Annual Reports

 
Quarterly Reports

 
8-K

 
Other

MEDASSETS INC 10-K 2010
e10vk
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2009
 
Commission File No. 001-33881
 
 
     
DELAWARE
  51-0391128
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification Number)
 
100 North Point Center East, Suite 200
Alpharetta, Georgia 30022
(Address of Principal Executive Offices)
 
(678) 323-2500
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, par value $0.01
  The Nasdaq Stock Market LLC
(Nasdaq Global Select Market)
 
Securities registered pursuant to Section 12(g) of the Act: Not Applicable
 
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act.  Yes o     No þ
 
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 o     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   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 Smaller reporting company o
     (Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
The aggregate market value of Common Stock held by non-affiliates of the registrant on June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, was $774,523,235 based on the closing sale price of the Common Shares on the Nasdaq Global Select Market on that date. For purposes of the foregoing calculation only, the registrant has assumed that all officers and directors of the registrant are affiliates.
 
The number of shares of Common Stock outstanding at February 18, 2010 was 56,787,823.
 
 
Portions of the Registrant’s Proxy Statement (to be filed pursuant to Regulation 14A within 120 days after the Registrant’s fiscal year-end of December 31, 2009), for the annual meeting of shareholders, are incorporated by reference in Part III.
 


 

 
MEDASSETS, INC.
 
 
                 
        Page
 
PART I.
  ITEM 1.     BUSINESS     1  
  ITEM 1A.     RISK FACTORS     14  
  ITEM 1B.     UNRESOLVED STAFF COMMENTS     30  
  ITEM 2.     PROPERTIES     31  
  ITEM 3.     LEGAL PROCEEDINGS     32  
  ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS     32  
 
PART II.
  ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     32  
  ITEM 6.     SELECTED FINANCIAL DATA     36  
  ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     38  
  ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     74  
  ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     75  
  ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     75  
  ITEM 9A.     CONTROLS AND PROCEDURES     75  
  ITEM 9B.     OTHER INFORMATION     76  
 
PART III.
  ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE     76  
  ITEM 11.     EXECUTIVE COMPENSATION     76  
  ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS     76  
  ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE     77  
  ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES     77  
 
PART IV.
  ITEM 15.     EXHIBITS AND FINANCIAL STATEMENT SCHEDULES     78  
        Signatures     80  
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1


Table of Contents

 
 
Unless the context indicates otherwise, references in this Annual Report to “MedAssets,” the “Company,” “we,” “our” and “us” mean MedAssets, Inc., and its subsidiaries and predecessor entities.
 
 
This Annual Report on Form 10-K contains certain “forward-looking statements” (as defined in Section 27A of the U.S. Securities Act of 1933, as amended, or the “Securities Act,” and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, or 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 Annual Report on Form 10-K, 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 under the heading “Risk Factors” in Part I, Item 1A. herein and elsewhere in this Annual Report on Form 10-K.
 
ITEM 1.   BUSINESS.
 
 
The Company, headquartered in Alpharetta, Georgia, was incorporated in 1999. MedAssets provides technology-enabled products and services which together help mitigate the increasing financial pressures faced by hospitals and health systems. These include the increasing complexity of healthcare reimbursement, rising levels of bad debt and uncompensated care and significant increases in supply utilization and operating costs. Our solutions are designed to improve operating margin and cash flow for hospitals and health systems. We believe implementation of our full suite of solutions has the potential to improve customer operating margins by 1.5% to 5.0% of revenues by increasing revenue capture and decreasing supply costs. The sustainable financial improvements provided by our solutions occur in a matter of months and can be quantified and confirmed by our customers. Our solutions integrate with our customers’ existing operations and enterprise software systems and require minimal upfront costs or capital expenditures.
 
According to the American Hospital Association, average community hospital operating margins were 4.3% in 2007, and approximately 34% of community hospitals had negative total margins during the first half of 2009. We believe that hospital and health system operating margins will remain under long-term and continual financial pressure due to shortfalls in available government reimbursement, managed care pricing leverage, and continued escalation of supply utilization and operating costs.
 
Our technology-enabled solutions are delivered primarily through company-hosted software, or software as a service (“SaaS”), supported by enterprise-wide sales, account management, implementation services and consulting. We employ an integrated, customer-centric approach to delivering our solutions which, when combined with the ability to deliver measurable financial improvement, has resulted in high retention of our large health system customers, and, in turn, a predictable base of stable, recurring revenue. Our ability to expand the breadth and value of our solutions over time has allowed us to develop strong relationships with our customers’ senior management teams.
 
Our success in improving our customers’ ability to increase revenue and manage supply expense has driven substantial growth in our customer base and has allowed us to expand sales of our products and services to existing customers. These factors have contributed to our compounded annual net revenue growth rate of


1


Table of Contents

approximately 36.4% over our last five fiscal years. Our customer base currently includes over 125 health systems and, including those that are part of our health system customers, more than 3,300 acute care hospitals and more than 40,000 ancillary or non-acute provider locations. Our Revenue Cycle Management segment currently has more than 2,200 hospital customers, which makes us one of the largest providers of revenue cycle management solutions to hospitals. Our Spend Management segment manages approximately $24 billion of annual supply spend by healthcare providers, has more than 1,700 hospital customers and includes the third largest group purchasing organization, or GPO, in the United States.
 
We deliver our solutions through two business segments, Revenue Cycle Management (“RCM”) and Spend Management (“SM”):
 
  •  Revenue Cycle Management.  Our RCM segment provides a comprehensive suite of products and services spanning the hospital revenue cycle workflow — from patient access and financial responsibility, charge capture and integrity, pricing analysis, claims processing and denials management, payor contract management, revenue recovery and accounts receivable services. Our workflow solutions, together with our data management, decision support, performance analytics, and compliance and audit tools, increase revenue capture and cash collections, reduce accounts receivable balances and increase regulatory compliance. Based on our analysis of certain customers that have implemented a portion of our products and services, we estimate that implementation of our full suite of revenue cycle management solutions has the potential to increase a typical health system’s net patient revenue by 1.0% to 3.0%.
 
  •  Spend Management.  Our SM 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 costs and utilization by managing the procurement process through our group purchasing organization’s portfolio of contracts, consulting services and business analytics and intelligence tools. Based on our analysis of certain customers that have implemented a portion of our products and services, we estimate that implementation of our full suite of spend management solutions has the potential to decrease a typical health system’s supply expenses by 3% to 10%, which equates to an increase in operating margin of 0.5% to 2.0% of revenue.
 
