 2010, however, early adoption is permitted. We are currently assessing the impact of the adoption of this update on our Condensed Consolidated Financial Statements.

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

elements. Among other things, tangible products containing software and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of software revenue guidance. In addition, the update also provides guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes tangible products and software. The accounting standards update is applicable for annual periods beginning after June 15, 2010, however, early adoption is permitted. The adoption of this update is not expected to have a material impact on our Condensed Consolidated Financial Statements.

In April 2010, the FASB issued new standards for vendors who apply the milestone method of revenue recognition to research and development arrangements. These new standards apply to arrangements with payments that are contingent, at inception, upon achieving substantively uncertain future events or circumstances. The guidance is applicable for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this guidance will impact our arrangements with one-time or nonrecurring performance fees that are contingent upon achieving certain results. Historically, we have recognized these types of performance fees in the period the respective performance target has been met. Upon adoption of this guidance on January 1, 2011, these performance fees will be recognized proportionately over the contract term. We are continuing to assess the impact of the adoption of this update on our Condensed Consolidated Financial Statements.

Subsequent Events

In February 2010, the FASB issued amended guidance on subsequent events. Under this amended guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective immediately and we adopted these new requirements for the period ended March 31, 2010.

3. ACQUISITION AND RESTRUCTURING ACTIVITIES

Stock Purchase Agreement

On September 14, 2010, we entered into the previously announced Stock Purchase Agreement (the “Purchase Agreement”) with Broadlane Holdings, LLC, a Delaware limited liability company (“Broadlane LLC”), and Broadlane Intermediate Holdings, Inc., a Delaware corporation and a wholly-owned subsidiary of Broadlane LLC (“Broadlane Holdings”, together with Broadlane LLC, “Broadlane”).

The Purchase Agreement contemplates a purchase by us of all of the issued and outstanding shares of capital stock of Broadlane Holdings (the “Broadlane Acquisition”) from Broadlane LLC. Pursuant to the Purchase Agreement, we will pay an aggregate purchase price of approximately $850,000, of which $725,000 is payable in cash upon the closing of the Broadlane Acquisition and $125,000 is payable in cash on or before January 4, 2012, subject to adjustment and to certain limitations on such payment contemplated by the debt financing contemplated in connection with the Broadlane Acquisition.

Each party’s obligation to consummate the Broadlane Acquisition is subject to various customary closing conditions, including, but not limited to, the absence of certain orders issued by courts or other governmental entities preventing the Broadlane Acquisition. Our obligation to consummate the Broadlane Acquisition is also subject to the absence of a Company Material Adverse Effect (as defined in the Purchase Agreement).

The waiting period under the Hart Scott Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”) was terminated on October 14, 2010.

During the three and nine months ended September 30, 2010, we incurred $1,546 of fees attributable to professional advisors and other fees related to the Broadlane Acquisition. We expensed these costs as incurred in accordance with GAAP and they are included in the Acquisition-related expenses line item of our Condensed Consolidated Statement of Operations.

Business Combination

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

During the year, our Spend Management segment acquired certain assets associated with oncology pharmaceutical products for $3,160. The acquired assets consist of certain customer relationships valued at $2,155 with a ten-year weighted-average useful life, a deferred tax asset of $381 and goodwill of $624.

Other Acquisition-Related Activities

During the three and nine months ended September 30, 2010, we incurred $936 and $2,805, respectively, related to certain due diligence and acquisition-related activities associated with an unsuccessful acquisition attempt. We expensed these costs as incurred in accordance with GAAP and they are included in the Acquisition-related expenses line item on our Condensed Consolidated Statement of Operations.

Accuro Restructuring Plan

In connection with the Accuro Healthcare Solutions, Inc. acquisition (“Accuro” or “Accuro Acquisition”) in June 2008, our management approved, committed and initiated a plan to restructure our operations resulting in certain management, system and organizational changes within our Revenue Cycle Management segment. Any increases or decreases to the estimates of executing the restructuring plan subsequent to June 2009 have been recorded as adjustments to operating expense.

The remaining balance relating to the Accuro restructuring plan pertains to a lease termination penalty we incurred for which we made cash payments of approximately $991 for the nine months ended September 30, 2010. In addition, we also reduced our estimated lease termination liability by approximately $348 related to a sublease arrangement. We expect that $428 of the remaining lease termination penalty will be paid ratably from October 2010 through January 2011 and $1,046 will be paid in February 2011. The balance of the accrual was $1,474 as of September 30, 2010.

4. DEFERRED REVENUE

Deferred revenue consists of unrecognized revenue related to advanced customer billing or customer payments received prior to revenue being realized and earned. Substantially all of our deferred revenue consists of: (i) deferred administrative fees, net; (ii) deferred service fees; (iii) deferred software and implementation fees; and (iv) other deferred fees, including receipts for our annual customer and vendor meeting received prior to the event.

The following table summarizes the deferred revenue categories and balances as of:


	September 30,			December 31,
	2010			2009
Software and implementation fees	$	15,621		$	14,080
Service fees		22,181			15,786
Administrative fees		1,395			924
Other fees		374			1,088

Deferred revenue, total		39,571			31,878
Less: Deferred revenue, current portion		(30,514	)		(24,498	)

Deferred revenue, non-current portion	$	9,057		$	7,380

As of September 30, 2010 and December 31, 2009, deferred revenue included in our Condensed Consolidated Balance Sheets that was contingent upon meeting performance targets was $4,393 and $686, respectively. Advance billings on arrangements that include contingent performance targets are recorded in accounts receivable and deferred revenue when billed.

5. NOTES PAYABLE

The balances of our notes payable are summarized as follows as of:

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)


	September 30,			December 31,
	2010			2009
Notes payable — senior	$	173,515		$	215,161
Less: current portion		(2,499	)		(13,771	)

Total long-term notes payable	$	171,016		$	201,390

The principal amount of our long-term notes payable consists of our senior term loan facility which had an outstanding balance of $173,515 as of September 30, 2010. We had zero dollars drawn on our revolving credit facility, and zero dollars drawn on our swing-line component, resulting in approximately $124,000 of availability under our credit facility inclusive of the swing-line as of September 30, 2010 and December 31, 2009 (after giving effect to $1,000 of outstanding but undrawn letters of credit on each date). During the nine months ended September 30, 2010, we made payments on our term loan balance which included a voluntary prepayment on our term loan of $28,500, an annual excess cash flow payment (based on 2009 results) to our lender in accordance with our credit facility of approximately $11,272 that was paid in March 2010 and scheduled principal payments on our senior term loan facility of $1,874. The applicable weighted-average interest rate (inclusive of the applicable bank margin and impact of our interest rate swap) on our senior term loan facility at September 30, 2010 was 5.4%. Total interest paid during the nine months ended September 30, 2010 and 2009 was approximately $8,887 and $11,313, respectively.

As of September 30, 2010, we had approximately $4,558 of debt issuance costs related to our credit agreement which will be amortized into interest expense using the effective interest method until the maturity date. Our revolving credit facility matures on October 23, 2011, and our term loan matures on October 23, 2013. For the nine months ended September 30, 2010 and 2009, we recognized approximately $1,372 and $1,382, respectively in interest expense related to the amortization of debt issuance costs. In connection with the Broadlane Acquisition, we expect to write off the unamortized debt issuance costs associated with our existing credit agreement once we close the acquisition.

Our credit agreement contains certain provisions that require us to pay a portion of our outstanding obligations one quarter subsequent to the end of each fiscal year in the form of an excess cash flow payment on the term loan. The amount is determined based on defined percentages of excess cash flow required in the credit agreement which is based on total leverage relative to adjusted EBITDA. Our current portion of notes payable does not include an amount with respect to any 2010 excess cash flow payment (payable in 2011). We will reclassify a portion of our long-term notes payable to a current classification at such time that any 2010 excess cash flow payment becomes probable and estimable.

Future maturities of principal of notes payable as of September 30, 2010 are as follows:


	Amount
2010	$	625	(1)
2011		2,499
2012		2,499
2013		167,892

Total notes payable	$	173,515


(1)		Represents the remaining quarterly principal payments due during the fiscal year ending December 31, 2010.

6. COMMITMENTS AND CONTINGENCIES

Performance Targets

In the ordinary course of contracting with our customers, we may agree to make some or all of our fees contingent upon the achievement of certain financial improvement targets from the use of our products and services. These contingent fees are not recognized as revenue until we receive customer acceptance on the achievement of the performance targets. We generally receive

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

customer acceptance as and when the performance targets are achieved. Prior to customer acceptance that a performance target has been achieved, we record billed contingent fees as deferred revenue on our Condensed Consolidated Balance Sheet. Often, recognition of this revenue occurs in periods subsequent to the recognition of the associated costs.

Legal Proceedings

From time to time, we become involved in legal proceedings arising in the ordinary course of business. As of September 30, 2010, we are not presently involved in any legal proceedings, the outcome of which, if determined adversely to us, would have a material adverse affect on our business, operating results or financial condition.

7. STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

Common Stock

During the nine months ended September 30, 2010, we issued approximately 1,176,000 shares of common stock in connection with employee stock option and stock-settled stock appreciation right (or “SSAR”) exercises for aggregate exercise proceeds of $9,081.

Share-Based Compensation

As of September 30, 2010, we had restricted common stock, SSARs and common stock option equity awards outstanding under three share-based compensation plans. As of September 30, 2010, we had approximately 1,299,000 shares reserved under our 2008 equity incentive plan available for grant.

The share-based compensation expense related to equity awards charged against income was $2,142 and $3,951 for the three months ended September 30, 2010 and 2009, respectively. The total income tax benefit recognized in the Condensed Consolidated Statement of Operations for share-based compensation arrangements related to equity awards was $813 and $1,495 for the three months ended September 30, 2010 and 2009, respectively.

The share-based compensation expense related to equity awards charged against income was $8,653 and $12,911 for the nine months ended September 30, 2010 and 2009, respectively. The total income tax benefit recognized in the Condensed Consolidated Statement of Operations for share-based compensation arrangements related to equity awards was $3,283 and $4,884 for the nine months ended September 30, 2010 and 2009, respectively. There were no capitalized share-based compensation expenses at September 30, 2010.

Total share-based compensation expense (inclusive of restricted common stock, SSARs and common stock options) for the three and nine months ended September 30, 2010 and 2009 as reflected in our Condensed Consolidated Statements of Operations is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Cost of revenue	$	616	$	778	$	1,843	$	2,407
Product development		124		90		457		695
Selling and marketing		433		680		1,849		2,242
General and administrative		969		2,403		4,504		7,567

Total share-based compensation expense	$	2,142	$	3,951	$	8,653	$	12,911

Equity Award Grants

During the nine months ended September 30, 2010, we granted the following equity awards to certain of our employees and our board of directors:

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

Common Stock Option Awards

During the nine months ended September 30, 2010, we granted stock options for the purchase of approximately 102,000 underlying shares. The stock options granted during the nine months ended September 30, 2010 have a weighted-average exercise price of $21.50 and have a service vesting period of five years. The weighted-average grant date fair value of each stock option granted during the nine months ended September 30, 2010 was $6.84.

As of September 30, 2010, there was approximately $4,727 of total unrecognized compensation expense related to all outstanding stock option awards that will be recognized over a weighted-average period of 1.5 years.

Restricted Common Stock Awards

During the nine months ended September 30, 2010, we granted approximately 110,000 shares of restricted common stock. The weighted-average grant date fair value of each restricted common stock share was $22.09. Approximately 57,000 restricted shares will vest on December 31, 2012 provided certain performance criteria are achieved. Approximately 39,000 restricted shares vest over four years; 12,000 shares vest ratably each month through December 31, 2010; and 2,000 restricted shares fully vested at the date of grant.

During the nine months ended September 30, 2010, approximately 37,000 shares of restricted common stock were forfeited.

As of September 30, 2010, there was approximately $9,879 of total unrecognized compensation expense related to all unvested restricted common stock awards that will be recognized over a weighted-average period of 1.6 years.

SSARs Awards

During the nine months ended September 30, 2010, we granted approximately 848,000 SSARs which were comprised of the following: (i) 153,000 SSARs that will vest on December 31, 2012 provided certain performance criteria are achieved; (ii) 100,000 SSARs that will vest on December 31, 2014 provided certain performance criteria are achieved; (iii) 77,000 SSARs that will vest over four years from their respective dates of grant; (iv) 412,000 SSARs that will vest over five years from their respective dates of grant; and (v) 106,000 SSARs that will vest ratably each month through December 31, 2010. The weighted-average grant date base price of each SSAR was $22.32 and the weighted-average grant date fair value of each SSAR granted during the nine months ended September 30, 2010 was $7.92.

As of September 30, 2010, there was approximately $10,152 of total unrecognized compensation expense related to all unvested SSARs that will be recognized over a weighted-average period of 1.7 years.

8. INCOME TAXES

Income tax expense recorded during the nine months ended September 30, 2010 and 2009 reflected an effective income tax rate of 39.9% and 38.3%, respectively. The increase in our effective tax rate was primarily attributable to an increase in our estimated annual effective tax rate due to the expiration of the credit for research and development expenditures. There was no significant change in the Company’s liabilities related to accounting for uncertainty in income taxes for the three and nine months ended September 30, 2010 and 2009, respectively.

9. INCOME PER SHARE

We calculate earnings per share (“EPS”) in accordance with GAAP. Basic EPS is calculated by dividing reported net income available to common shareholders by the weighted-average number of common shares outstanding for the reporting period. Diluted EPS reflects the potential dilution that could occur if our stock options, stock warrants, SSARs and unvested restricted stock were included in our common shares outstanding during the reporting period.

A reconciliation of basic and diluted weighted average shares outstanding for basic and diluted EPS is as follows:

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)


	Three Months Ended September 30,
	2010		2009
Numerator for Basic and Diluted Income Per Share:
Net income	$	8,461	$	5,896
Denominator for basic income per share weighted average shares		56,717,000		54,792,000
Effect of dilutive securities:
Stock options		2,070,000		2,384,000
Stock settled stock appreciation rights		480,000		287,000
Restricted stock and stock warrants		519,000		392,000

Denominator for diluted income per share — adjusted weighted average shares and assumed conversions		59,786,000		57,855,000

Basic income per share:
Basic net income per common share	$	0.15	$	0.11

Diluted net income per share:
Diluted net income per common share	$	0.14	$	0.10


	Nine Months Ended September 30,
	2010		2009
Numerator for Basic and Diluted Income Per Share:
Net income	$	17,275	$	9,976
Denominator for basic income per share weighted average shares		56,238,000		54,589,000
Effect of dilutive securities:
Stock options		2,089,000		2,275,000
Stock settled stock appreciation rights		492,000		21,000
Restricted stock and stock warrants		521,000		338,000

Denominator for diluted income per share — adjusted weighted average shares and assumed conversions		59,340,000		57,223,000

Basic income per share:
Basic net income per common share	$	0.31	$	0.18

Diluted net income per share:
Diluted net income per common share	$	0.29	$	0.17

The effect of certain dilutive securities has been excluded for the three and nine months ended September 30, 2010 and 2009 because the impact is anti-dilutive as a result of the strike price of certain securities being greater than the average market price (or out of the money) during the periods presented. The following table provides a summary of those potentially dilutive securities that have been excluded from the above calculation of basic and diluted EPS (also note that there are additional securities that could be dilutive in future periods):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Stock options		26,000		69,000		25,000		133,000
SSARs		147,000		20,000		142,000		39,000
Restricted stock and stock warrants		—		1,000				4,000

Total		173,000		90,000		167,000		176,000

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

10. SEGMENT INFORMATION

We deliver our solutions and manage our business through two reportable business segments, Revenue Cycle Management (or “RCM”) and Spend Management (or “SM”):

•

Revenue Cycle Management. Our Revenue Cycle Management segment provides a comprehensive suite of software and services spanning the hospital, health system and other ancillary healthcare provider revenue cycle workflow — from patient admission and financial responsibility, patient financial liability estimation, charge capture, case management, contract management and health information management through claims processing and accounts receivable management. Our workflow solutions, together with our data management and business intelligence tools, increase revenue capture and cash collections, reduce accounts receivable balances and increase regulatory compliance.