We believe that we are uniquely positioned to identify, analyze, implement and maintain customer-specific solutions for hospitals and health systems as they continue to face the financial pressures that are endemic and long-term to the healthcare industry and particularly acute in today’s economic climate. We have leveraged the scale and scope of our revenue cycle management and spend management businesses to develop a strong understanding and unique base of content regarding the industry in which hospitals and health systems operate. The solutions that we develop with the benefit of this insight are designed to strengthen the discrete financial and operational weaknesses across revenue cycle management and spend management operations.
 
 
According to the U.S. Centers for Medicare & Medicaid Services, or CMS, spending on healthcare in the United States was estimated to be $2.4 trillion in 2008, or 16.6% of United States Gross Domestic Product, or GDP. Healthcare spending is projected to grow at a rate of approximately 6.2% per annum, and reach almost $4.4 trillion by 2018, or 20.3% of GDP. In 2008, spending on hospital care was estimated to be $747 billion, representing the single largest component. According to the American Hospital Association, the U.S. healthcare market has approximately 5,800 acute care hospitals, of which nearly 2,900 are part of health systems. A health system is a healthcare provider with a range of facilities and services designed to deliver care more efficiently and to compete more effectively to increase market share. In addition to the acute care hospital market, our solutions can also improve operating margin and cash flow for non-acute care providers. The non-acute care market consists of nearly 550,000 healthcare facilities and providers, including outpatient medical centers and surgery centers, medical and diagnostic laboratories, imaging and diagnostic centers, home healthcare service providers, long term care providers, and physician practices.
 
We believe that ongoing strains on government agencies’ ability to pay for healthcare will have the effect of limiting available reimbursement for hospitals. Reimbursement by federal programs often does not cover a


2


Table of Contents

hospital’s cost of providing care. In 2008, community hospitals had a shortfall of more than $36 billion relative to the cost of providing care to Medicare and Medicaid beneficiaries, up from $3.9 billion in 2000, according to the American Hospital Association. The growing Medicare eligible population, combined with a declining number of workers per Medicare beneficiary, is expected to result in significant Medicare budgetary pressures leading to increasing reimbursement shortfalls for hospitals relative to the cost of providing care.
 
We believe ongoing efforts by employers to manage healthcare costs will also have the effect of limiting available reimbursement for hospitals. In order to address rising healthcare costs, employers have pressured managed care companies to contain healthcare insurance premium increases, and reduced the healthcare benefits offered to employees.
 
The introduction of consumer-directed or high-deductible health plans by managed care companies, as well as the overall decline in healthcare coverage by employers, has forced private individuals to assume greater financial responsibility for their healthcare expenditures. Consumer-directed health plans, and their associated high deductibles, increase the complexity and change the nature of billing procedures for hospitals and health systems. In cases where individuals cannot pay or hospitals are unable to get an individual to pay for care, hospitals forego reimbursement and classify the associated care expenses as uncompensated care.
 
Hospitals in particular continue to deal with intense financial pressures that are creating even greater cash flow challenges and bad debt risk. The slowdown in the U.S. economy has resulted in and may continue to result in increased costs of capital and decreased liquidity for hospitals. The macroeconomic environment is also forcing higher unemployment rates and adding to the rolls of the uninsured, which could lead to lower levels of reimbursement and a greater percentage of uncompensated care. In addition, supply cost increases forced by rising raw material costs in food production and the manufacture of medical products over the long term may result in hospital net revenues increasing at a slower rate than supply cost growth.
 
 
Hospitals typically submit multiple invoices to a large number of different payors, including government agencies, managed care companies and private individuals, in order to collect payment for the care they provide. The delivery of an individual patient’s care depends on the provision of a large number and wide range of different products and services, which are tracked through numerous clinical and financial information systems across various hospital departments, resulting in invoices that are usually highly detailed and complex. For example, a hospital invoice for a common surgical procedure can reflect over 200 unique charges or supply items and other expenses. A fundamental component of a hospital’s ability to bill for these items is the maintenance of an up-to-date, accurate chargemaster file, which can consist of over 40,000 individual charge items.
 
In addition to requiring intricate operational processes to compile appropriate charges and claims for reimbursement, hospitals must also submit these claims in a manner that adheres to numerous payor claim formats and properly reflects individually contracted payor reimbursement rates. For example, some hospitals rely on accurate billing adjudication and payment from over 50 contracted payors that are linked to thousands of independent insurance plans, inclusive of private individuals, in order to be compensated for the patient care they provide. Upon receipt of the claim from a hospital, a payor proceeds to verify the accuracy and completeness of, or adjudicate the claim to determine the appropriateness and accuracy of the payment to the hospital. If a payor denies payment for any or all of the amount of the claim, the hospital is then responsible for determining the reason for the denial, amending and/or resubmitting the claim to the payor.
 
 
We estimate that the supplies and non-labor services used in conjunction with the delivery of hospital care account for approximately 30% of overall hospital expenses. These expenses include commodity-type medical-surgical supplies, medical devices, prescription and over the counter pharmaceuticals, laboratory supplies, food and nutritional products and purchased services. Hospitals are required to purchase many different types of supplies and services as a result of the wide range of medical care that they administer to patients. For example, it is common for hospitals to maintain supply cost and pricing information on over


3


Table of Contents

35,000 different product types and models in their internal supply record-keeping systems, or master item files.
 
Hospitals often rely on GPOs, which aggregate hospitals’ purchasing volumes, to manage supply and service costs. The Health Industry Group Purchasing Association, or HIGPA, estimates that GPOs save hospitals and health systems between 10-15% on these purchases by negotiating discounted prices with manufacturers, distributors and other vendors. These discounts have driven widespread adoption of the group-purchasing model. GPOs contract with suppliers directly for the benefit of their customers, but they do not take title or possession of the products for which they contract; nor do GPOs make any payments to the vendors for the products purchased by their customers. GPOs primarily derive their revenues from administrative fees earned from vendors based on a percentage of dollars spent by their hospital and health system customers. Vendors discount prices and pay administrative fees to GPOs because GPOs provide access to a large customer base, thus reducing sales and marketing costs and overhead associated with managing contract terms with a highly-fragmented provider market.
 