•

Spend Management. Our Spend Management segment provides a comprehensive suite of technology-enabled services that help our customers manage their non-labor expense categories. Our solutions lower supply and medical device pricing and utilization by managing the procurement process through our group purchasing organization portfolio of contracts, consulting services and business intelligence tools.

GAAP relating to segment reporting defines reportable segments as components of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing financial performance. The accounting guidance indicates that financial information about segments should be reported on the same basis as that used by the chief operating decision maker in the analysis of performance and allocation of resources. Management of the Company, including our chief operating decision maker, uses what we refer to as Segment Adjusted EBITDA as its primary measure of profit or loss to assess segment performance and to determine the allocation of resources. We define Segment Adjusted EBITDA as segment net income (loss) before net interest expense, income tax expense (benefit), depreciation and amortization (“EBITDA”) as adjusted for other non-recurring, non-cash or non-operating items. Our chief operating decision maker uses Segment Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period to period. Segment Adjusted EBITDA includes expenses associated with sales and marketing, general and administrative and product development activities specific to the operation of the segment. General and administrative corporate expenses that are not specific to the segments are not included in the calculation of Segment Adjusted EBITDA. These expenses include the costs to staff and manage our corporate offices, interest expense on our credit facilities and expenses related to being a publicly-held company. All reportable segment revenues are presented net of inter-segment eliminations and represent revenues from external customers.

The following tables present Segment Adjusted EBITDA and financial position information as utilized by our chief operating decision maker. A reconciliation of Segment Adjusted EBITDA to consolidated net income is included. General corporate expenses are included in the “Corporate” column. In addition, accounts receivable and accounts payable intra-company eliminations are included in the “Corporate” column. Other assets and liabilities are included to provide a reconciliation to total assets and total liabilities. Beginning in our next filing on Form 10-K, we will net these intra-company amounts in the segment presentation.

The following tables represent our results of operations, by segment, for the three and nine months ended September 30, 2010 and 2009:

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)


	Three Months Ended September 30, 2010
	RCM			SM			Corporate			Total
Results of Operations:
Revenue:
Gross administrative fees(1)	$	—		$	43,625		$	—		$	43,625
Revenue share obligation(1)		—			(15,742	)		—			(15,742	)
Other service fees		60,530			7,439			—			67,969

Total net revenue		60,530			35,322			—			95,852
Total operating expenses		50,898			16,848			10,797			78,543

Operating income (loss)		9,632			18,474			(10,797	)		17,309
Interest (expense)		—			—			(3,247	)		(3,247	)
Other (expense) income		(70	)		32			122			84

Income (loss) before income taxes	$	9,562		$	18,506		$	(13,922	)	$	14,146
Income tax (benefit)		3,836			7,007			(5,158	)		5,685

Net income (loss)		5,726			11,499			(8,764	)		8,461

Segment Adjusted EBITDA	$	19,681		$	20,120		$	(6,244	)	$	33,557


(1)		These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.


	As of September 30, 2010
	RCM		SM		Corporate			Total
Financial Position:
Accounts receivable, net	$	65,773	$	41,265	$	(31,346	)	$	75,692
Other assets		552,534		96,193		57,915			706,642

Total assets		618,307		137,458		26,569			782,334
Accrued revenue share obligation		—		25,153		—			25,153
Deferred revenue		32,215		7,356					39,571
Other liabilities		32,384		26,018		181,153			239,555

Total liabilities	$	64,599	$	58,527	$	181,153		$	304,279


	Three Months Ended September 30, 2009
	RCM		SM			Corporate			Total
Results of Operations:
Revenue:
Gross administrative fees(1)	$	—	$	39,222		$	—		$	39,222
Revenue share obligation(1)		—		(13,591	)		—			(13,591	)
Other service fees		51,635		5,127			—			56,762

Total net revenue		51,635		30,758			—			82,393
Total operating expenses		44,067		17,500			7,281			68,848

Operating income (loss)		7,568		13,258			(7,281	)		13,545
Interest (expense)		—		—			(4,259	)		(4,259	)
Other income		21		57			145			223

Income (loss) before income taxes	$	7,589	$	13,315		$	(11,395	)	$	9,509
Income tax (benefit)		2,883		4,986			(4,256	)		3,613

Net income (loss)		4,706		8,329			(7,139	)		5,896

Segment Adjusted EBITDA	$	17,964	$	15,710		$	(5,126	)	$	28,548


(1)		These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)


	Nine Months Ended September 30, 2010
	RCM			SM			Corporate			Total
Results of Operations:
Revenue:
Gross administrative fees(1)	$	—		$	129,527		$	—		$	129,527
Revenue share obligation(1)		—			(45,090	)		—			(45,090	)
Other service fees		176,420			23,528			—			199,948

Total net revenue		176,420			107,965			—			284,385
Total operating expenses		152,836			61,443			30,654			244,933

Operating income (loss)		23,584			46,522			(30,654	)		39,452
Interest (expense)		—			—			(10,986	)		(10,986	)
Other (expense) income		(115	)		43			358			286

Income (loss) before income taxes	$	23,469		$	46,565		$	(41,282	)	$	28,752
Income tax (benefit)		9,362			18,157			(16,042	)		11,477

Net income (loss)		14,107			28,408			(25,240	)		17,275

Segment Adjusted EBITDA	$	54,220		$	52,062		$	(19,519	)	$	86,763


(1)		These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.


	Nine Months Ended September 30, 2009
	RCM			SM			Corporate			Total
Results of Operations:
Revenue:
Gross administrative fees(1)	$	—		$	119,498		$	—		$	119,498
Revenue share obligation(1)		—			(41,003	)		—			(41,003	)
Other service fees		149,425			17,666			—			167,091

Total net revenue		149,425			96,161			—			245,586
Total operating expenses		136,205			57,443			22,155			215,803

Operating income (loss)		13,220			38,718			(22,155	)		29,783
Interest (expense)		(1	)		—			(14,014	)		(14,015	)
Other (expense) income		(125	)		141			388			404

Income (loss) before income taxes	$	13,094		$	38,859		$	(35,781	)	$	16,172
Income tax (benefit)		5,017			14,890			(13,711	)		6,196

Net income (loss)		8,077			23,969			(22,070	)		9,976

Segment Adjusted EBITDA	$	44,785		$	46,135		$	(15,529	)	$	75,391


(1)		These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.

GAAP for segment reporting requires that the total of the reportable segments’ measures of profit or loss be reconciled to the Company’s consolidated operating results. The following table reconciles Segment Adjusted EBITDA to consolidated net income for each of the three and nine months ended September 30, 2010 and 2009:

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
RCM Adjusted EBITDA	$	19,681		$	17,964		$	54,220		$	44,785
SM Adjusted EBITDA		20,120			15,710			52,062			46,135

Total reportable Segment Adjusted EBITDA		39,801			33,674			106,282			90,920
Depreciation		(3,950	)		(2,552	)		(11,081	)		(7,455	)
Depreciation (included in cost of revenue)		(726	)		—			(2,167	)		—
Amortization of intangibles		(5,596	)		(7,018	)		(17,706	)		(21,029	)
Amortization of intangibles (included in cost of revenue)		(139	)		(801	)		(509	)		(2,391	)
Interest expense, net of interest income(1)		44			2			98			12
Income tax expense		(10,843	)		(7,869	)		(27,518	)		(19,907	)
Share-based compensation expense(2)		(1,366	)		(2,402	)		(4,884	)		(7,901	)
Accuro purchase accounting adjustment(3)		—			1			—			(203	)

Total reportable segment net income		17,225			13,035			42,515			32,046
Corporate net (loss)		(8,764	)		(7,139	)		(25,240	)		(22,070	)

Consolidated net income	$	8,461		$	5,896		$	17,275		$	9,976


(1)		Interest income is included in other income (expense) and is not netted against interest expense in our Condensed Consolidated Statement of Operations.

(2)		Represents non-cash share-based compensation to both employees and directors. We believe excluding this non-cash expense allows us to compare our operating performance without regard to the impact of share-based compensation, which varies from period to period based on amount and timing of equity grants.

(3)		These adjustments include the effect on revenue of adjusting acquired deferred revenue balances, net of any reduction in associated deferred costs, to fair value as of the acquisition date for Accuro. The reduction of the deferred revenue balances materially affects period-to-period financial performance comparability and revenue and earnings growth in periods subsequent to the acquisition and is not indicative of changes in the underlying results of operations. In 2010, these adjustments are no longer reconciling items related to acquired deferred revenue balances as the amounts were fully amortized in 2009. We may have this adjustment in future periods as required by GAAP.

11. DERIVATIVE FINANCIAL INSTRUMENTS

Effective January 1, 2009, we adopted GAAP for derivatives and hedging which requires companies to provide enhanced qualitative and quantitative disclosures about how and why an entity uses derivative instruments and how derivative instruments and related hedged items are accounted. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instruments. Our interest rate risk management policy permits the use of derivative instruments, such as interest rate swaps, to reduce volatility in our results of operations and/or cash flows resulting from interest rate fluctuations. Our derivative instruments are utilized for risk management purposes and we do not use derivatives for speculative trading purposes.

As of September 30, 2010, we had an interest rate swap which was highly effective and, as a result, we did not record any gain or loss from ineffectiveness in our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009.

Interest rate swap

On May 21, 2009, we entered into a forward starting London Inter-bank Offered Rate (“LIBOR”) interest rate swap with a notional amount of $138,276 beginning June 30, 2010, which effectively converts a portion of our variable rate term loan credit facility to a fixed rate debt. The notional amount subject to the swap has pre-set quarterly step downs corresponding to our anticipated principal reduction schedule.

The interest rate swap converts the three-month LIBOR rate on the corresponding notional amount of debt to an effective fixed rate

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

of 1.99% (exclusive of the applicable bank margin charged by our lender). The interest rate swap terminates on March 31, 2012 and qualifies as a highly effective cash flow hedge under GAAP.

As such, the fair value of the derivative is recorded in our Condensed Consolidated Balance Sheets. Accordingly, as of September 30, 2010, we recorded a negative fair value of the swap on our balance sheet as a liability of approximately $1,656 in other long-term liabilities, and the offsetting loss ($1,028 net of tax) was recorded in Accumulated Other Comprehensive Loss (“AOCI”) in our stockholders’ equity. If we assess any portion of this to be ineffective (none in this case), we will reclassify the ineffective portion to current period earnings or loss accordingly.

We determined the fair value of the swap using Level 2 inputs as defined under GAAP for fair value measurements and disclosures because our valuation techniques included inputs that are considered significantly observable in the market, either directly or indirectly. Our valuation technique assessed the swap by comparing each fixed interest payment, or cash flow, to a hypothetical cash flow utilizing an observable market three-month floating LIBOR rate as of September 30, 2010. Future hypothetical cash flows utilize projected market-based LIBOR rates. Each fixed cash flow and hypothetical cash flow is then discounted to present value utilizing a market observable discount factor for each cash flow. The discount factor fluctuates based on the timing of each future cash flow. The fair value of the swap represents a cumulative total of the differences between the discounted cash flows that are fixed from those that are hypothetical using floating rates.

We considered the credit worthiness of the counterparty of the hedged instrument. We believe the swap is probable given the size, international presence and track record of the counterparty to perform under the obligations of the contract and that the counterparty is not at risk of default which would change the highly effective status of the hedged instrument.

As part of the Broadlane Acquisition, we expect to terminate this interest rate swap once the acquisition has been completed and additional financing is secured.

Interest rate collar

On June 24, 2008 (effective June 30, 2008), we entered into an interest rate collar to hedge our interest rate exposure on a notional $155,000 of our outstanding term loan credit facility. The collar expired on June 30, 2010. The collar set a maximum interest rate of 6.00% and a minimum interest rate of 2.85% on the three-month LIBOR applicable to a notional $155,000 of term loan debt. This collar effectively limited our LIBOR interest exposure on this portion of our term loan debt to within that range (2.85% to 6.00%). The collar did not hedge the applicable margin payable to our lenders on our indebtedness. Settlement payments were made between the hedge counterparty and us on a quarterly basis, coinciding with our term loan installment payment dates, for any rate overage on the maximum rate and any rate deficiency on the minimum rate on the notional amount outstanding.

Par forward contracts

Historically, we had a series of par forward contracts to lock in the rate of exchange in U.S. dollar terms at a specific par forward exchange rate of Canadian dollars to one U.S. dollar, with respect to one specific Canadian customer contract. This three-year customer contract expired on April 30, 2010.

The following table presents the fair value of our outstanding derivative instruments as of September 30, 2010 and December 31, 2009:

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)


		Fair Value of Financial
	Balance Sheet Location	Instruments
		As of		As of
		September		December
		30, 2010		31, 2009
Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate contracts	Other long term liabilities		1,656		2,575
Foreign exchange contracts	Other long term liabilities		—		8

Total		$	1,656	$	2,583

The effects of derivative instruments designated as cash flow hedges on income and AOCI are summarized below:


	Amount of Gain or (Loss)					Amount of Gain or (Loss)
	Recognized in OCI on					Recognized in OCI on
	Derivative (Effective					Derivative (Effective
	Portion)					Portion)
	Three Months Ended					Nine Months Ended
	September 30,					September 30,
Derivatives designated as cash flow hedges	2010		2009			2010		2009
	(Unaudited)					(Unaudited)
Interest rate contracts	$	32	$	(281	)	$	572	$	317
Foreign exchange contracts		—		(72	)		5		(186	)


Total gain recognized in other comprehensive income	$	32	$	(353	)	$	577	$	131

12. FAIR VALUE MEASUREMENTS

We measure fair value for financial instruments, such as derivatives and non-financial assets, when a valuation is necessary, such as for impairment of long-lived and indefinite-lived assets when indicators of impairment exist in accordance with GAAP for fair value measurements and disclosures. This defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under accounting pronouncements.

Refer to Note 11 for information and fair values of our derivative instruments measured on a recurring basis under GAAP for fair value measurements and disclosures.

In estimating our fair value disclosures for financial instruments, we use the following methods and assumptions:

	•		Cash and cash equivalents: The carrying value reported in the Condensed Consolidated Balance Sheets for these items approximates fair value due to the high credit standing of the financial institutions holding these items and their liquid nature;

	•		Accounts receivable, net: The carrying value reported in the Condensed Consolidated Balance Sheets is net of allowances for doubtful accounts which includes a degree of counterparty non-performance risk;

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

	•		Accounts payable and current liabilities: The carrying value reported in the Condensed Consolidated Balance Sheets for these items approximates fair value, which is the likely amount for which the liability with short settlement periods would be transferred to a market participant with a similar credit standing as the Company;

	•		Finance obligation: The carrying value of our finance obligation reported in the Condensed Consolidated Balance Sheets approximates fair value based on current interest rates; and

	•		Notes payable: The carrying value of our long-term notes payable reported in the Condensed Consolidated Balance Sheets approximates fair value since they bear interest at variable rates. Refer to Note 5.

13. RELATED PARTY TRANSACTION

We have an agreement with John Bardis, our chief executive officer, for the use of an airplane owned by JJB Aviation, LLC, a limited liability company, owned by Mr. Bardis. We pay Mr. Bardis at market-based rates for the use of the airplane for business purposes. The audit committee of our board of directors (the “Board”) reviews such usage of the airplane annually. During the nine months ended September 30, 2010 and 2009, we incurred charges of $1,514 and $1,184, respectively, related to transactions with Mr. Bardis.

14. SUBSEQUENT EVENTS

We have evaluated subsequent events for recognition or disclosure in the Condensed Consolidated Financial Statements filed on Form 10-Q with the SEC noting the following items for disclosure in connection with the Broadlane Acquisition: (i) the waiting period under the Hart Scott Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”) was terminated on October 14, 2010; and (ii) we are currently in the process of obtaining debt financing to fund the acquisition.


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

NOTE ON FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” (as defined in Section 27A of the U.S. Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that reflect our expectations regarding our future growth, results of operations, performance and business prospects and opportunities. Words such as “anticipates,” “believes,” “plans,” “expects,” “intends,” “estimates,” “projects,” “targets,” “can,” “could,” “may,” “should,” “will,” “would,” and similar expressions have been used to identify these forward-looking statements, but are not the exclusive means of identifying these statements. For purposes of this Quarterly Report on Form 10-Q, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements reflect our current beliefs and expectations and are based on information currently available to us. As such, no assurance can be given that our future growth, results of operations, performance and business prospects and opportunities covered by such forward-looking statements will be achieved. We have no intention or obligation to update or revise these forward-looking statements to reflect new events, information or circumstances.

A number of important factors could cause our actual results to differ materially from those indicated by such forward-looking statements, including those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as filed with the SEC on March 1, 2010.

Overview

On September 14, 2010, we entered into a certain Purchase Agreement in connection with the Broadlane Acquisition. Refer to the Recent Developments section below for additional information.

Management’s primary metrics to measure the consolidated financial performance of the business are net revenue, non-GAAP gross fees, non-GAAP revenue share obligation, non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margin and non-GAAP diluted cash EPS.

The table below highlights our primary results of operations for the three and nine months ended September 30, 2010 and 2009 (unaudited):


	Three Months Ended												Nine Months Ended
	September 30,												September 30,
	2010			2009			Change						2010			2009			Change
	Amount			Amount			Amount			%			Amount			Amount			Amount			%
	(In millions)												(In millions)
Gross fees(1)	$	111.6		$	96.0		$	15.6			16.3	%	$	329.5		$	286.6		$	42.9			15.0	%
Revenue share obligation(1)		(15.7	)		(13.6	)		(2.1	)		15.4			(45.1	)		(41.0	)		(4.1	)		10.0

Total net revenue		95.9			82.4			13.5			16.4			284.4			245.6			38.8			15.8

Operating income		17.3			13.5			3.8			28.1			39.5			29.8			9.7			32.6
Net income	$	8.5		$	5.9		$	2.6			44.1	%	$	17.3		$	10.0		$	7.3			73.0	%

Adjusted EBITDA(1)	$	33.6		$	28.5		$	5.1			17.9	%	$	86.8		$	75.4		$	11.4			15.1	%
Adjusted EBITDA margin(1)		35.0	%		34.6	%								30.5	%		30.7	%
Diluted Cash EPS(1)	$	0.25		$	0.22		$	0.03			13.6	%	$	0.61		$	0.54		$	0.07			13.0	%


(1)		These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.

The increases in non-GAAP gross fees and total net revenue during the three and nine months ended September 30, 2010 compared

to the three and nine months ended September 30, 2009 were primarily attributable to:

	•		growth in our Revenue Cycle Management segment from our comprehensive revenue cycle services and technology solutions; and

	•		growth in our Spend Management segment from our medical device consulting and strategic sourcing services and our vendor administrative fees.

The increase in operating income during the three and nine months ended September 30, 2010 compared to the three and nine months ended September 30, 2009, was primarily attributable to the growth in net revenue discussed above partially offset by the following:

	•		increased cost of revenue attributable to: (i) a higher percentage of net revenue being derived from service-based engagements within our Revenue Cycle Management and Spend Management segments; (ii) direct costs relating to certain new and existing customer arrangements whereby the related revenue associated with these arrangements is contingent upon meeting financial performance targets. The related revenue will be recorded once the performance targets are achieved. The increase in these types of arrangements is concentrated within our Spend Management segment;

	•		higher expenses related to: (i) certain due diligence and acquisition-related costs pursuant to an unsuccessful acquisition attempt; and (ii) our recent stock purchase agreement; and

	•		higher operating expenses related to new and existing salary-related compensation expense primarily associated with our expanding services-based business.

For the three and nine months ended September 30, 2010, increases in consolidated non-GAAP adjusted EBITDA compared to the three and nine months ended September 30, 2009 were primarily attributable to: (i) the net revenue growth discussed above; (ii) our continued focus on cost control initiatives and lower cash-based performance-related compensation expense; and (iii) a decrease in our bad debt expense due to significantly lower customer collection risk. This increase was partially offset by: (i) higher cost of revenue resulting from a shift to more service-based revenue; and (ii) an increase in our expenses primarily for salary-related compensation expense.

For the three and nine months ended September 30, 2010, decreases in consolidated non-GAAP adjusted EBITDA margin compared to the three and nine months ended September 30, 2009 were primarily attributable to the revenue shift to more service-based revenue, which resulted in a higher cost of revenue in both segments.

Recent Developments

Certain significant items or events must be considered to better understand differences in our results of operations from period to period. We believe that the following item has had a material impact on our results of operations for the periods discussed below or may have a material impact on our results of operations in future periods:

Stock Purchase Agreement with Broadlane Holdings, LLC and Broadlane Intermediate Holdings, Inc.

On September 14, 2010, we entered into the previously announced Purchase Agreement with Broadlane LLC and Broadlane Holdings.

The Purchase Agreement contemplates a purchase by us of all of the issued and outstanding shares of capital stock of Broadlane Holdings from Broadlane LLC. Pursuant to the Purchase Agreement, we will pay an aggregate purchase price of approximately $850 million, of which $725 million is payable in cash upon the closing of the Broadlane Acquisition and $125 million is payable in cash on or before January 4, 2012, subject to adjustment and to certain limitations on such payment contemplated by the debt financing contemplated in connection with the Broadlane Acquisition.

The waiting period under the HSR Act was terminated with respect to the Broadlane Acquisition on October 14, 2010.

Segment Structure and Revenue Streams

We deliver our solutions through two business segments, Revenue Cycle Management and Spend Management. Management’s primary metrics to measure segment financial performance are net revenue, non-GAAP gross fees and Segment Adjusted EBITDA. All of our revenues are from external customers and inter-segment revenues have been eliminated. See Note 10 of the Notes to our Condensed Consolidated Financial Statements herein for discussion on Segment Adjusted EBITDA and certain items of our segment results of operations and financial position.

Revenue Cycle Management

Our Revenue Cycle Management segment provides a comprehensive suite of software as a service (“SaaS”) based solutions spanning the hospital revenue cycle workflow — from patient admission, charge capture, case management and health information management through claims processing and accounts receivable management. Our workflow solutions, together with our data management and business intelligence tools, increase revenue capture and cash collections, reduce accounts receivable balances and improve regulatory compliance. Our Revenue Cycle Management segment revenue is listed under the caption “Other service fees” on our Condensed Consolidated Statements of Operations and consists of the following components:

	•		Subscription and implementation fees. We earn fixed subscription fees on a monthly or annual basis on multi-year contracts for customer access to our SaaS-based solutions. We may also charge our customers non-refundable upfront fees for implementation of our SaaS-based services. These non-refundable upfront fees are earned over the subscription period or estimated customer relationship period, whichever is longer.

			We defer costs related to implementation services and expense these costs in proportion to the revenue earned over the subscription period or customer relationship period, as applicable.

			In addition, we defer upfront sales commissions related to subscription and implementation fees and expense these costs ratably over the related contract term.

	•		Transaction fees. For certain of our revenue cycle management solutions, we earn fees that vary based on the volume of customer transactions or enrolled members.

	•		Licensed-software fees. We earn license, implementation, maintenance and other software-related service fees for our business intelligence, decision support and other software products. These software revenues are typically recognized ratably over the contract period as these are effectively annual licenses. We have certain Revenue Cycle Management contracts that are sold in multiple-element arrangements and include software products. We have considered Rule 5-03 of Regulation S-X for these types of multiple-element arrangements that include software products and determined the amount is below the threshold that would require separate disclosure on our consolidated statement of operations.

	•		Service fees. For certain of our revenue cycle management solutions, we earn fees based on a percentage of cash remittances collected, fixed-fee and cost-plus consulting arrangements. The related revenues are earned as services are rendered.

Spend Management

Our Spend Management segment provides a suite of technology-enabled services that help our customers manage their non-labor expense categories. Our solutions lower supply and medical device pricing and supply utilization by managing the procurement process through our group purchasing organization’s portfolio of contracts, consulting services and analytical tool sets. Our Spend Management segment revenue consists of the following components:

	•		Administrative fees and revenue share obligation. We earn administrative fees from manufacturers, distributors and other vendors (collectively referred to as “vendors”) of products and services with whom we have contracts under which our group purchasing organization customers may purchase products and services. Administrative fees represent a percentage, which we refer to as our administrative fee ratio, typically ranging from 0.25% to 3.00% of the purchases made by our group purchasing organization customers through contracts with our vendors.

			Our group purchasing organization customers make purchases, and receive shipments, directly from the vendors.

			Generally on a monthly or quarterly basis, vendors provide us with a report describing the purchases made by our customers through our group purchasing organization vendor contracts, including associated administrative fees. We recognize revenue upon the receipt of these reports from vendors.

			Some customer contracts require that a portion of our administrative fees are contingent upon achieving certain financial improvements, such as lower supply costs, which we refer to as performance targets. Contingent administrative fees are not recognized as revenue until we receive customer acceptance on the achievement of those contractual performance targets. Prior to customer acceptance that a performance target has been achieved, we record contingent administrative fees as deferred revenue on our consolidated balance sheet. Often, recognition of this revenue occurs in periods subsequent to the recognition of the associated costs. Should we fail to meet a performance target, we may be contractually obligated to refund some or all of the contingent fees.

			Additionally, in many cases, we are contractually obligated to pay a portion of the administrative fees to our hospital and health system customers. Typically this amount, which we refer to as our revenue share obligation, is calculated as a percentage of administrative fees earned on a particular customer’s purchases from our vendors. Our total net revenue on our Condensed Consolidated Statements of Operations is shown net of the revenue share obligation.

	•		Other service fees. The following items are included as “Other service fees” in our Condensed Consolidated Statement of Operations:

	•		Consulting fees. We consult with our customers regarding the costs and utilization of medical devices and implantable physician preference items (“PPI”) and the efficiency and quality of their key clinical service lines. Our consulting projects are typically fixed fee projects with an average duration of six to nine months, and the related revenues are earned as services are rendered.

	•		Subscription fees. We also offer technology-enabled services that provide spend management analytics and data services to improve operational efficiency, reduce supply costs, and increase transparency across spend management processes. We earn fixed subscription fees on a monthly basis for these Company-hosted SaaS-based solutions.

Operating Expenses

We classify our operating expenses as follows:

	•		Cost of revenue. Cost of revenue primarily consists of the direct labor costs incurred to generate our revenue. Direct labor costs consist primarily of salaries, benefits, and other direct costs and share-based compensation expenses related to personnel who provide services to implement our solutions for our customers (indirect labor costs for these personnel are included in general and administrative expenses). As the majority of our services are generated internally, our costs to provide these services are primarily labor-driven. A less significant portion of our cost of revenue consists of costs of third-party products and services and client reimbursed out-of-pocket costs. Cost of revenue does not include certain expenses relating to hosting our services and providing support and related data center capacity (which is included in general and administrative expenses), and allocated amounts for rent, depreciation, amortization or other indirect operating costs because we do not consider the inclusion of these items in cost of revenue relevant to our business. However, cost of revenue does include the amortization for the cost of software to be sold, leased, or otherwise marketed. As a result of the Accuro Acquisition and related integration, there may be some re-allocation of expenses primarily between cost of revenue and general and administrative expense resulting from the implementation of our accounting expense allocation policies that could affect period over period comparability. In addition, any changes in revenue mix between our Revenue Cycle Management and Spend Management segments, including changes in revenue mix towards SaaS-based revenue and consulting services, may cause significant fluctuations in our cost of revenue and have a favorable or unfavorable impact on operating income.

	•		Product development expenses. Product development expenses primarily consist of the salaries, benefits, incentive compensation and share-based compensation expense of the technology professionals who develop, support and maintain our software-related products and services. Product development expenses are net of capitalized software development costs for both internal and external use.

	•		Selling and marketing expenses. Selling and marketing expenses consist primarily of costs related to marketing programs

			(including trade shows and brand messaging), personnel-related expenses for sales and marketing employees (including salaries, benefits, incentive compensation and share-based compensation expense), certain meeting costs and travel-related expenses.

	•		General and administrative expenses. General and administrative expenses consist primarily of personnel-related expenses for administrative employees and indirect time related to operational service-based employees (including salaries, benefits, incentive compensation and share-based compensation expense) and travel-related expenses, occupancy and other indirect costs, insurance costs, professional fees, and other general overhead expenses.

	•		Depreciation. Depreciation expense consists primarily of depreciation of fixed assets and the amortization of software, including capitalized costs of software developed for internal use.

	•		Amortization of intangibles. Amortization of intangibles includes the amortization of all identified intangible assets (with the exception of software), primarily resulting from acquisitions.