 
We believe that the endemic, persistent and growing industry pressures provide us substantial opportunities to assist hospitals and health systems to increase net revenue and reduce supply expense. We estimate the total addressable market for our revenue cycle management and spend management solutions in the United States to be $6.9 billion.
 
 
Hospitals and health systems are faced with complex and changing reimbursement rules across the government agency and managed care payor categories, as well as the challenge of collecting an increasing percentage of revenue directly from individual patients.
 
  •  Government agency reimbursement.  In 2007, the U.S. government increased the number of billable codes for medical procedures in an effort to increase the accuracy of Medicare reimbursement, mandating the implementation of 745 new medical severity-based, diagnosis-related groups, or DRGs, to replace the 538 current DRGs. In addition, U.S. healthcare providers will be required to move from the ICD-9 (International Statistical Classification of Diseases and Related Health Problems) system to ICD-10, a much more complex scheme of classifying diseases, in order to comply with World Health Organization standards by as early as 2013. These recent and future coding changes require hospitals to change their systems and processes to implement these new codes in order to submit compliant Medicare invoices required for payment, thereby straining existing information technology.
 
The Centers for Medicare and Medicaid Services (“CMS”) has multiple initiatives to prevent improper payments before a claim is paid, and to identify and recover improper payments after a claim has been paid. With the passage of the Deficit Reduction Act of 2005, the Department of Health and Human Services established a Medicaid Integrity Program to provide CMS with the resources necessary to combat fraud, waste and abuse in Medicaid. For example, in 2006, CMS entered into contracts with Medicaid Integrity Contractors to review healthcare provider actions, audit provider claims, as well as identify and work to recoup overpayments made by Medicaid to these providers. The Medicare Recovery Audit Contractor (or “RAC”) program under CMS seeks to identify and recover Medicare overpayments to hospitals. The RAC program began in California, Florida and New York in 2005, expanded to Arizona, Massachusetts and South Carolina in July 2007, and is expected to achieve full nationwide implementation in 2010.
 
  •  HITECH Act.   In February 2009 the United States Congress enacted the Health Information Technology for Economic and Clinical Health Act, or 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. Financial incentives under the HITECH Act may not be sufficient to fund the government mandated clinical system improvements. This may necessitate that healthcare providers direct their limited capital dollars toward the implementation of clinical


4


Table of Contents

  information systems, which could affect opportunities for the Company to offer its financial improvement-focused products and services to help offset the additional financial pressures being placed on these institutions.
 
  •  Managed care reimbursement.  Employers typically provide medical benefits to their employees through managed care plans that can offer a variety of indemnity, preferred provider organization, or PPO, health maintenance organization, or HMO, point-of-service, or POS, and consumer-directed health plans. Each of these plans has individual network designs and pre-authorization requirements, as well as co-payment, co-insurance and deductible profiles. These varying profiles are difficult to monitor and frequently result in the submission of invoices that do not comply with applicable payor requirements.
 
  •  Individual payors.  According to CMS, consumer out-of-pocket payments for health expenditures increased to $279 billion in 2008 from $200 billion in 2001. Furthermore, many employer-sponsored plans have benefit designs that require large out-of-pocket expenses for individual employees. Traditionally, hospitals and health systems have developed billing and collection processes to interact with government agency and managed care payors on a high-volume, scheduled basis. The advent of consumer-directed healthcare, or high-deductible health insurance plans, requires hospitals and health systems to invoice patients on an individual basis. Many hospitals and health systems do not have the operational or technological infrastructure required to successfully manage a high volume of invoices to individual payors.
 
 
Hospitals and health systems face increasing supply costs due to upward pressure on pricing caused by technological innovation and complexities inherent in procuring the vast number and quantity of supplies and medical devices required for the delivery of care.
 
  •  Pricing pressure due to technological innovation.  Historically, advances in specific therapies and technologies have resulted in higher priced supplies for hospitals, which have significantly decreased the profitability associated with a number of the medical procedures that hospitals perform. For implantable medical devices in particular, hospitals often have a limited ability to mitigate high unit costs because practicing physicians, who are usually not employed by the hospital, often prefer to choose the specific devices that will be used in the delivery of care. Furthermore, device vendors frequently market directly to the physicians, which reinforce physician preference for specific devices. Although hospitals are required to procure and pay for these devices, their ability to manage the costs is limited because the hospitals cannot influence the purchasing decision in the same way they are able to with other medical supplies.
 
  •  Supply chain complexities.  Despite the use of GPOs to obtain discounts on supplies, hospitals and health systems often do not optimally manage their supply costs due to decentralized purchasing decisions and varying clinical preferences. In addition, hospital supply procurement is highly complex given the vast number of supplies purchased subject to frequently changing contract terms. As a result, supplies are often purchased without a manufacturer contract, or off-contract, which results in higher prices. Furthermore, hospitals often fail to aggregate purchases of commodity-type supplies to take advantage of discounts based on purchase volume, or to recognize when they have qualified for these discounts.
 
  •  Hospitals focus on clinical care.  As organizations, hospitals have historically devoted the majority of their financial and operational resources to investing in people, technologies and infrastructure that improve the level and quantities of clinical care that they can provide. In part, this focus has been driven by hospitals’ historical ability to capture higher reimbursement for innovative, more sophisticated medical procedures and therapeutic specialties. Since hospitals’ overall financial and operational resources are limited, investments in higher quality clinical care have often come at the expense of investment in other infrastructure systems, including revenue capture, billing, and materials management. As a result, existing hospital operations and financial and information systems are often ill-suited


5


Table of Contents

  to manage the increasing complexity and ongoing change that are inherent to the current reimbursement environment and supply procurement process.
 
 
Our technology-enabled products and services enable hospitals and health systems to reverse the trend of supply expense increasing at a greater rate than revenue. Our revenue cycle management products and services increase revenue capture and collection rates for hospitals and health systems by analyzing complex information sets, such as chargemasters and payor rules, to facilitate compliance with regulatory and payor requirements and the accurate and timely submission and tracking of invoices or claims. Our spend management products and services reduce supply expense through data management and spending analysis, such as master item files and hospital purchasing data. This enables us to assist hospitals in negotiating discounts on specific high-cost physician preference items and pharmaceuticals and allows our customers to optimize purchasing to further leverage the benefits of the vendor discounts negotiated by our group purchasing organization.
 