Results of Operations

Consolidated Tables

The following table sets forth our consolidated results of operations grouped by segment for the periods shown:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(Unaudited, in thousands)
Net revenue:
Revenue Cycle Management	$	60,530		$	51,635		$	176,420		$	149,425
Spend Management
Gross administrative fees(1)		43,625			39,222			129,527			119,498
Revenue share obligation(1)		(15,742	)		(13,591	)		(45,090	)		(41,003	)
Other service fees		7,439			5,127			23,528			17,666

Total Spend Management		35,322			30,758			107,965			96,161

Total net revenue		95,852			82,393			284,385			245,586
Operating expenses:
Revenue Cycle Management		50,898			44,067			152,836			136,205
Spend Management		16,848			17,500			61,443			57,443

Total segment operating expenses		67,746			61,567			214,279			193,648
Operating income
Revenue Cycle Management		9,632			7,568			23,584			13,220
Spend Management		18,474			13,258			46,522			38,718

Total segment operating income		28,106			20,826			70,106			51,938
Corporate expenses(2)		10,797			7,281			30,654			22,155

Operating income		17,309			13,545			39,452			29,783
Other income (expense):
Interest expense		(3,247	)		(4,259	)		(10,986	)		(14,015	)
Other income (expense)		84			223			286			404

Income before income taxes		14,146			9,509			28,752			16,172
Income tax expense		5,685			3,613			11,477			6,196

Net income		8,461			5,896			17,275			9,976
Reportable segment adjusted EBITDA(3):
Revenue Cycle Management		19,681			17,964			54,220			44,785
Spend Management	$	20,120		$	15,710		$	52,062		$	46,135
Reportable segment adjusted EBITDA margin(4):
Revenue Cycle Management		32.5	%		34.8	%		30.7	%		30.0	%
Spend Management		57.0	%		51.1	%		48.2	%		48.0	%

Comparison of the Three Months Ended September 30, 2010 and September 30, 2009


	Three Months Ended September 30,
	2010						2009						Change
				% of						% of
	Amount			Revenue			Amount			Revenue			Amount			%
	(Unaudited, in thousands)
Net revenue:
Revenue Cycle Management	$	60,530			63.1	%	$	51,635			62.7	%	$	8,895			17.2	%
Spend Management
Gross administrative fees(1)		43,625			45.5			39,222			47.6			4,403			11.2
Revenue share obligation(1)		(15,742	)		(16.4	)		(13,591	)		(16.5	)		(2,151	)		15.8
Other service fees		7,439			7.8			5,127			6.2			2,312			45.1

Total Spend Management		35,322			36.9			30,758			37.3			4,564			14.8

Total net revenue	$	95,852			100.0	%	$	82,393			100.0	%	$	13,459			16.3	%


(1)		These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.

Total net revenue. Total net revenue for the three months ended September 30, 2010 was $95.9 million, an increase of $13.5 million, or 16.3%, from total net revenue of $82.4 million for the three months ended September 30, 2009. The increase in total net revenue was comprised of an $8.9 million increase in Revenue Cycle Management revenue and an increase of $4.6 million in Spend Management revenue.

Revenue Cycle Management net revenue. Revenue Cycle Management net revenue for the three months ended September 30, 2010 was $60.5 million, an increase of $8.9 million, or 17.2%, from net revenue of $51.6 million for the three months ended September 30, 2009. The increase was attributable to a $9.6 million increase in revenue from our comprehensive revenue cycle service engagements and a $1.2 million increase in revenue from our revenue cycle technology tools. The increase was partially offset by a $1.9 million decrease in revenue relating to our decision support business primarily due to a scheduled and planned step down in license fees from a large business intelligence customer.

Spend Management net revenue. Spend Management net revenue for the three months ended September 30, 2010 was $35.3 million, an increase of $4.5 million, or 14.8%, from net revenue of $30.8 million for the three months ended September 30, 2009. The increase was the result of a $4.4 million, or 11.2%, increase in non-GAAP gross administrative fees and a $2.3 million, or 45.1%, increase in other service fees. This was partially offset by a $2.2 million increase in non-GAAP revenue share obligation, as discussed further below:

	•		Gross administrative fees. Non-GAAP gross administrative fee revenue increased by $4.4 million, or 11.2%, as compared to the prior period, primarily due to increased customer purchasing volume in certain supply categories. We may have fluctuations in our non-GAAP gross administrative fee revenue in future periods as the timing of vendor reporting and customer acknowledgement of achieved performance targets varies.

	•		Revenue share obligation. Non-GAAP revenue share obligation increased $2.2 million, or 15.8%, as compared to the prior period. We analyze the impact of our non-GAAP revenue share obligation on our results of operations by calculating the ratio of non-GAAP revenue share obligation to non-GAAP gross administrative fees (or the “revenue share ratio”). Our revenue share ratio was 36.1% and 34.7% for the three months ended September 30, 2010 and 2009, respectively. This increase was primarily attributable to an increase in customers who are entitled to a higher revenue share percentage due to increased purchasing volume. We have not had any significant changes in our customer revenue mix during the year that would result in a material impact on our revenue share ratio. We may experience fluctuations in our revenue share ratio in the future because of the timing of vendor reporting and the timing of revenue recognition based on performance target achievement for certain customers.

	•		Other service fees. The $2.3 million, or 45.1%, increase in other service fees primarily related to higher revenues from medical device consulting and strategic sourcing services. The growth in supply chain consulting was mainly due to an increased number of engagements from new and existing customers.

Total Operating Expenses


	Three Months Ended September 30,
	2010					2009					Change
			% of					% of
	Amount		Revenue			Amount		Revenue			Amount			%
	(Unaudited, in thousands)
Operating expenses:
Cost of revenue	$	22,697		23.7	%	$	21,472		26.1	%	$	1,225			5.7	%
Product development expenses		4,666		4.9			4,156		5.0			510			12.3
Selling and marketing expenses		8,671		9.0			10,038		12.2			(1,367	)		(13.6	)
General and administrative expenses		29,196		30.5			23,039		28.0			6,157			26.7
Acquisition-related expenses		2,482		2.6			—		0.0			2,482			100.0
Depreciation		5,235		5.5			3,125		3.8			2,110			67.5
Amortization of intangibles		5,596		5.8			7,018		8.5			(1,422	)		(20.3	)

Total operating expenses		78,543		81.9			68,848		83.6			9,695			14.1
Operating expenses by segment:
Revenue Cycle Management		50,898		53.1			44,067		53.5			6,831			15.5
Spend Management		16,848		17.6			17,500		21.2			(652	)		(3.7	)


Total segment operating expenses		67,746		70.7			61,567		74.7			6,179			10.0
Corporate expenses		10,797		11.3			7,281		8.8			3,516			48.3


Total operating expenses	$	78,543		81.9	%	$	68,848		83.6	%	$	9,695			14.1	%

Cost of revenue. Cost of revenue for the three months ended September 30, 2010 was $22.7 million, or 23.7% of total net revenue, an increase of $1.2 million, or 5.7%, from cost of revenue of $21.5 million, or 26.1% of total net revenue, for the three months ended September 30, 2009. The decrease in cost of revenue as a percentage of total net revenue was primarily attributable to the strong revenue growth in our comprehensive revenue cycle services, which grew at a faster rate than the related cost of revenue.

The increase in cost of revenue was primarily attributable to an increase in service-related engagements in both our Revenue Cycle Management and Spend Management segments, which result in a higher cost of revenue as these activities are more labor intensive. In addition, our Spend Management segment incurs direct costs relating to certain new and existing arrangements whereby the related revenue associated with these arrangements is deferred until certain financial performance targets are achieved. The related revenue will be recorded once the performance targets are achieved and accepted by our customers.

Revenue Cycle Management SaaS-based revenue results in a higher cost of revenue than net administrative fee revenue included in our Spend Management revenue. As such, we may experience higher cost of revenue if: (i) the revenue mix continues to shift towards Revenue Cycle Management segment products and services and more specifically if the revenue mix within the Revenue Cycle Management segment shifts towards more service-related engagements; and (ii) we continue to experience growth in our consulting services within the Spend Management segment.

Product development expenses. Product development expenses for the three months ended September 30, 2010 were $4.7 million, or 4.9% of total net revenue, an increase of $0.5 million, or 12.3%, from product development expenses of $4.2 million, or 5.0% of total net revenue, for the three months ended September 30, 2009. The increase during the three months ended September 30, 2010 was primarily attributable to a net $0.7 million increase in compensation expense that is comprised of a $1.4 million increase in salary-related compensation expense relating to new and existing employees offset by a $0.7 million reduction in cash-based performance-related compensation expense.

Our product development capitalization rate for the three months ended September 30, 2010 and 2009, was 47.2% and 55.6%, respectively. The decrease in our capitalization rate was attributable to a lower number of software products under development during the period compared to the prior period.

We plan to continue to focus on development efforts designed to integrate, enhance and standardize our products. We plan to also continue to develop a number of new Revenue Cycle Management products and services and enhance our existing products in both segments. We expect to maintain or increase our product development spending for the remainder of 2010 and future periods.

Selling and marketing expenses. Selling and marketing expenses for the three months ended September 30, 2010 were $8.7 million, or 9.0% of total net revenue, a decrease of $1.4 million, or 13.6%, from selling and marketing expenses of $10.0 million, or 12.2% of total net revenue, for the three months ended September 30, 2009. The decrease in dollar terms and as a percentage of net revenue was primarily attributable to a net $0.8 million decrease in compensation expense that is comprised of a $1.5 million reduction in cash-based performance-related compensation expense offset by a $0.7 million increase in salary-related compensation expense to new and existing employees; and a $0.3 million decrease in share-based compensation expense resulting from the use of the accelerated method of expense attribution used for our service-based equity awards that are subject to graded vesting, which comprises a majority of our total equity awards. This method results in a continual decrease in annual share-based compensation expense over the requisite service period of each grant. The remaining decrease was attributable to lower operating infrastructure expense.

General and administrative expenses. General and administrative expenses for the three months ended September 30, 2010 were $29.2 million, or 30.5% of total net revenue, an increase of $6.2 million, or 26.7%, from general and administrative expenses of $23.0 million, or 28.0% of total net revenue, for the three months ended September 30, 2009.

The increase was primarily attributable to a net $7.7 million increase in compensation expense that is comprised of a $8.6 million increase in salary-related compensation expense to new and existing employees offset by a $0.9 million reduction in cash-based performance-related compensation expense; a $0.6 million increase in professional fees; and a $0.4 million increase in other operating infrastructure expense. The increase was partially offset by a $1.4 million decrease in share-based compensation expense (for the reason described within “Selling and marketing expenses”); and a $1.1 million decrease in bad debt expense due to significantly lower uncollectable accounts compared to the prior period.

Acquisition-related expenses. Acquisition-related expenses for the three months ended September 30, 2010 were $2.5 million, or 2.6% of total net revenue, an increase of $2.5 million, from acquisition related expenses of zero, for the three months ended September 30, 2009. The increase was primarily attributable to a $1.5 million increase in acquisition-related fees associated with the Broadlane Acquisition; and a $1.0 million increase in acquisition-related fees associated with an unsuccessful acquisition attempt.

Depreciation. Depreciation expense for the three months ended September 30, 2010 was $5.2 million, or 5.5% of total net revenue, an increase of $2.1 million, or 67.5%, from depreciation of $3.1 million, or 3.8% of total net revenue, for the three months ended September 30, 2009. The increase was primarily attributable to depreciation resulting from purchases of property and equipment and to a lesser extent increases to capitalized software development subsequent to September 30, 2009.

Amortization of intangibles. Amortization of intangibles for the three months ended September 30, 2010 was $5.6 million, or 5.8% of total net revenue, a decrease of $1.4 million, or 20.3%, from amortization of intangibles of $7.0 million, or 8.5% of total net revenue, for the three months ended September 30, 2009. The decrease was primarily attributable to the amortization of certain identified intangible assets that are nearing the end of their useful life under an accelerated method of amortization.

Segment Operating Expenses

Revenue Cycle Management expenses. Revenue Cycle Management operating expenses for the three months ended September 30, 2010 were $50.9 million, or 53.1% of total net revenue, an increase of $6.8 million, or 15.5%, from $44.1 million, or 53.5% of total net revenue, for the three months ended September 30, 2009.

Revenue Cycle Management operating expenses increased as a result of a $9.4 million increase in compensation expense relating to new and existing employees; and a $1.3 million increase in depreciation expense. The increase was partially offset by a $1.3 million decrease in bad debt expense due to significantly lower uncollectable accounts compared to the prior year; a $1.1 million decrease in amortization of intangibles; a $0.7 million decrease in our operating infrastructure expense; a $0.5 million decrease in share-based compensation expense (for the reason described within “Selling and marketing expenses”); and a $0.3 million decrease in legal expenses due to lower activity than in the prior period.

As a percentage of Revenue Cycle Management segment net revenue, segment expenses decreased to 84.1% from 85.3% for the three months ended September 30, 2010 and 2009, respectively, for the reasons described above.

Spend Management expenses. Spend Management operating expenses for the three months ended September 30, 2010 were $16.8 million, or 17.6% of total net revenue, a decrease of $0.7 million, or 3.7%, from $17.5 million, or 21.2% of total net revenue for the three months ended September 30, 2009. The decrease in Spend Management expenses was primarily attributable to a net $2.1 million decrease in compensation expense comprised of a $2.5 million reduction in cash-based performance-related compensation

expense offset by a $0.4 million increase in salary-related compensation expense relating to new and existing employees; and a $0.5 million decrease in share-based compensation expense (for the reason described within “Selling and marketing expenses”). The decrease was partially offset by a $1.6 million increase in cost of revenues associated with new customers and the revenue mix shift in the segment towards supply chain consulting services, as previously described; and a $0.3 million increase in other operating infrastructure expense.

As a percentage of Spend Management segment net revenue, segment expenses decreased to 47.7% from 56.9% for the three months ended September 30, 2010 and 2009, respectively.

Corporate expenses. Corporate expenses for the three months ended September 30, 2010 were $10.8 million, an increase of $3.5 million, or 48.3%, from $7.3 million for the three months ended September 30, 2009, or 11.3% and 8.8% of total net revenue, respectively. The increase in corporate expenses was primarily attributable to a $1.5 million increase in acquisition-related fees associated with the Broadlane Acquisition; a $1.0 million increase in acquisition-related fees associated with an unsuccessful acquisition attempt; a $0.7 million increase in depreciation expense; and a $0.3 million increase in other operating infrastructure expense.

We expect to incur a significant amount of acquisition-related costs for the remainder of 2010 and future periods relating to the Broadlane Acquisition.

Non-operating Expenses

Interest expense. Interest expense for the three months ended September 30, 2010 was $3.2 million, a decrease of $1.1 million, or 23.8%, from interest expense of $4.3 million for the three months ended September 30, 2009. As of September 30, 2010, we had total indebtedness of $173.5 million compared to $230.8 million as of September 30, 2009. The decrease in interest expense is primarily attributable to the decrease in our indebtedness compared to the prior period.

We expect to incur additional indebtedness to fund the purchase price of the Broadlane Acquisition. The anticipated increase in our indebtedness will cause a significant increase in our interest expense for the remainder of 2010 and in future periods. In addition, we expect to terminate our existing interest rate swap after the new financing is obtained and to enter into one or more interest rate derivative instruments. We also expect to write-off the unamortized debt issuance costs associated with our existing credit agreement following the consummation of the Broadlane Acquisition.