 
Key elements of our competitive strengths include:
 
  •  Comprehensive and flexible suite of solutions.  Our proprietary applications are primarily delivered through SaaS-based software and are designed to integrate with our customers’ existing systems and work processes, rather than replacing enterprise software systems. As a result, our solutions are scalable and generally require minimal or no upfront investment by our customers. In addition, our products have been recognized as industry leaders, with our claims management and payor contract management software tools ranked #1 for the fourth consecutive year by KLAS Enterprises LLC, an independent organization that measures and reports on healthcare technology vendor performance. Moreover, we can offer our customers an opportunity to leverage our comprehensive and flexible set of product and service capabilities in order to help transform their operations through fundamental and sustainable process change and to ensure cost savings, revenue capture and/or cash flows.
 
  •  Superior proprietary data.  Our solutions are supported by proprietary databases compiled by leveraging the breadth of our customer base and product and service offerings over a period of years. We believe our databases are the industry’s most comprehensive, including our proprietary master item file containing approximately two million different product types and models, our chargemaster containing over 180,000 distinct charges, and our databases of governmental and other third-party payor rules and comprehensive pricing data. In addition, we integrate a hospital’s revenue cycle and spend management data sets to ensure that all chargeable supplies are accurately represented in the hospital’s chargemaster, resulting in increased revenue capture and enhanced regulatory compliance. This content also enables us to provide our customers with spend management decision support and analytical services, including the ability to effectively manage and control their contract portfolios and monitor pricing, tiers and market share. The breadth of our customer base and product and service offerings allows us to continually update our proprietary databases, ensuring that our data remains current and comprehensive.
 
  •  Large and experienced sales force.  We employ a highly-trained and focused sales team of approximately 130 people. Our sales force provides national coverage for establishing and managing customer relationships and maintains close relationships with senior management of hospitals and health systems, as well as other operationally-focused executives involved in areas of revenue cycle management and spend management. The size of our sales team allows us to have personnel that focus on enterprise sales, which we define as selling a comprehensive solution to healthcare providers, and on technical sales, which we define as sales of individual products and services. We utilize a highly-consultative sales process during which we gather extensive customer financial and operating data that we use to demonstrate that our solutions can yield significant near-term financial improvement. Our sales team’s compensation is highly variable and designed to drive profitable growth in sales to both current customers and new prospects, and to support customer satisfaction and retention efforts.


6


Table of Contents

 
  •  Long-term and expanding customer relationships.  We collaborate with our customers throughout the duration of our relationship to ensure anticipated financial improvement is realized and to identify additional solutions that can yield incremental financial improvement. Our ability to provide measurable financial improvement and expand the value of our solutions over time has allowed us to develop strong relationships with our customers’ senior management teams. Our collaborative approach and ability to deliver measurable financial improvement has resulted in high retention of our large health system customers and, in turn, a predictable base of stable, recurring revenue.
 
  •  Leading market position.  We believe we hold a top three market share position in the two segments in which we operate. This relative market share advantage enables us to invest, at a greater level, in areas of our business to enhance our competitiveness through product innovation and development, sales and customer support, as well as employee training and development.
 
  •  Proven management team and dynamic culture.  Our senior management team has an average of 20 years experience in the healthcare industry, an average of seven years of service with us and a proven track record of delivering measurable financial improvement for healthcare providers. We believe that our current management team has the expertise and experience to continue to grow our business by executing our strategy without significant additional headcount in senior management positions. Our management team has established a customer-driven culture that encourages employees at all levels to focus on identifying and addressing the evolving needs of healthcare providers and has facilitated the integration of acquired companies.
 
  •  Successful history of growing our business and integrating acquired businesses.  Since inception, we have successfully acquired and integrated multiple companies across the healthcare revenue cycle and spend management sectors. For example, in 2003, we extended our spend management solutions by acquiring Aspen Healthcare Metrics LLC, a performance improvement consulting firm, and created a platform for our revenue cycle management solutions by acquiring OSI Systems, Inc. (part of our Revenue Cycle Management segment). We have enhanced the breadth of our solutions by acquiring XactiMed, Inc. (or “XactiMed”) and MD-X Solutions Inc. (or “MD-X”) in 2007, and Accuro Healthcare Solutions, Inc. (or “Accuro”) in 2008, with products and services that are complementary to our own, and supporting these acquired products and services with our enterprise-wide sales, account management, consulting and implementation services, which has contributed to increases in our revenue.
 
 
Our mission is to partner with hospitals and health systems to enhance their financial strength through improved operating margins and cash flows. Key elements of our strategy include:
 
  •  Continually improving and expanding our suite of solutions.  We intend to continue to leverage our research and development team, proprietary databases and industry knowledge to further integrate our products and services and develop new financial improvement solutions for hospitals and healthcare providers. In addition to our internal research and development, we also intend to expand our portfolio of solutions through strategic partnerships and acquisitions that will allow us to offer incremental financial improvement to healthcare providers. Research and development of new products and successful execution and integration of future acquisitions are integral to our overall strategy as we continue to expand our portfolio of products.
 
  •  Further penetrating our existing customer base.  We intend to leverage our long-standing customer relationships and large and experienced sales team to increase the penetration rate for our comprehensive suite of solutions with our existing hospital and health system customers. We estimate the addressable market for existing customers to be a $4.1 billion revenue opportunity for our existing products and services. Within our large and diverse customer base, many of our hospital and health system customers utilize solutions from only one of our segments. The vast majority of our customers use less than the full suite of our solutions.


7


Table of Contents

 
  •  Attracting new customers.  We intend to utilize our large and experienced sales team to aggressively seek new customers. We estimate that the addressable market for new customers for our revenue cycle management and spend management solutions represents a $2.8 billion revenue opportunity for our existing products and services. We believe that our comprehensive and flexible suite of solutions and ability to demonstrate financial improvement opportunities through our highly-consultative sales process will continue to allow us to successfully differentiate our solutions from those of our competitors.
 
  •  Leveraging operating efficiencies and economies of scale and scope.  The design, scalability and scope of our solutions enable us to efficiently deploy a customer-specific solution for our customers principally through web-based SaaS technologies. As we add new solutions to our portfolio and new customers, we expect to leverage our current capabilities to reduce the average cost of providing our solutions to our customers.
 
  •  Maintaining an internal environment that fosters a strong and dynamic culture.  Our management team strives to maintain an organization with individuals who possess a strong work ethic and high integrity, and who are recognized by their dependability and commitment to excellence. We believe that this results in attracting employees who are driven to achieve our long-term mission of being the recognized leader in the markets in which we compete. We believe that dynamic, customer-centric thinking will be a catalyst for our continued growth and success.
 
 
We deliver our solutions through two business segments, Revenue Cycle Management and Spend Management. Information about our business segments should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
 
 
Our Revenue Cycle Management segment provides a comprehensive suite of products and services that span what has traditionally been viewed as the hospital revenue cycle. Progressing from a traditional revenue cycle solution, we have expanded the scope of revenue cycle to include products and services that may help to enhance the effectiveness of certain clinical and administrative functions performed within a hospital. We combine our revenue cycle workflow solutions with sophisticated decision support and business intelligence tools to increase financial improvement opportunities and regulatory compliance for our customers. Our suite of solutions provides us with significant flexibility in meeting customer needs. Some customers choose to actively manage their revenue cycle using internal resources that are supplemented with our solutions. Other customers have chosen end-to-end solutions that utilize our full suite of products and services spanning the entire revenue cycle workflow. Regardless of the client approach, we create timely, actionable information from the vast amount of data that exists in underlying customer information systems. In so doing, we enable financial improvement through successful process improvement, informed decision making, and implementation.
 
 
Hospitals face unique content, data management, business process and claims processing challenges and can utilize our solutions to address these issues in the following stages of the revenue cycle workflow:
 
  •  Patient access and financial responsibility.  The initial point of patient contact and data collection during the admissions process is critical for efficient and effective claim adjudication. Our patient bill estimation, patient access workflow manager and process improvement tools and services promote accurate information and data capture, facilitate communication across revenue cycle operations and assist the hospital in the identification and collection of the patient’s ability to pay.
 
  •  Charge capture and revenue integrity.  Many hospitals need to have processes that ensure implementation of a defensible pricing strategy and compliance with third-party and government payor rules. Our charge integrity solutions help establish and sustain revenue integrity by identifying missed charges on


8


Table of Contents

  billed claims. Our chargemaster and pricing solutions and workflow capabilities help hospitals accurately capture services rendered and present those services for billing with appropriate and compliant coding consistent with the hospital’s pricing methodology and payor rules.
 
  •  Strategic pricing.  We maintain a proprietary charge benchmark database that we estimate covers services resulting in over 95% of a hospital’s departmental gross revenues. Through our tools, hospitals are able to establish defensible pricing based on comparative charging benchmarks as well as hospital-specific costs to increase revenue while providing transparency to pricing strategies.
 
  •  Case management, coding and documentation.  Many hospitals need to have tools and processes to ensure accurate documentation and coding that adheres to complex and changing regulatory and payor requirements. For example, reimbursement mechanisms deployed by payors that shift length of stay cost risk to providers necessitate tools and processes to manage ongoing payor authorization and concurrent denials management while the patient is being treated. Our solutions help hospitals improve workflow and management of covered days and length of stay to prevent denied days and reduced reimbursement in order to negotiate the complexities of documentation and coding and streamline the payor authorization communication channel.
 
  •  Claims processing.  Following aggregation of all necessary claim data by a hospital’s patient accounting system, a hospital must deliver claims to payors electronically. Our claims processing tools enhance the process with comprehensive edits and workflow technology to correct non-compliant invoices prior to submission. The efficiency that this tool provides expedites processing and, by extension, receipt of cash while reducing the resources required to adjudicate claims.
 
  •  Denials management and reimbursement integrity.  The collection of reimbursable dollars requires successful payor management and communication, and a proactive approach to managing the accuracy of payor reimbursement of claims. Our contract payor management and denial management solutions identify and account for all payor underpayments, full or partial denials and target problem areas that affect the bottom line to improve collection of receivables due from payors. We have coupled this workflow with reporting that provides transparency into the reimbursable dollars management process.
 
  •  Revenue recovery and accounts receivable management.  Our solutions help to ensure appropriate payment is received for the services provided. We help manage accounts receivable (A/R) performance to accelerate payments and to increase net revenues. Our revenue recovery services collect additional cash by detecting inappropriate discounting and inaccurate payments by payors, including silent PPOs, recovering revenue from denied claims and providing Medicare RAC audit review and appeal services.
 
  •  Revenue cycle and supply chain integration.  Our CrossWalk solution, utilizing our proprietary master item file containing approximately four million different product types and models and our proprietary chargemaster containing over 180,000 distinct charges, integrates a hospital’s supply chain and revenue cycle to provide side-by-side visibility into supply charge and cost data and the corresponding charges in the hospital’s chargemaster to ensure that all chargeable supplies are accurately represented in the chargemaster.
 
 
Our decision support software provides customers with an integrated suite of business intelligence tools designed to facilitate hospital decision-making by integrating clinical, financial and operational information into a common data set for accuracy and ease of use across the organization. A new, upgraded version of our decision support software solution suite was introduced in October 2008. Key components include:
 
  •  Budgeting.  A paperless workflow management tool that streamlines the set-up of multiple forecasts and spread methods, deploys the budget to multiple end-users and monitors the completion of the budget.
 
  •  Cost accounting.  An application that guides the process of developing cost standards, calculating case costs, and allocating overhead; includes microcosting, open charge codes, relative value unit measurements, and markup.


9


Table of Contents

 
  •  Cost management.  A costing application that enables customers to obtain and maintain detailed costs of goods and services, including accounting for resources to perform procedures, to help establish the relative cost of providing services.
 
  •  Contract analytics.  A comprehensive tool that supports all aspects of the contracting process, including contract modeling, negotiation, expected payment calculation, compliance and monitoring.
 
  •  Clinical analytics.  A tool that integrates clinical data with financial and administrative data to help assess the quality and cost of services, including the evaluation of service lines, physician treatment protocols and quality outcomes.
 
  •  Key indicators.  A dashboard application that provides access to customer-defined business intelligence data to identify emerging trends and monitor key financial and performance indicators on stated business objectives, including profitability per referring physician and per procedure.
 
 
Our Spend Management segment helps our customers manage their non-labor expense categories through a combination of group purchasing, performance improvement consulting, including implantable physician preference items, or PPI, cost and utilization management and service line consulting, and business intelligence tools.
 