Other income. Other income for the three months ended September 30, 2010 and 2009 was $0.1 million and $0.2 million, respectively, comprised principally of rental income.

Income tax expense. Income tax expense for the three months ended September 30, 2010 was $5.7 million, an increase of $2.1 million from an income tax expense of $3.6 million for the three months ended September 30, 2009, reflecting an effective tax rate of 40.2% and 38.0%, respectively. The increase in our effective tax rate was primarily attributable to the expiration of the credit for research and development expenditures. Although legislation extending this credit has been proposed, Congress has not yet reenacted this tax provision. If the legislation extending this credit is passed during the year ending December 31, 2010, retrospectively, our estimated annual effective tax rate will be impacted favorably.

Comparison of the Nine Months Ended September 30, 2010 and September 30, 2009


	Nine Months Ended September 30,
	2010						2009						Change
				% of						% of
	Amount			Revenue			Amount			Revenue			Amount			%
	(Unaudited, in thousands)
Net revenue:
Revenue Cycle Management	$	176,420			62.0	%	$	149,425			60.8	%	$	26,995			18.1	%
Spend Management
Gross administrative fees(1)		129,527			45.5			119,498			48.7			10,029			8.4
Revenue share obligation(1)		(45,090	)		(15.8	)		(41,003	)		(16.7	)		(4,087	)		10.0
Other service fees		23,528			8.3			17,666			7.2			5,862			33.2

Total Spend Management		107,965			38.0			96,161			39.2			11,804			12.3

Total net revenue	$	284,385			100.0	%	$	245,586			100.0	%	$	38,799			15.8	%

(1) These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.

Total net revenue. Total net revenue for the nine months ended September 30, 2010 was $284.4 million, an increase of $38.8 million, or 15.8%, from total net revenue of $245.6 million for the nine months ended September 30, 2009. The increase in total net revenue was comprised of a $27.0 million increase in Revenue Cycle Management revenue and an increase of $11.8 million in Spend Management revenue.

Revenue Cycle Management net revenue. Revenue Cycle Management net revenue for the nine months ended September 30, 2010 was $176.4 million, an increase of $27.0 million, or 18.1%, from net revenue of $149.4 million for the nine months ended September 30, 2009. The increase was primarily attributable to a $24.0 million increase in revenue from our comprehensive revenue cycle service engagements including certain performance fees earned and a $7.2 million increase in revenue from our revenue cycle technology tools. The increase was partially offset by a $4.2 million decrease in revenue relating to our decision support business primarily due to a scheduled and planned step down in license fees from a large business intelligence customer.

Spend Management net revenue. Spend Management net revenue for the nine months ended September 30, 2010 was $108.0 million, an increase of $11.8 million, or 12.3%, from net revenue of $96.2 million for the nine months ended September 30, 2009. The increase was primarily the result of a $10.0 million, or 8.4% increase, in non-GAAP gross administrative fees and a $5.9 million, or 33.2% increase, in other service fees. This was partially offset by a $4.1 million increase in non-GAAP revenue share obligation, as discussed further below:

	•		Gross administrative fees. Non-GAAP gross administrative fee revenue increased by $10.0 million, or 8.4%, as compared to the prior period, and was attributable to increased customer purchasing volumes in certain supply categories. We may have fluctuations in our non-GAAP gross administrative fee revenue in future periods as the timing of vendor reporting and customer acknowledgement of achieved performance targets varies.

	•		Revenue share obligation. Non-GAAP revenue share obligation increased $4.1 million, or 10.0%, as compared to the prior period. We analyze the impact of our non-GAAP revenue share obligation on our results of operations by calculating the ratio of non-GAAP revenue share obligation to non-GAAP gross administrative fees (or the “revenue share ratio”). Our revenue share ratio was 34.8% and 34.3% for the nine months ended September 30, 2010 and 2009, respectively. We have not had any significant changes in our customer revenue mix during the year that would result in a material impact on our revenue share ratio. We may experience fluctuations in our revenue share ratio because of the timing of vendor reporting and the timing of revenue recognition based on performance target achievement for certain customers.

	•		Other service fees. The $5.9 million, or 33.2%, increase in other service fees primarily related to higher revenues from medical device consulting and strategic sourcing services. The growth in supply chain consulting was mainly due to an increased number of engagements from new and existing customers. In addition, we recorded $3.5 million in revenue associated with our annual customer and vendor meeting for the nine months ended September 30, 2010 compared to $3.0 million for the nine months ended September 30, 2009.

Total Operating Expenses


	Nine Months Ended September 30,
	2010					2009					Change
			% of					% of
	Amount		Revenue			Amount		Revenue			Amount			%
	(Unaudited, in thousands)
Operating expenses:
Cost of revenue	$	67,176		23.6	%	$	55,830		22.7	%	$	11,346			20.3	%
Product development expenses		14,859		5.2			15,424		6.3			(565	)		(3.7	)
Selling and marketing expenses		35,348		12.4			36,529		14.9			(1,181	)		(3.2	)
General and administrative expenses		91,425		32.1			77,971		31.7			13,454			17.3
Acquisition-related expenses		4,351		1.5			—		0.0			4,351			100.0
Depreciation		14,068		4.9			9,020		3.7			5,048			56.0
Amortization of intangibles		17,706		6.2			21,029		8.6			(3,323	)		(15.8	)

Total operating expenses		244,933		86.1			215,803		87.9			29,130			13.5
Operating expenses by segment:
Revenue Cycle Management		152,836		53.7			136,205		55.5			16,631			12.2
Spend Management		61,443		21.6			57,443		23.4			4,000			7.0

Total segment operating expenses		214,279		75.3			193,648		78.9			20,631			10.7
Corporate expenses		30,654		10.8			22,155		9.0			8,499			38.4

Total operating expenses	$	244,933		86.1	%	$	215,803		87.9	%	$	29,130			13.5	%

Cost of revenue. Cost of revenue for the nine months ended September 30, 2010 was $67.2 million, or 23.6% of total net revenue, an increase of $11.3 million, or 20.3%, from cost of revenue of $55.8 million, or 22.7% of total net revenue, for the nine months ended September 30, 2009.

The increase was primarily attributable to an increase in service-related engagements in both our Revenue Cycle Management and Spend Management segments, which provides for a higher cost of revenue given these activities are more labor intensive. In addition, our Spend Management segment incurs direct costs relating to certain new and existing arrangements whereby the related revenue associated with these arrangements is deferred until certain financial performance targets are achieved. The related revenue will be recorded once the performance targets are achieved and accepted by our customers.

We may experience higher cost of revenue if: (i) the revenue mix continues to shift towards Revenue Cycle Management segment products and services and more specifically if the revenue mix within the Revenue Cycle Management segment shifts towards more service-related engagements; and (ii) we experience continued growth in our consulting services within the Spend Management segment.

Product development expenses. Product development expenses for the nine months ended September 30, 2010 were $14.9 million, or 5.2% of total net revenue, a decrease of $0.5 million, or 3.7%, from product development expenses of $15.4 million, or 6.3% of total net revenue, for the nine months ended September 30, 2009. The decrease was comprised of $0.4 million in lower expenses within our operating infrastructure compared to the prior period; and a $0.2 million decrease in share-based compensation expense resulting from the use of the accelerated method of expense attribution used for our service-based equity awards that are subject to graded vesting, which comprises a majority of our total equity awards. This method results in a continual decrease in annual share-based compensation expense over the requisite service period of each grant. This was partially offset by a net $0.1 million increase in compensation expense that is comprised of a $1.4 million increase in salary-related compensation expense relating to new and existing employees offset by a $1.3 million reduction in cash-based performance-related compensation expense.

Our product development capitalization rate for the nine months ended September 30, 2010 and 2009, was 44.5% and 44.3%, respectively.

We plan to continue to focus on development efforts designed to integrate, enhance and standardize our products. We also plan to continue to develop a number of new Revenue Cycle Management products and services and enhance our existing products in both segments. We expect to maintain or increase our product development spending for the rest of 2010 and in future periods.

Selling and marketing expenses. Selling and marketing expenses for the nine months ended September 30, 2010 were $35.3 million, or 12.4% of total net revenue, a decrease of $1.2 million, or 3.2%, from selling and marketing expenses of $36.5 million, or 14.9% of

total net revenue, for the nine months ended September 30, 2009.

The decrease in dollar terms and as a percentage of net revenue was primarily attributable to a $0.5 million decrease in advertising expenses; a $0.4 million decrease in share-based compensation expense (for the reason described within “Product development expenses”); a net $0.4 million decrease in compensation expense that is comprised of a $0.8 million increase in salary-related compensation expense relating to new and existing employees offset by a $1.2 million reduction in cash-based performance-related compensation expense; and a $0.2 million decrease in other operating infrastructure expense. The decrease was partially offset by a $0.3 million increase in expenses associated with our annual customer and vendor meeting held during the period. Total expenses related to our customer and vendor meeting amounted to $4.7 million and $4.4 million for the nine months ended September 30, 2010 and 2009, respectively.

General and administrative expenses. General and administrative expenses for the nine months ended September 30, 2010 were $91.4 million, or 32.1% of total net revenue, an increase of $13.4 million, or 17.3%, from general and administrative expenses of $78.0 million, or 31.7% of total net revenue, for the nine months ended September 30, 2009.

The increase was primarily attributable to a net $19.2 million increase in compensation expense that is comprised of a $21.1 million increase in salary-related compensation expense to new and existing employees, primarily operational service-based employees, offset by a $1.9 million reduction in cash-based performance-related compensation expense. This increase was also attributable to a $1.3 million increase in professional fees; a $0.9 million increase in other operating infrastructure expense; and a $0.7 million increase in charitable contributions. The increase was partially offset by a $3.4 million decrease in bad debt expense due to significantly lower uncollectable accounts compared to the prior year; a $3.1 million decrease in share-based compensation expense (for the reason described within “Product development expenses”); a $1.7 million decrease in legal expenses due to lower activity than in the prior year; and a $0.5 million decrease in rent expense.

Acquisition-related expenses. Acquisition-related expenses for the nine months ended September 30, 2010 were $4.4 million, or 1.5% of total net revenue, an increase of $4.4 million, from acquisition related expenses of zero, for the nine months ended September 30, 2009. The increase was primarily attributable to a $2.9 million increase in acquisition-related fees associated with an unsuccessful acquisition attempt; and a $1.5 million increase in acquisition-related fees associated with the Broadlane Acquisition.

Depreciation. Depreciation expense for the nine months ended September 30, 2010 was $14.1 million, or 4.9% of total net revenue, an increase of $5.1 million, or 56.0%, from depreciation of $9.0 million, or 3.7% of total net revenue, for the nine months ended September 30, 2009. The increase was primarily attributable to depreciation resulting from purchases of property and equipment and to a lesser extent increases to capitalized software development subsequent to September 30, 2009.

Amortization of intangibles. Amortization of intangibles for the nine months ended September 30, 2010 was $17.7 million, or 6.2% of total net revenue, a decrease of $3.3 million, or 15.8%, from amortization of intangibles of $21.0 million, or 8.6% of total net revenue, for the nine months ended September 30, 2009. The decrease was primarily attributable to the amortization of certain identified intangible assets that are nearing the end of their useful life under an accelerated method of amortization.

Segment Operating Expenses

Revenue Cycle Management expenses. Revenue Cycle Management operating expenses for the nine months ended September 30, 2010 were $152.8 million, or 53.7% of total net revenue, an increase of $16.6 million, or 12.2%, from $136.2 million, or 55.5% of total net revenue, for the nine months ended September 30, 2009.

Revenue Cycle Management operating expenses increased as a result of a net $18.3 million increase in compensation expense that is comprised of a $20.6 million increase in salary-related compensation expense to new and existing employees, primarily operational service-based employees. This was offset by a $2.3 million reduction in cash-based performance-related compensation expense; a $7.0 million increase in cost of revenue in connection with direct labor costs associated with revenue growth; and a $3.5 million increase in depreciation expense. The increase was partially offset by a $3.8 million decrease in bad debt expense due to significantly lower uncollectable accounts compared to the prior year; a $2.4 million decrease in amortization of intangibles; a $2.1 million decrease in share-based compensation expense (for the reason described within “Product development expenses”); a $1.9 million decrease in legal expenses due to lower activity than in the prior year; a $1.3 million decrease in our operating infrastructure expense; and a $0.7 million decrease in rent expense.

As a percentage of Revenue Cycle Management segment net revenue, segment expenses decreased to 86.6% from 91.2% for the nine months ended September 30, 2010 and 2009, respectively, for the reasons described above.

Spend Management expenses. Spend Management operating expenses for the nine months ended September 30, 2010 were $61.4 million, or 21.6% of total net revenue, an increase of $4.0 million, or 7.0%, from $57.4 million, or 23.4% of total net revenue, for the nine months ended September 30, 2009. The increase in Spend Management expenses was primarily attributable to a $4.9 million increase in cost of revenues associated with new customers and the revenue mix shift in the segment towards supply chain consulting services; a $1.1 million increase in other operating infrastructure expense; and a $0.6 million increase in bad debt expense. The increase was partially offset by a $0.9 million decrease in the amortization of intangibles as certain of these assets reached the end of their useful life; a $0.9 million decrease in share-based compensation (for the reason described within “Product development expenses”); and a net $0.8 million decrease in compensation expense that is comprised of a $1.6 million reduction in cash-based performance-related compensation expense offset by a $0.8 million increase in salary-related compensation expense relating to new and existing employees.

As a percentage of Spend Management segment net revenue, segment expenses decreased to 56.9% from 59.7% for the nine months ended September 30, 2010 and 2009, respectively.

Corporate expenses. Corporate expenses for the nine months ended September 30, 2010 were $30.6 million, an increase of $8.5 million, or 38.4%, from $22.1 million for the nine months ended September 30, 2009, or 10.8% and 9.0% of total net revenue, respectively. The increase in corporate expenses was primarily attributable to a $2.9 million increase in acquisition-related fees associated with an unsuccessful acquisition attempt; a $1.5 million increase in acquisition-related fees associated with the Broadlane Acquisition; a $1.4 million increase in depreciation expense; a $1.4 million increase in other operating infrastructure expense; a net $1.3 million increase in compensation expense that is comprised of a $1.8 million increase in salary-related compensation expense related to new and existing employees offset by a $0.5 million reduction in cash-based performance-related compensation expense; a $0.6 million increase in professional fees; and a $0.5 million increase in charitable contributions. The increase was partially offset by a $1.1 million decrease in share-based compensation expense (for the reason described within “Product development expenses”).

We expect to incur a significant amount of acquisition-related costs for the remainder of 2010 and future periods relating to the Broadlane Acquisition.

Non-operating Expenses

Interest expense. Interest expense for the nine months ended September 30, 2010 was $11.0 million, a decrease of $3.0 million, or 21.6%, from interest expense of $14.0 million for the nine months ended September 30, 2009. As of September 30, 2010, we had total indebtedness of $173.5 million compared to $230.8 million as of September 30, 2009. The decrease in interest expense is primarily attributable to the decrease in our indebtedness compared to the prior period.