 
Our group purchasing organization utilizes a national contract portfolio consisting of over 1,700 contracts with approximately 1,150 manufacturers, distributors and other vendors, a custom and local contracting function and aggregated group buys, to efficiently connect manufacturers, distributors and other vendors with our healthcare provider customers. We use the aggregate purchasing power of our healthcare provider customers to negotiate pricing discounts and improved contract terms with vendors. Contracted vendors pay us administrative fees based on the purchase price of goods and services sold to our healthcare provider customers purchasing under the contracts we have negotiated.
 
  •  Flexible contracting.  Our national portfolio of contracts provides access to a wide range of products and services that we offer through the following programs: medical/surgical supplies; pharmaceuticals; laboratory supplies; capital equipment; information technology; food and nutritional products; and purchased non-labor services. Our national portfolio of contracts is designed to provide our healthcare provider customers with a flexible solution, including pricing tiers based on purchase volume and multiple sources for many products and services. We have adopted this strategy because of the diverse nature of our healthcare provider customers and the significant number of factors, including overall size, service mix, for-profit versus not-for-profit status, and the degree of integration between hospitals in a health system, that influence and dictate their needs. Utilizing the market information we obtain through providing our spend management solutions, we constantly evaluate the depth, breadth and competitiveness of our contract portfolio.
 
  •  Custom and local contracting.  Our national portfolio of contracts is customer-driven and designed for maximum flexibility; however, contracts designed to meet the needs of numerous healthcare providers will not always deliver savings for individual healthcare providers. To address this challenge, we have developed a custom contracting capability that enables us to negotiate custom contracts on behalf of our group purchasing organization customers.
 
  •  Aggregated purchasing for capital equipment.  We have also developed a program for aggregating customer purchases for capital intensive medical equipment. After our in-house market research team identifies customer needs within defined capital product or service categories, such as diagnostic imaging, cardiac catheterization laboratory and design and construction, we manage a competitive bidding process for the combined volume of customer purchasers to identify the vendors that provide the greatest level of value, as defined by both clinical effectiveness and cost of ownership across the equipment lifecycle.


10


Table of Contents

 
Performance Improvement Consulting and Analytics
 
Our management consulting services use a combination of data and performance analysis, demonstrated best practices and experienced consultants to reduce clinical costs and increase operational efficiency. Our focus is on delivering significant and sustainable financial and operational improvement in the following areas:
 
  •  PPI Cost and Utilization Management.  Implantable medical device (“PPI”) costs represent approximately 40% of the total supply expense of a typical hospital. PPI includes expensive medical devices and implantables (e.g., stents, catheters, heart valves, pacemakers, leads, total joint implants, spine implants and bone products) in the areas of cardiology, orthopedics, neurology, and other highly advanced and innovative service lines, as well as branded pharmaceuticals. We assist healthcare providers with PPI cost reduction by providing data and utilization analyses and pricing targets, and by facilitating the implementation and request for proposal processes for PPI in the following areas: cardiac rhythm management, cardiovascular surgery, orthopedic surgery, spine surgery and interventional procedures.
 
  •  Service Line Improvement.  We assist providers in evaluating their service lines and identifying areas for clinical resource improvement through a rigorous process that includes advanced data analysis of utilization, profitability and other operational metrics. Specific areas of our service line expertise include cardiac and vascular surgery, invasive cardiology and rhythm management, medical cardiology, orthopedic surgery, spine and neurology, and general surgery.
 
  •  Service Line Analytics.  We offer a SaaS or web-based business intelligence solution, supported by consulting services, for the ongoing control and management of supply costs. Using data from a hospital’s information systems, including clinical, financial and supply-cost data reported by service lines and DRGs, we identify opportunities for cost reduction and develop a management plan to achieve improved financial results.
 
 
Our data management and business intelligence tools are an integral part of our spend management solutions. These tools provide transparency into expenses, identify performance deficiencies and areas for operational improvement, and allow for monitoring and measuring results. Key components include:
 
Strategic information.  We provide our customers with spend management decision support and analytical services to enable them to effectively manage pricing and pricing tiers, monitor market share and identify cost-saving alternatives.
 
Customer master item file services.  We believe our proprietary supply item database is one of the industry’s most comprehensive. We provide master item file services utilizing our proprietary master item file containing approximately two million items, which allows us to identify and standardize customer supply data at an exceptionally high rate for timely and accurate spend management reporting.
 
Electronic contract portfolio catalog.  We establish and maintain a web-based contract warehouse that provides visibility, management and control of our customer’s entire contract portfolio.
 
Other Information About the Business
 
 
As of December 31, 2009, our customer base included over 125 health systems and, including those that are part of our health system customers, more than 3,300 acute care hospitals and approximately 40,000 ancillary or non-acute provider locations. Our group purchasing organization has contracts with approximately 1,150 manufacturers, distributors and other vendors that pay us administrative fees based on purchase volume by our healthcare provider customers. The diversity of our large customer base ensures that our success is not tied to a single healthcare provider or GPO vendor. No single customer or GPO supplier accounts for more than four percent of our total net revenue for any period included in this annual report on Form 10-K. Additionally, our customers are located primarily throughout the United States and to a lesser extent, Canada.


11


Table of Contents

 
We complement our existing products and services and R&D activities by entering into strategic business relationships with companies whose products and services complement our solutions. For example, we maintain a strategic relationship with Foodbuy LLC, which is the nation’s largest GPO that is focused exclusively on the foodservice marketplace and manages more than $5 billion in food and food-related purchasing. Through this relationship, customers of our group purchasing organization have access to Foodbuy’s contract portfolio and related suite of procurement services. Under our arrangement with Foodbuy, we receive a portion of the administrative fees paid to Foodbuy on sales of goods and services to our healthcare provider customers. We also have co-marketing arrangements with entities whose products and services complement our solutions, such as accounts payable purchasing as well as financial eligibility qualification and registration quality for patients at the point of admission.
 
In addition to our employed sales force, we maintain business relationships with a wide range of group purchasing organizations and other marketing affiliates that market or support our products or services. We refer to these individuals and organizations as affiliates or affiliate partners. These affiliate partners, which typically provide a limited number of services on a regional basis, are responsible for the recruitment and direct management of healthcare providers in both the acute care and alternate site markets. Through our relationship with these affiliate partners, we are able to offer a range of solutions to these providers, including both spend management and revenue cycle management products and services, with minimal investment in additional time and resources. Our affiliate relationships provide a cost-effective way to serve the fragmented market comprised of ancillary care institutions.
 