Other income. Other income for the nine months ended September 30, 2010 was $0.3 million, comprised principally of rental income. Other income for the nine months ended September 30, 2009 was $0.4 million, comprised principally of rental income slightly offset by foreign exchange transaction losses.

Income tax expense. Income tax expense for the nine months ended September 30, 2010 was $11.5 million, an increase of $5.3 million from an income tax expense of $6.2 million for the nine months ended September 30, 2009. The increase was primarily attributable to higher income before taxes in the nine months ended September 30, 2010 as compared to the prior period. The income tax expense recorded during the nine months ended September 30, 2010 and 2009 reflected an effective tax rate of 39.9% and 38.3%, respectively. The increase in our effective tax rate was primarily attributable to an increase in our estimated annual effective tax rate due to the expiration of the credit for research and development expenditures. Although legislation has been proposed, Congress has not yet reenacted this tax provision. If the legislation extending this credit is passed during the year ending December 31, 2010, retrospectively, our estimated annual effective tax rate will be impacted favorably.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the

reported amount of revenue and expenses during the reporting period. We base our estimates and judgments on historical experience and other assumptions that we find reasonable under the circumstances. Actual results may differ materially from such estimates under different conditions.

Management considers an accounting policy to be critical if the accounting policy requires management to make particularly difficult, subjective or complex judgments about matters that are inherently uncertain. A summary of our critical accounting policies is included in Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. There have been no material changes to the critical accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, except as discussed below.

Allowance for Doubtful Accounts

In evaluating the collectibility of our accounts receivable, we assess a number of factors, including a specific client’s ability to meet its financial obligations to us, such as whether a customer declares bankruptcy. Other factors include the length of time the receivables are past due and historical collection experience. Based on these assessments, we record a reserve for specific account balances as well as a general reserve based on our historical experience for bad debt to reduce the related receivables to the amount we expect to collect from clients. If circumstances related to specific clients change, or economic conditions deteriorate such that our past collection experience is no longer relevant, our estimate of the recoverability of our accounts receivable could be further reduced from the levels provided for in the Condensed Consolidated Financial Statements. If actual results are not consistent with our estimates or assumptions, we may experience a higher or lower expense.

We have not made any material changes in the accounting methodology used to estimate the allowance for doubtful accounts. If actual results are not consistent with our estimates or assumptions, we may experience a higher or lower expense.

Our bad debt expense to total net revenue ratio for the three months ended September 30, 2010 and 2009 was 0.2% and 1.6% (or 0.3% and 2.3% of other service fee revenue), respectively. Our bad debt expense to total net revenue ratio for the nine months ended September 30, 2010 and 2009 was 0.2% and 1.6% (or 0.3% and 2.3% of other service fee revenue), respectively. The decrease in the three and nine months ended September 30, 2010 was attributable to the decline in uncollectible accounts and bankruptcies that occurred during the prior period and due to improved internal processes to manage our accounts receivable exposure with respect to customers in our Revenue Cycle Management segment. However, as our revenue mix continues to shift more towards our Revenue Cycle Management segment, we may experience a higher bad debt expense to total revenue ratio based on our current collections experience with our hospital customers.

Liquidity and Capital Resources

Our primary cash requirements involve payment of ordinary expenses, working capital fluctuations, debt service obligations and capital expenditures. Our capital expenditures typically consist of software purchases, internal product development capitalization and computer hardware purchases. Historically, the acquisition of complementary businesses has resulted in a significant use of cash. Our principal sources of funds have primarily been cash provided by operating activities and borrowings under our credit facilities.

We believe we currently have adequate cash flow from operations, capital resources, available credit facilities and liquidity to meet our cash flow requirements including the following near term obligations (next 12 months): (i) our working capital needs; (ii) our debt service obligations; (iii) planned capital expenditures for the remainder of the year; (iv) our revenue share obligation and rebate payments; and (v) estimated federal and state income tax payments.

As consideration for the Broadlane Acquisition, we will pay an aggregate purchase price of approximately $850 million, of which $725 million is payable in cash upon the closing of the Broadlane Acquisition and $125 million is payable in cash on or before January 4, 2012, subject to adjustments and to certain limitations on such payment as contemplated by the debt financing contemplated in connection with the Broadlane Acquisition. Under the new credit facility which is expected to be entered into in connection with the Broadlane Acquisition (the “New Credit Facility”), we anticipate obtaining $750 million in senior secured first-lien loan facilities, and, if and to the extent that less than $360 million of notes are issued by us pursuant to a certain offering memorandum on or prior to the closing date of the Broadlane Acquisition, up to $360 million of senior unsecured increasing rate bridge loans under a senior unsecured bridge facility such that the aggregate face amount of the outstanding notes and the principal amount of the bridge loans does not exceed $360 million.

As part of our proposed Broadlane Acquisition, we expect to incur significant transaction and integration related costs in the future.

Historically, we have utilized federal net operating loss carryforwards (“NOLs”) for both regular and Alternative Minimum Tax

payment purposes. Consequently, our federal cash tax payments in past reporting periods have been minimal. However, given the current amount and limitations of our NOLs, we expect our cash paid for taxes to increase significantly in future years.

We have not historically utilized borrowings available under our existing credit agreement to fund operations. However, pursuant to the change in our cash management practice in 2008, we currently use the swing-line component of our revolving credit facility for funding operations while we voluntarily apply our excess cash balances to reduce our swing-line loan on a daily basis and to reduce our existing revolving credit facility on a routine basis. In addition, we may periodically make voluntary repayments on our term loan.

During the three months ended September 30, 2010, we made a $10.0 million voluntary repayment on our term loan.

As of September 30, 2010, we had zero dollars drawn on our revolving credit facility resulting in $124.0 million of availability under our revolving credit facility inclusive of the swing-line (netted for a $1.0 million letter of credit). Based on our analysis as of September 30, 2010, we are in compliance with all applicable covenant requirements of our existing credit agreement. We may observe fluctuations in cash flows provided by operations from period to period. Certain events may cause us to draw additional amounts under our swing-line or revolving facility and may include the following:

	•		changes in working capital due to inconsistent timing of cash receipts and payments for major recurring items such as trade accounts payable, revenue share obligation, incentive compensation, changes in deferred revenue, and other various items;

	•		acquisitions; and

	•		unforeseeable events or transactions.

We may continue to pursue other acquisitions or investments in the future. We may also increase our capital expenditures consistent with our anticipated growth in infrastructure, software solutions, and personnel, and as we expand our market presence. Cash provided by operating activities may not be sufficient to fund such expenditures. Accordingly, in addition to the use of our available revolving credit facility or the new credit facility, we may need to engage in additional equity or debt financings to secure additional funds for such purposes. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters including higher interest costs, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain required financing on terms satisfactory to us, our ability to continue to support our business growth and to respond to business challenges could be limited.

Discussion of Cash Flow

Cash and cash equivalents as of September 30, 2010 decreased $5.5 million from December 31, 2009.

Operating Activities.

The following table summarizes the cash provided by operating activities for the nine months ended September 30, 2010 and 2009:


	Nine Months Ended September 30,
	2010			2009			Change
	Amount			Amount			Amount			%
	(In millions)
Net income	$	17.3		$	10.0		$	7.3			73.0	%
Non-cash items		43.9			45.6			(1.7	)		(3.7	)
Net changes in working capital		(14.1	)		(15.7	)		1.6			(10.2	)

Net cash provided by operations	$	47.1		$	39.9		$	7.2			18.0	%

Net income represents the profitability attained during the periods presented and is inclusive of certain non-cash expenses. These non-cash expenses include depreciation for fixed assets, amortization of intangible assets, stock compensation expense, bad debt expense, deferred income tax expense, excess tax benefit from the exercise of stock options, loss on sale of assets and non-cash interest expense. Refer to our Condensed Consolidated Statement of Cash Flows for detailed fluctuations of these non-cash items. The total for these non-cash expenses was $43.9 million and $45.6 million for the nine months ended September 30, 2010 and 2009, respectively. The decrease in non-cash expenses for the nine months ended September 30, 2010 compared to September 30, 2009 was primarily

attributable to: (i) lower share-based compensation; (ii) a decrease in bad debt expense; and (iii) a decrease in amortization of intangibles.

Working capital is a measure of our liquid assets. Changes in working capital are included in the determination of cash provided by operating activities. For the nine months ended September 30, 2010, the working capital changes resulting in a reduction to cash flow from operations of $14.1 million primarily consisted of the following:

Reduction of cash flow

	•		an increase in accounts receivable of $8.7 million primarily related to the timing of invoicing and cash collections and our revenue growth;

	•		an increase in prepaid expenses and other assets of $6.2 million primarily related to income tax assets due to the annualization of book tax timing differences;

	•		an increase in other long-term assets of $1.2 million related to the timing of cash payments for our deferred sales expenses;

	•		a decrease in accrued revenue share obligation and rebates of $6.8 million due to the timing of cash payments and customer purchasing volume at our GPO; and

	•		a $6.0 million decrease in accrued payroll and benefits due to payroll cycle timing and lower performance-cash based compensation than the prior period.

The working capital changes resulting in reductions to the 2010 operating cash flow discussed above were partially offset by the following increases to cash flow:

Increase to cash flow

	•		a $7.7 million increase in deferred revenue for cash receipts not yet recognized as revenue;

	•		a $3.7 million working capital increase in trade accounts payable due to the timing of various payment obligations; and

	•		a $3.3 million increase in other accrued expenses due to the timing of various payment obligations.

For the nine months ended September 30, 2009, working capital changes resulting in a reduction to cash flow from operations of $15.7 million primarily consisted of the following:

Reduction of cash flow

	•		an increase in accounts receivable of $4.5 million related to the timing of invoicing and cash collections and our revenue growth;

	•		an increase in other long-term assets of $3.6 million related to the timing of cash payments for our deferred sales expenses;

	•		an increase in prepaid expenses and other assets of $1.5 million primarily related to sales incentive compensation payments;

	•		a decrease in accrued revenue share obligation and rebates of $5.0 million due to the timing of cash payments and customer purchasing volume at our GPO;

	•		a decrease in accrued payroll and benefits of $4.1 million due to payroll cycle timing; and

	•		a $2.8 million decrease in other accrued expenses due to the timing of various payment obligations.

The working capital changes resulting in reductions to the 2009 operating cash flow discussed above were partially offset by an increase to cash flow from a $5.1 million working capital increase in trade accounts payable due to the timing of various payment obligations.

Investing Activities.

Investing activities used $24.6 million of cash for the nine months ended September 30, 2010 which included: $11.9 million for investment in software development; $9.6 million of capital expenditures that were primarily related to the growth in our RCM segment; and $3.1 million relating to an acquisition we completed during the period (refer to Note 3 in the Notes to the Condensed Consolidated Financial Statements).

Investing activities used $39.8 million of cash for the nine months ended September 30, 2009 which included: a $18.3 million deferred purchase consideration payment (inclusive of $1.5 million of imputed interest) made in June 2009 as part of the Accuro Acquisition; $12.3 million for investment in software development; and $9.2 million of capital expenditures that were primarily related to the infrastructure growth in our RCM segment.

We believe that cash used in investing activities will continue to be materially impacted by continued growth in investments in property and equipment, future acquisitions and capitalized software. Our property, equipment, and software investments consist primarily of SaaS-based technology infrastructure to provide capacity for expansion of our customer base, including computers and related equipment and software purchased or implemented by outside parties. Our software development investments consist primarily of company-managed design, development, testing and deployment of new application functionality.

Financing Activities.

Financing activities used $28.0 million of cash for the nine months ended September 30, 2010. We received $9.1 million from the issuance of common stock related to equity award exercises and $5.1 million from the excess tax benefit associated with those exercises. This was offset by payments made on our credit facility of $41.7 million (comprised of a voluntary prepayment on our term loan of $28.5 million, our 2009 excess cash flow payment of $11.3 million and $1.9 million in mandatory quarterly principal payments) in addition to payments of $0.5 million that were made on our finance obligation. Our credit agreement requires an annual payment of excess cash flow which we expect to pay in the first quarter of 2011 provided our consolidated leverage ratio is more than 1.5 to 1.0.

Financing activities used $0.9 million of cash for the nine months ended September 30, 2009. We borrowed $71.8 million on our credit facility during the period. We also received $8.3 million from the issuance of common stock and $6.1 million from the excess tax benefit from the exercise of stock options. These were offset by payments made on our credit facility of $86.6 million and $0.5 million that were made on our finance obligation.

Off-Balance Sheet Arrangements and Commitments

We have provided a $1.0 million letter of credit to guarantee our performance under the terms of a ten-year lease agreement. The letter of credit is associated with the capital lease of a building located in Cape Girardeau, Missouri under a finance obligation. We do not believe that this letter of credit will be drawn.

We lease office space and equipment under operating leases. Some of these operating leases include rent escalations, rent holidays, and rent concessions and incentives. However, we recognize lease expense on a straight-line basis over the minimum lease term utilizing total future minimum lease payments. Our consolidated future minimum rental payments under our operating leases with initial or remaining non-cancelable lease terms of at least one year are as follows as of September 30, 2010 for each respective year (in thousands):


	Amount
	(Unaudited)
2010	$	2,781	(1)
2011		9,088
2012		7,974
2013		7,671
2014		6,911
Thereafter		20,179

Total future minimum rental payments	$	54,604


(1)		Represents the remaining rental payments due during the fiscal year ending December 31, 2010.

Other than the lease commitments above, we did not have any other off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Use of Non-GAAP Financial Measures

In order to provide investors with greater insight, promote transparency and allow for a more comprehensive understanding of the information used by management and the Board in financial and operational decision-making, we supplement our Condensed Consolidated Financial Statements presented on a GAAP basis in this Quarterly Report on Form 10-Q with the following non-GAAP financial measures: gross fees, gross administrative fees, revenue share obligation, EBITDA, Adjusted EBITDA, Adjusted EBITDA margin and cash diluted earnings per share.

These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. We compensate for such limitations by relying primarily on our GAAP results and using non-GAAP financial measures only supplementally. We provide reconciliations of non-GAAP measures to their most directly comparable GAAP measures, where possible. Investors are encouraged to carefully review those reconciliations. In addition, because these non-GAAP measures are not measures of financial performance under GAAP and are susceptible to varying calculations, these measures, as defined by us, may differ from and may not be comparable to similarly titled measures used by other companies.

Gross Fees, Gross Administrative Fees and Revenue Share Obligation. Gross fees include all gross administrative fees we receive pursuant to our vendor contracts and all other fees we receive from customers. Our revenue share obligation represents the portion of the gross administrative fees we are contractually obligated to share with certain of our GPO customers. Total net revenue (a GAAP measure) reflects our gross fees net of our revenue share obligation. These non-GAAP measures assist management and the Board and may be helpful to investors in analyzing our growth in the Spend Management segment given that administrative fees constitute a material portion of our revenue and are paid to us by over 1,150 vendors contracted by our GPO, and that our revenue share obligation constitutes a significant outlay to certain of our GPO customers. A reconciliation of these non-GAAP measures to their most directly comparable GAAP measure can be found in the “Overview” and “Results of Operations” section of Item 2.

EBITDA, Adjusted EBITDA and Adjusted EBITDA margin. We define: (i) EBITDA, as net income (loss) before net interest expense, income tax expense (benefit), depreciation and amortization; (ii) Adjusted EBITDA, as net income (loss) before net interest expense, income tax expense (benefit), depreciation and amortization and other non-recurring, non-cash or non-operating items; and (iii) Adjusted EBITDA margin, as Adjusted EBITDA as a percentage of net revenue. We use EBITDA, Adjusted EBITDA and Adjusted EBITDA margin to facilitate a comparison of our operating performance on a consistent basis from period to period and provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone. These measures assist management and the Board and may be useful to investors in comparing our operating performance consistently over time as it removes the impact of our capital structure (primarily interest charges and amortization of debt issuance costs), asset base (primarily depreciation and amortization) and items outside the control of the management team (taxes), as well as other non-cash (purchase accounting adjustments, and imputed rental income) and non-recurring items, from our operational results. Adjusted EBITDA also removes the impact of non-cash share-based compensation expense and certain acquisition-related charges.

Our Board and management also use these measures as (i) one of the primary methods for planning and forecasting overall expectations and for evaluating, on at least a quarterly and annual basis, actual results against such expectations; and (ii) as a performance evaluation metric in determining achievement of certain executive incentive compensation programs, as well as for incentive compensation plans for employees generally.

Additionally, research analysts, investment bankers and lenders may use these measures to assess our operating performance. For example, our credit agreement requires delivery of compliance reports certifying compliance with financial covenants certain of which are, in part, based on an adjusted EBITDA measurement that is similar to the Adjusted EBITDA measurement reviewed by our management and our Board. The principal difference is that the measurement of adjusted EBITDA considered by our lenders under our credit agreement allows for certain adjustments (e.g., inclusion of interest income, franchise taxes and other non-cash expenses, offset by the deduction of our capitalized lease payments for one of our office leases) that result in a higher adjusted EBITDA than the Adjusted EBITDA measure reviewed by our Board and management and disclosed in our Annual Report on Form 10-K. Additionally, our credit agreement contains provisions that utilize other measures, such as excess cash flow, to measure liquidity.

EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flow from continuing operating activities. Despite the advantages regarding the use and analysis of these measures as mentioned above, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin, as disclosed in this Quarterly Report on Form 10-Q,

have limitations as analytical tools, and you should not consider these measures in isolation, or as a substitute for analysis of our results as reported under GAAP; nor are these measures intended to be measures of liquidity or free cash flow for our discretionary use. Some of the limitations of EBITDA are:

	•		EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

	•		EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

	•		EBITDA does not reflect the interest expense, or the cash requirements to service interest or principal payments under our credit agreement;

	•		EBITDA does not reflect income tax payments we are required to make; and

	•		Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements.

Adjusted EBITDA has all the inherent limitations of EBITDA. To properly and prudently evaluate our business, we encourage you to review the GAAP financial statements included elsewhere in this Quarterly Report on Form 10-Q, and not rely on any single financial measure to evaluate our business. We also strongly urge you to review the reconciliation of net income to Adjusted EBITDA in this section, along with our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

The following table sets forth a reconciliation of EBITDA and Adjusted EBITDA to net income, a comparable GAAP-based measure. All of the items included in the reconciliation from net income to EBITDA to Adjusted EBITDA are either (i) non-cash items (e.g., depreciation and amortization, impairment of intangibles and share-based compensation expense) or (ii) items that management does not consider in assessing our on-going operating performance (e.g., income taxes and interest expense). In the case of the non-cash items, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other non-recurring items, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance.

The following table reconciles net income to Adjusted EBITDA for the three and nine months ended September 30, 2010 and 2009:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(Unaudited, in thousands)
Net income	$	8,461		$	5,896		$	17,275		$	9,976
Depreciation		5,235			3,125			14,068			9,020
Depreciation (included in cost of revenue)		726			616			2,167			1,836
Amortization of intangibles, acquisition related		5,596			7,018			17,706			21,029
Amortization of intangibles (included in cost of revenue)		139			185			509			555
Interest expense, net of interest income(1)		3,201			4,255			10,886			13,994
Income tax expense		5,685			3,613			11,477			6,196

EBITDA		29,043			24,708			74,088			62,606
Share-based compensation(2)		2,142			3,951			8,653			12,911
Rental income from capitalizing building lease(3)		(110	)		(110	)		(329	)		(329	)
Purchase accounting adjustment(4)		—			(1	)		—			203
Acquisition-related charges(5)		2,482			—			4,351			—

Adjusted EBITDA	$	33,557		$	28,548		$	86,763		$	75,391


(1)		Interest income is included in other income (expense) and is not netted against interest expense in our Condensed


		Consolidated Statement of Operations.

(2)		Represents non-cash share-based compensation to both employees and directors. We believe excluding this non-cash expense allows us to compare our operating performance without regard to the impact of share-based compensation expense, which varies from period to period based on the amount and timing of grants.

(3)		The imputed rental income recognized with respect to a capitalized building lease is deducted from net income (loss) due to its non-cash nature. We believe this income is not a useful measure of continuing operating performance. See our Consolidated Financial Statements filed in our annual report on Form 10-K for the year ended December 31, 2009 for further discussion of this rental income.

(4)		These adjustments include the effect on revenue of adjusting acquired deferred revenue balances, net of any reduction in associated deferred costs, to fair value as of the acquisition date for Accuro. The reduction of the deferred revenue balance materially affects period-to-period financial performance comparability and revenue and earnings growth in future periods subsequent to the acquisition and is not indicative of changes in underlying results of operations. In 2010, these adjustments will no longer be reconciling items related to acquired deferred revenue balances because the amounts were fully amortized in 2009. We may have this adjustment in future periods if we have any new acquisitions.

(5)		These charges reflect (i) due diligence and acquisition-related expenses pertaining to merger and acquisition activities relating to an unsuccessful acquisition attempt amounting to $1.0 million and $2.9 million for the three and nine months ended September 30, 2010, respectively; and (ii) acquisition-related expenses associated with the Broadlane Acquisition amounting to $1.5 million for the three and nine months ended September 30, 2010, respectively. We consider these charges to be non-operating expenses and unrelated to our underlying results of operations.

Diluted Cash Earnings Per Share.

The Company defines diluted cash EPS as diluted earnings per share excluding non-cash acquisition-related intangible amortization, non-recurring expense items on a tax-adjusted basis, non-cash tax-adjusted shared-based compensation expense and certain tax-adjusted acquisition-related charges. Diluted cash EPS is not a measure of liquidity under GAAP, or otherwise, and is not an alternative to cash flow from continuing operating activities. Diluted cash EPS growth is used by the Company as the financial performance metric that determines whether certain equity awards granted pursuant to the Company’s Long-Term Performance Incentive Plan will vest. Use of this measure for this purpose allows management and the Board to analyze the Company’s operating performance on a consistent basis by removing the impact of certain non-cash and non-recurring items from our operations and by rewarding organic growth and accretive business transactions. As a significant portion of senior management’s incentive based compensation is based on the achievement of certain diluted cash EPS growth over time, investors may find such information useful; however, as a non-GAAP financial measure, diluted cash EPS is not the sole measure of the Company’s financial performance and may not be the best measure for investors to gauge such performance.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Per share data	2010			2009			2010			2009
	(Unaudited)						(Unaudited)
EPS — diluted	$	0.14		$	0.10		$	0.29		$	0.17
Pre-tax non-cash, aquisition-related intangible amortization		0.10			0.12			0.31			0.38
Pre-tax non-cash, share-based compensation(1)		0.04			0.07			0.15			0.22
Pre-tax acquisition-related charges(2)		0.04			—			0.07			—

Tax effect on pre-tax adjustments(3)		(0.07	)		(0.07	)		(0.21	)		(0.23	)

Non-GAAP cash EPS — diluted	$	0.25		$	0.22		$	0.61		$	0.54

Weighted average shares — diluted (in 000s)		59,786			57,855			59,340			57,223


(1)		Represents the per share impact, on a tax-adjusted basis of non-cash share-based compensation to employees and directors. We believe excluding this non-cash expense allows us to compare our operating performance without regard to the impact of


		share-based compensation expense, which varies from period to period based on the amount and timing of grants.

(2)		Represents the per share impact, on a tax-adjusted basis of (i) due diligence and acquisition-related expenses relating to an unsuccessful acquisition attempt; and (ii) acquisition-related expenses associated with the Broadlane Acquisition. We consider these charges to be non-operating expenses and unrelated to our underlying results of operations.

(3)		This amount reflects the tax impact to the adjustments used to derive Non-GAAP diluted cash EPS. The Company uses its effective tax rate for each respective period to tax effect the adjustments. The effective tax rate for the three months ended September 30, 2010 and 2009 was 40.2% and 38.0%, respectively. The effective tax rate for the nine months ended September 30, 2010 and 2009 was 39.9% and 38.3%, respectively.

New Pronouncements

Revenue Recognition

In October 2009, the FASB issued an accounting standards update for multiple-deliverable revenue arrangements. The update addressed the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. The update also addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. The amendments in the update significantly expand the disclosures related to a vendor’s multiple-deliverable revenue arrangements with the objective of providing information about the significant judgments made and changes to those judgments and how the application of the relative selling-price method of determining stand-alone value affects the timing or amount of revenue recognition. The accounting standards update is applicable for annual periods beginning after June 15, 2010, however, early adoption is permitted. We are currently assessing the impact of the adoption of this update on our Condensed Consolidated Financial Statements.

In October 2009, the FASB issued an accounting standards update relating to certain revenue arrangements that include software elements. The update will change the accounting model for revenue arrangements that include both tangible products and software elements. Among other things, tangible products containing software and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of software revenue guidance. In addition, the update also provides guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes tangible products and software. The accounting standards update is applicable for annual periods beginning after June 15, 2010, however, early adoption is permitted. The adoption of this update is not expected to have a material impact on our Condensed Consolidated Financial Statements.

Subsequent Events


Item 3.		Quantitative and Qualitative Disclosures About Market Risk

Foreign currency exchange risk. Certain of our contracts are denominated in Canadian dollars. As our Canadian sales have not historically been significant to our operations, we do not believe that changes in the Canadian dollar relative to the U.S. dollar will have a significant impact on our financial condition, results of operations or cash flows. On August 2, 2007, we entered into a series of forward contracts to fix the Canadian dollar-to-U.S. dollar exchange rates on a Canadian customer contract, as discussed in Note 11 to our Condensed Consolidated Financial Statements herein, which expired on April 30, 2010. We have one other Canadian dollar contract that we have not elected to hedge. We currently do not transact any other business in any currency other than the U.S. dollar. As we

continue to grow our operations, we may increase the amount of our sales to foreign customers. Although we do not expect foreign currency exchange risk to have a significant impact on our future operations, we will assess the risk on a case-specific basis to determine whether any forward currency hedge instrument would be warranted.

Interest rate risk. We had outstanding borrowings on our term loan and revolving credit facility of $173.5 million as of September 30, 2010. The term loan and revolving credit facility bear interest at LIBOR plus an applicable margin.

On May 21, 2009, we entered into a LIBOR interest rate swap with a notional amount of $138.3 million beginning June 30, 2010, which effectively converts a portion of our variable rate term loan credit facility to a fixed rate debt. The notional amount subject to the swap has pre-set quarterly step downs corresponding to our anticipated principal reduction schedule.

The interest rate swap converts the three-month LIBOR rate on the corresponding notional amount of debt to an effective fixed rate of 1.99% (exclusive of the applicable bank margin charged by our lender). The interest rate swap terminates on March 31, 2012 and qualifies as a highly effective cash flow hedge under GAAP for derivatives and hedging.

As such, the fair value of the derivative will be recorded on our Consolidated Balance Sheet. The interest rate swap matures on March 31, 2012. As of September 30, 2010, the interest rate swap had a negative market value of $1.7 million ($1.0 million net of tax). The liability is included in other long-term liabilities in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2010. The unrealized loss is recorded in other comprehensive loss, net of tax, in the Condensed Consolidated Statement of Stockholders’ Equity.

We considered the credit worthiness of the counterparty of the hedged instrument. We believe the swap is probable of occurring given the size, international presence and track record of the counterparty to perform under the obligations of the contract and that the counterparty is not at risk of default that would change the highly effective status of the hedged instrument.

On June 24, 2008 (effective June 30, 2008), we entered into an interest rate collar to hedge our interest rate exposure on a notional $155.0 million of our outstanding term loan credit facility. The collar expired on June 30, 2010. The collar set a maximum interest rate of 6.00% and a minimum interest rate of 2.85% on the three-month LIBOR applicable to a notional $155.0 million of term loan debt. This collar effectively limited our LIBOR interest exposure on this portion of our term loan debt to within that range (2.85% to 6.00%). The collar did not hedge the applicable margin payable to our lenders on our indebtedness. Settlement payments were made between the hedge counterparty and us on a quarterly basis, coinciding with our term loan installment payment dates, for any rate overage on the maximum rate and any rate deficiency on the minimum rate on the notional amount outstanding.

A hypothetical 100 basis point increase or decrease in LIBOR, which would represent potential interest rate change exposure on our outstanding unhedged portion of our term loan and revolving credit facility, would have resulted in an insignificant change to our interest expense for the three and nine months ended September 30, 2010, respectively.

We anticipate that we will enter into a number of financing arrangements to fund the Broadlane Acquisition. The anticipated increase in our indebtedness will cause a significant increase in our interest expense for the remainder of 2010 and in future periods. We expect to terminate our existing interest rate swap after the new financing is obtained and to enter into one or more interest rate derivative instruments.


Item 4.		Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, management recognizes that any control or procedure, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship regarding the potential utilization of certain controls and procedures.

As required by Rule 13a-15(b) under the Exchange Act, our management, with the participation of our chief executive officer and chief financial officer, evaluated the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based on such evaluation, our chief executive officer and chief financial officer have concluded

that, as of the end of the period covered by this report, our disclosure controls and procedures were effective and were operating at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting for the three months ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.		Legal Proceedings

From time to time, we become involved in legal proceedings arising in the ordinary course of our business. We are not presently involved in any legal proceedings, the outcome of which, if determined adversely to us, would have a material adverse affect on our business, operating results or financial condition.


Item 1A.		Risk Factors

Risks related to the Broadlane Acquisition

We may experience difficulties in integrating Broadlane’s business and the anticipated benefits of the Broadlane Acquisition may not be realized fully (or at all) and may take longer to realize than expected.

Our future performance will depend in large part on whether we can successfully integrate the Broadlane business, which would be our largest acquisition to date, in an effective and efficient manner. Integrating our business with the Broadlane business will be a complex, time-consuming and expensive process and involve a number of risks, including:

•

the diversion of our management’s attention, as integrating the operations and assets of the acquired business will require a substantial amount of our management’s time;

•

difficulties associated with assimilating the operations of the acquired business, including differing technology, business systems and corporate cultures;

•

increased demand from customers for pricing concessions based on the broader product offering;

•

the ability to achieve operating and financial synergies anticipated to result from the Broadlane Acquisition;

•

greater than expected costs of integration; and

•

failure to retain key personnel and customers of Broadlane.