 
The market for our products and services is fragmented, intensely competitive and characterized by the frequent introduction of new products and services, and by rapidly evolving industry standards, technology and customer needs. We have experienced and expect to continue to experience intense competition from a number of companies.
 
Our revenue cycle management solutions compete with products and services provided by large, well-financed and technologically-sophisticated entities, including: information technology providers such as Eclipsys Corporation, McKesson Corporation and Siemens Corporation, Inc.; consulting firms such as Accenture Ltd., Accretive Health, Inc., Deloitte & Touche LLP, Ernst & Young LLP, Huron Consulting, Inc., Navigant Consulting, Inc. and The Advisory Board Company; and providers of niche products and services such as Concuity Inc., Craneware Inc., Ingenix (formerly CareMedic Systems, Inc.), Emdeon Inc., Passport Health Communications, Inc. and The SSI Group, Inc. We also compete with hundreds of smaller niche companies.
 
Within our Spend Management segment, in addition to a number of the consulting firms listed above, our primary competitors are GPOs. There are more than 600 GPOs in the United States, of which approximately 30 negotiate sizeable contracts for their customers, while the remaining GPOs negotiate minor agreements with regional vendors for services. Six GPOs, including us, account for approximately 85 percent of the market. We primarily compete with Amerinet Inc., Broadlane, HealthTrust LLC, Novation LLC and Premier, Inc.
 
We compete on the basis of several factors, including:
 
  •  ability to deliver financial improvement and return on investment through the use of products and services;
 
  •  breadth, depth and quality of product and service offerings;
 
  •  quality and reliability of services, including customer support;
 
  •  ease of use and convenience;
 
  •  ability to integrate services with existing technology;


12


Table of Contents

 
  •  price; and
 
  •  brand recognition.
 
We believe that our ability to deliver measurable financial improvement and the breadth of our full suite of solutions give us a competitive advantage in the marketplace.
 
Employees
 
As of December 31, 2009, we had approximately 2,200 full time employees.
 
 
The healthcare industry is highly regulated and is subject to changing political, legislative, regulatory and other influences. Existing and new federal and state laws and regulations affecting the healthcare industry could create unexpected liabilities for us, could cause us or our customers to incur additional costs and could restrict our or our customer’s operations. Many healthcare laws are complex, and their application to us, our customers or the specific services and relationships we have with our customers are not always clear. In particular, many existing healthcare laws and regulations, when enacted, did not anticipate the comprehensive products and revenue cycle management and spend management solutions that we provide, and these laws and regulations may be applied to our products and services in ways that we do not anticipate. Our failure to accurately anticipate the application of these laws and regulations, or our other failure to comply, could create liability for us, result in adverse publicity and negatively affect our business. See the “Risk Factors” section herein for more information regarding the impact of government regulation on our Company.
 
 
Our success as a company depends upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, trade secrets, copyrights and trademarks, as well as customary contractual protections.
 
We generally control access to, and the use of, our proprietary software and other confidential information. This protection is accomplished through a combination of internal and external controls, including contractual protections with employees, contractors, customers, and partners, and through a combination of U.S. and international copyright laws. We license some of our software pursuant to agreements that impose restrictions on our customers’ ability to use such software, such as prohibiting reverse engineering and limiting the use of copies. We also seek to avoid disclosure of our intellectual property by relying on non-disclosure and assignment of intellectual property agreements with our employees and consultants that acknowledge our exclusive ownership of all intellectual property developed by the individual during the course of his or her work with us. The agreements also require that each person maintain the confidentiality of all proprietary information disclosed to them.
 
We incorporate a number of third party software programs into certain of our software and information technology platforms pursuant to license agreements. Some of this software is proprietary and some is open source. We use third-party software to, among other things, maintain and enhance content generation and delivery, and support our technology infrastructure.
 
We have registered, or have pending applications for the registration of, certain of our trademarks. We actively manage our trademark portfolio, maintain long standing trademarks that are in use, and file applications for trademark registrations for new brands in all relevant jurisdictions.
 
 
Our research and development, or R&D, expenditures primarily consist of our investment in internally developed software. We incurred $35.4 million, $27.5 million and $14.6 million for R&D activities in 2009, 2008 and 2007, respectively, and we capitalized 46.3%, 40.4% and 46.7% of these expenses, respectively. As of December 31, 2009, our software development, product management and quality assurance activities


13


Table of Contents

involved approximately 380 employees. We expect to incur significant research and development costs in the future due to our continuing investment in internally developed software as we intend to release new features and functionality, expand our content offerings, upgrade and extend our service offerings, and develop new technologies.
 
 
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, are available free of charge on our website (www.medassets.com under the “Investor Relations” caption) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC” or the “Commission”). The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this report, unless expressly noted otherwise.
 
ITEM 1A.   RISK FACTORS.
 
Although it is not possible to predict or identify all risks and uncertainties that could cause actual results to differ materially from those anticipated, projected or implied in any forward-looking statement, you should carefully consider the risk factors discussed below which constitute material risks and uncertainties known to us that we believe could affect our future growth, results of operations, performance and business prospects and opportunities. You should not consider this list to be a complete statement of all the potential risks and uncertainties regarding our business and the trading price of our securities. Additional risks not presently known to us, or which we currently consider immaterial, may adversely impact our business and the trading price of our securities.
 
Risks Related to Our Business
 
 
The market for our products and services is fragmented, intensely competitive and characterized by the frequent introduction of new products and services and by rapidly evolving industry standards, technology and customer needs. Our revenue cycle management products and services compete with products and services provided by large, well-financed and technologically-sophisticated entities, including: information technology providers such as Eclipsys Corporation, McKesson Corporation, and Siemens Corporation, Inc.; consulting firms such as Accenture Ltd., Accretive Health, Inc., Deloitte & Touche LLP, Ernst & Young LLP, Huron Consulting, Inc., Navigant Consulting, Inc. and The Advisory Board Company; and providers of niche products and services such as Concuity Inc., Craneware Inc., Ingenix (formerly CareMedic Systems, Inc.), Emdeon Inc., Passport Health Communications, Inc. and The SSI Group, Inc. The primary competitors to our spend management products and services are other large GPOs, such as Amerinet, Broadlane, HealthTrust LLC, Novation LLC and Premier, Inc., as well as a number of the consulting firms named above. In addition, some large health systems may choose to contract directly with vendors for some of their larger categories of supply expenses.
 