Delays or unexpected difficulties or additional costs in the integration process could have a material adverse effect on our business, financial condition and results of operations. Even if we are able to integrate the Broadlane business successfully, this integration may not result in the realization of the full benefits of synergies, cost savings, revenue enhancements, growth, operational efficiencies and other benefits that we expect. We cannot assure you that we will successfully integrate the Broadlane business with our business or achieve the desired benefits from the Broadlane Acquisition within a reasonable period of time or at all.

Uncertainty regarding the Broadlane Acquisition may cause actual or potential customers, suppliers, distributors and others to delay or defer decisions concerning Broadlane or us, which may have a material adverse effect on our or Broadlane’s business, financial condition or results of operation.

In response to the announcement or completion of the Broadlane Acquisition, actual or potential customers, suppliers, distributors, resellers and others may delay or defer purchasing, supply or distribution decisions or otherwise alter existing relationships with us or Broadlane. Prospective customers could be reluctant to purchase our and Broadlane’s products and services due to uncertainty about the direction of the combined company’s products and services and willingness to support and service existing products and services, given the differences between our service offerings and those of Broadlane. Existing customers, suppliers and distributors of Broadlane and the Company may seek to terminate and/or renegotiate their relationships with the combined company as a result of the Broadlane Acquisition. Existing customers may not accept new products or continue as customers of the combined company, and the combined company may fail to compete effectively against companies already serving the broader market opportunities expected to be available to the combined company. These and other actions by customers, suppliers, distributors, resellers or others could negatively affect the business of the combined company.

Risks related to government regulation

Our business and our industry are highly regulated, and if government regulations are interpreted or enforced in a manner adverse to us or our business, we may be subject to enforcement actions, penalties, and other material limitations on our business.

We and the healthcare manufacturers, distributors and providers with whom we do business are extensively regulated by federal, state and local governmental agencies. Most of the products offered through our group purchasing contracts are subject to direct regulation by federal and state governmental agencies. We rely upon vendors who use our services to meet all quality control, packaging, distribution, labeling, hazard and health information notice, record keeping and licensing requirements. In addition, we rely upon the carriers retained by our vendors to comply with regulations regarding the shipment of any hazardous materials.

We cannot guarantee that the vendors are in compliance with applicable laws and regulations. If vendors or the providers with whom we do business have failed, or fail in the future, to adequately comply with any relevant laws or regulations, we could become involved in governmental investigations or private lawsuits concerning these regulations. If we were found to be legally responsible in any way for such failure we could be subject to injunctions, penalties or fines which could harm our business. Furthermore, any such investigation or lawsuit could cause us to expend significant resources and divert the attention of our management team, regardless of the outcome, and thus could harm our business.

In recent years, the group purchasing industry and some of its largest purchasing customers have been reviewed by the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights for possible conflict of interest and restraint of trade violations. As a response to the Senate Subcommittee inquiry, our company joined other GPOs to develop a set of voluntary principles of ethics and business conduct designed to address the Senate’s concerns regarding anti-competitive practices. The voluntary code was presented to the Senate Subcommittee in March 2006. In addition, we maintain our own Standards of Business Conduct that provide guidelines for conducting our business practices in a manner that is consistent with antitrust and restraint of trade laws and regulations. There has not been any further inquiry by the Senate Subcommittee since March 2006. On August 11, 2009, we, and several other GPOs, received a letter from Senators Charles Grassley, Herb Kohl and Bill Nelson requesting information concerning the different relationships between and among our GPO and its clients, distributors, manufacturers and other vendors and suppliers, and requesting

certain information about the services the GPO performs and the payments it receives. On September 25, 2009, we and several other GPOs received a request for information from the Government Accountability Office (GAO), also concerning our GPO’s services and relationships with our clients. Subsequently, we, and other GPOs, received follow-up requests for additional information. We fully complied with all of these requests. On September 27, 2010, the GAO released a report titled “Group Purchasing Organizations — Services Provided to Customers and Initiatives Regarding Their Business Practices”. On that same day, the Minority Staff of the Senate Finance Committee released a report titled “Empirical Data Lacking to Support Claims of Savings with Group Purchasing Organizations”.

Congress, the Department of Justice, the Federal Trade Commission or other state or federal governing entity could at any time open a new investigation of the group purchasing industry, or develop new rules, regulations or laws governing the industry, that could adversely impact our ability to negotiate pricing arrangements with vendors, increase reporting and documentation requirements, or otherwise require us to modify our arrangements in a manner that negatively impacts our business and financial results. We may also face private or government lawsuits alleging violations arising from the concerns articulated by these governmental actors. We are involved on an ongoing basis in litigation, arising in the ordinary course of business or otherwise, which from time to time may include class actions involving consumers, shareholders, employees or injured persons, and claims relating to commercial, labor, employment, antitrust, securities or environmental matters. The outcome of litigation cannot be predicted with certainty and adverse litigation outcomes could adversely affect our financial results.

Any material changes in the political, economic or regulatory healthcare environment that affect the purchasing practices and operations of healthcare organizations, or lead to consolidation in the healthcare industry, could require us to modify our services or reduce the funds available to purchase our products and services.

Our business, financial condition and results of operations depend upon conditions affecting the healthcare industry generally and hospitals and health systems particularly. Our ability to grow will depend upon the economic environment of the healthcare industry generally as well as our ability to increase the number of programs and services that we sell to our customers. The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. Factors such as changes in reimbursement policies for healthcare expenses, consolidation in the healthcare industry, regulation, litigation, and general economic conditions affect the purchasing practices, operation and, ultimately, the operating funds of healthcare organizations. In particular, changes in regulations affecting the healthcare industry, such as any increased regulation by governmental agencies of the purchase and sale of medical products, or restrictions on permissible discounts and other financial arrangements, could require us to make unplanned modifications of our products and services, or result in delays or cancellations of orders or reduce funds and demand for our products and services.

Because of current macro-economic conditions including continued disruptions in the broader capital markets, the lingering effect of the weakened economy coupled with small reserves and thin operating margins, cash flow and access to credit can be problematic for many healthcare delivery organizations. While we believe we are well positioned through our product and service offerings to assist hospitals and health systems who are dealing with increasing and intense financial pressures, it is unclear what long-term effects these conditions will have on the healthcare industry and in turn on our business, financial condition and results of operations.

In addition, in February 2009 the United States Congress enacted the HITECH Act, as part of the American Recovery and Reinvestment Act of 2009. The HITECH Act requires that hospitals and health systems make investments in their clinical information systems, including the adoption of electronic medical records. While we believe that increased emphasis on electronic medical records by hospitals and health systems will also drive demand for SaaS-based tools, such as ours, to help rationalize and standardize patient and clinical data for efficient and accurate use, we cannot be certain that such demand will materialize nor can we be certain that we will be benefit from it.

Further, in March 2010, President Obama signed into law the Patient Protection and Affordable Care Act (“PPACA”), amended by the Health Care and Education and Reconciliation Act of 2010 (collectively, the “Affordable Care Act”). The Affordable Care Act is a sweeping measure designed to expand access to affordable health insurance, control health care spending, and improve health care quality. The law includes provisions to tie Medicare provider reimbursement to health care quality and incentives; mandatory compliance programs; enhanced transparency disclosure requirements; increased funding and initiatives to address fraud and abuse; and incentives to state Medicaid programs to promote community-based care as an alternative to institutional long-term care services, among many others. In addition, the law provides for the establishment of a national voluntary pilot program to bundle Medicare payments for hospital and post-acute services, which could lead to changes in the delivery of health care services. Likewise, many states have adopted or are considering changes in health care policies as a result of state budgetary shortfalls. We do not know what effect the federal Affordable Care Act or state law proposals may have on our business.

Federal and state privacy and security laws may increase the costs of operation and expose us to civil and criminal sanctions.

We must comply with extensive federal and state requirements regarding the use, retention and security of patient healthcare information. The Health Insurance Portability and Accountability Act of 1996, as amended, and the regulations that have been issued under it, which we refer to collectively as HIPAA, contain substantial restrictions and requirements with respect to the use and disclosure of individuals’ protected health information. These restrictions and requirements are set forth in the Privacy Rule and Security Rule portions of HIPAA. The HIPAA Privacy Rule prohibits a covered entity from using or disclosing an individual’s protected health information unless the use or disclosure is authorized by the individual or is specifically required or permitted under the Privacy Rule. The Privacy Rule imposes a complex system of requirements on covered entities for complying with this basic standard. Under the HIPAA Security Rule, covered entities must establish administrative, physical and technical safeguards to protect the confidentiality, integrity and availability of electronic protected health information maintained or transmitted by them or by others on their behalf.

The HIPAA Privacy and Security Rules have historically applied directly to covered entities, such as our customers who are healthcare providers that engage in HIPAA-defined standard electronic transactions. Because some of our customers disclose protected health information to us so that we may use that information to provide certain consulting or other services to those customers, we are a “business associate” of those customers. In order to provide customers with services that involve the use or disclosure of protected health information, the HIPAA Privacy and Security Rules require us to enter into business associate agreements with our customers. Such agreements must, among other things, provide adequate written assurances:

	•		as to how we will use and disclose the protected health information;

	•		that we will implement reasonable administrative, physical and technical safeguards to protect such information from misuse;

	•		that we will enter into similar agreements with our agents and subcontractors that have access to the information;

	•		that we will report security incidents and other inappropriate uses or disclosures of the information; and

	•		that we will assist the covered entity with certain of its duties under the Privacy Rule.

With the enactment of the HITECH Act, the privacy and security requirements of HIPAA have been modified and expanded. The HITECH Act applies certain of the HIPAA privacy and security requirements directly to business associates of covered entities. As such, and upon the enforcement date of a forthcoming final regulation implementing the HITECH Act’s privacy and security provisions, we will be required to directly comply with certain aspects of the Privacy and Security Rules, and will also be subject to enforcement for a violation of HIPAA standards. Significantly, the HITECH Act also establishes new mandatory federal requirements for both covered entities and business associates regarding notification of breaches of unsecured protected health information. These breach notification requirements are currently effective and being enforced.

Any failure or perception of failure of our products or services to meet HIPAA standards and related regulatory requirements could expose us to certain notification, penalty and/or enforcement risks and could adversely affect demand for our products and services, and force us to expend significant capital, research and development and other resources to modify our products or services to address the privacy and security requirements of our customers and HIPAA.

In addition to our obligations under HIPAA, most states have enacted patient confidentiality laws that protect against the disclosure of confidential medical information, and many states have adopted or are considering adopting further legislation in this area, including privacy safeguards, security standards, and data security breach notification requirements. These state laws, if more stringent than HIPAA requirements, are not preempted by the federal requirements, and we are required to comply with them as well.

We are unable to predict what changes to HIPAA or other federal or state laws or regulations might be made in the future or how those changes could affect our business or the associated costs of compliance. For example, the federal Office of the National Coordinator for Health Information Technology, or ONCHIT, is coordinating the development of national standards for creating an interoperable health information technology infrastructure based on the widespread adoption of electronic health records (EHRs) in the healthcare sector. In October 2010, the Certification Commission for Health Information Technology (CCHIT) announced it has tested and certified 33 electronic health record products under the Commission’s ONC-ATCB program, which certifies that the EHRs are capable of meeting the 2011/2012 criteria supporting Stage 1 meaningful use as approved by the Secretary of Health and Human Services. The certifications include 19 Complete EHRs, which meet all of the 2011/2012 criteria for either eligible provider or hospital technology, and 14 EHR Modules, which meet one or more — but not all — of the criteria. We are yet unable to predict what, if any, impact the creation of such standards will have on our products, services or compliance costs.

Failure by us to comply with any of the federal state standards regarding patient privacy, identity theft prevention and detection, and data security may subject us to penalties, including civil monetary penalties and in some circumstances, criminal penalties. In addition, such failure may injure our reputation and adversely affect our ability to retain customers and attract new customers.

There have been no other material changes in the risk factors as disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2009.


Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds

During the nine months ended September 30, 2010, we issued approximately 49,000 unregistered shares of our common stock in connection with stock option exercises related to stock options issued in connection with our acquisition of OSI Systems, Inc. in June 2003. We received approximately $0.1 million in consideration in connection with these stock option exercises.

These issuances of our common stock were deemed to be exempt from registration in reliance on Section 4(2) of the Securities Act, or Regulation D or Rule 701 promulgated thereunder, as transactions by an issuer not involving any public offering.


Item 3.		Defaults Upon Senior Securities

Not applicable.


Item 4.		Removed and Reserved

Not applicable.


Item 5.		Other Information

Not applicable.


Item 6.		Exhibits


Exhibit
No.		Description of Exhibit
31.1*		Sarbanes-Oxley Act of 2002, Section 302 Certification for President and Chief Executive Officer

31.2*		Sarbanes-Oxley Act of 2002, Section 302 Certification for Chief Financial Officer

32.1*		Sarbanes-Oxley Act of 2002, Section 906 Certification for President and Chief Executive Officer and Chief Financial Officer

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document


*		Filed herewith


	PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009		3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009		4
Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2010		5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3. Quantitative and Qualitative Disclosures About Market Risk		42
Item 4. Controls and Procedures		43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		44
Item 1A. Risk Factors		44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 3. Defaults Upon Senior Securities		47
Item 4. [Removed and Reserved]		47
Item 5. Other Information		47
Item 6. Exhibits		47
Signatures		48
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


								Accumulated
					Additional			Other						Total
	Common Stock				Paid-In			Comprehensive			Accumulated			Stockholders’
	Shares		Par Value		Capital			Income (Loss)			Deficit			Equity
	(In thousands)
Balances at December 31, 2009		56,715	$	567	$	639,315		$	(1,605	)	$	(200,905	)	$	437,372

Issuance of common stock from equity award exercises		1,176		12		9,069			—			—			9,081
Issuance of common restricted stock (net of forfeitures)		73		1		(1	)		—			—			—
Stock compensation expense		—		—		8,653			—			—			8,653
Excess tax benefit from equity award exercises		—		—		5,097			—			—			5,097
Other comprehensive income:
Unrealized gain from hedging activities (net of a tax of $349)		—		—		—			577			—			577
Net income		—		—		—			—			17,275			17,275

Comprehensive income		—		—		—			577			17,275			17,852

Balances at September 30, 2010		57,964	$	580	$	662,133		$	(1,028	)	$	(183,630	)	$	478,055


(1)		These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.

(2)		Represents the expenses of corporate office operations.

(3)		Management’s primary metric of segment profit or loss is segment adjusted EBITDA. See Note 10 of the Notes to Condensed Consolidated Financial Statements.

(4)		Reportable segment adjusted EBITDA margin represents each reportable segment’s adjusted EBITDA as a percentage of each segment’s respective net revenue.


Signature	Title	Date

/s/ JOHN A. BARDIS Name: John A. Bardis	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)	October 28, 2010

/s/ L. NEIL HUNN Name: L. Neil Hunn	Chief Financial Officer (Principal Financial Officer)	October 28, 2010