With respect to both our revenue cycle management and spend management products and services, we compete on the basis of several factors, including breadth, depth and quality of product and service offerings, ability to deliver financial improvement through the use of products and services, quality and reliability of services, ease of use and convenience, brand recognition, ability to integrate services with existing technology and price. Many of our competitors are more established, benefit from greater name recognition, have larger customer bases and have substantially greater financial, technical and marketing resources. Other of our competitors have proprietary technology that differentiates their product and service offerings from ours. As a result of these competitive advantages, our competitors and potential competitors may be able to respond more quickly to market forces, undertake more extensive marketing campaigns for their brands, products and


14


Table of Contents

services and make more attractive offers to customers. In addition, many GPOs are owned by the provider-customers of the GPO, which enables our competitors to distinguish themselves on that basis.
 
We cannot be certain that we will be able to retain our current customers or expand our customer base in this competitive environment. If we do not retain current customers or expand our customer base, our business and results of operations will be harmed. Additionally, as a result of larger agreements that we have entered into in the recent past with certain of our customers, a larger portion of our revenue is now attributable to a smaller group of customers. Although no single customer accounts for more than four percent of our total net revenue as of December 31, 2009, any significant loss of business from these large customers could have a material adverse effect on our business, results of operations and financial condition. Moreover, we expect that competition will continue to increase as a result of consolidation in both the information technology and healthcare industries. If one or more of our competitors or potential competitors were to merge or partner with another of our competitors, the change in the competitive landscape could also adversely affect our ability to compete effectively and could harm our business. Many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power and economic conditions may force additional consolidation. As the healthcare industry consolidates, competition to provide services to industry participants will become more intense and the importance of existing relationships with industry participants will become greater.
 
 
We may be subject to pricing pressures with respect to our future sales arising from various sources, including, without limitation, competition within the industry, consolidation of healthcare industry participants, practices of managed care organizations, government action affecting reimbursement and certain of our customers who experience significant financial stress. If our competitors are able to offer products and services that result, or that are perceived to result, in customer financial improvement that is substantially similar to or better than the financial improvement generated by our products and services, we may be forced to compete on the basis of additional attributes, such as price, to remain competitive. In addition, as healthcare providers consolidate to create integrated healthcare delivery systems with greater market power, these providers may try to use their market power to negotiate fee reductions for our products and services. Our customers and the other entities with which we have a business relationship are affected by changes in regulations and limitations in governmental spending for Medicare and Medicaid programs. Government actions could limit government spending for the Medicare and Medicaid programs, limit payments to healthcare providers, and increase emphasis on competition and other programs that could have an adverse effect on our customers and the other entities with which we have a business relationship. Additionally, if our current and prospective customers do not benefit from any broader economic recovery, this may exacerbate pricing pressure.
 
If our pricing experiences significant downward pressure, our business will be less profitable and our results of operations will be adversely affected. In addition, because cash flow from operations funds our working capital requirements, reduced profitability could require us to raise additional capital sooner than we would otherwise need.
 
 
Our success depends on providing products and services that healthcare providers use to improve financial performance. Our competitors are constantly developing products and services that may become more efficient or appealing to our customers. In addition, certain of our existing products may become obsolete in light of rapidly evolving industry standards, technology and customer needs, including changing regulations and provider reimbursement policies. As a result, we must continue to invest significant resources in research and development in order to enhance our existing products and services and introduce new high-quality products and services that customers and potential customers will want. Many of our customer relationships are nonexclusive or terminable on short notice, or otherwise terminable after a specified term. If our new or modified product and service innovations are not responsive to user preferences or industry or regulatory


15


Table of Contents

changes, are not appropriately timed with market opportunity, or are not effectively brought to market, we may lose existing customers and be unable to obtain new customers and our results of operations may suffer.
 
 
A key element of our strategy is to market our products and services directly to large healthcare providers, such as health systems and acute care hospitals and to increase the number of our products and services utilized by existing health system and acute care hospital customers. The evaluation process is often lengthy and involves significant technical evaluation and commitment of personnel by these organizations. The use of our products and services may also be delayed due to an inability or reluctance to change or modify existing procedures. If we are unable to sell additional products and services to existing health system and hospital customers, or enter into and maintain favorable relationships with other large healthcare providers, our revenue could grow at a slower rate or even decrease.
 
 
Some of our new-customer projects are complex and require lengthy and significant work to implement our products and services. Each customer’s situation may be different, and unanticipated difficulties and delays may arise as a result of failure by us or by the customer to meet respective implementation responsibilities. If the customer implementation process is not executed successfully or if execution is delayed, our relationships with some of our customers may be adversely impacted and our results of operations will be impacted negatively. In addition, cancellation of any implementation of our products and services after it has begun may involve loss to us of time, effort and resources invested in the cancelled implementation as well as lost opportunity for acquiring other customers over that same period of time. These factors may contribute to substantial fluctuations in our quarterly operating results, particularly in the near term and during any period in which our sales volume is relatively low.
 
If we are unable to maintain our third party providers, strategic alliances or enter into new alliances, we may be unable to grow our current base business.
 
Our business strategy includes entering into strategic alliances and affiliations with leading healthcare service providers. We work closely with our strategic partners to either expand our penetration in certain areas or classes of trade, or expand our market capabilities. We may not achieve our objectives through these alliances. Many of these companies have multiple relationships and they may not regard us as significant to their business. These companies may pursue relationships with our competitors or develop or acquire products and services that compete with our products and services. In addition, in many cases, these companies may terminate their relationships with us with little or no notice. If existing alliances are terminated or we are unable to enter into alliances with leading healthcare service providers, we may be unable to maintain or increase our market presence.
 
 
Our success as a company depends in part upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including trade secrets, copyrights and trademarks, as well as customary contractual protections.
 
We utilize a combination of internal and external measures to protect our proprietary software and confidential information. Such measures include contractual protections with employees, contractors, customers, and partners, as well as U.S. copyright laws.
 
We protect the intellectual property in our software pursuant to customary contractual protections in our agreements that impose restrictions on our customers’ ability to use such software, such as prohibiting reverse engineering and limiting the use of copies. We also seek to avoid disclosure of our intellectual property by


16


Table of Contents

relying on non-disclosure and intellectual property assignment agreements with our employees and consultants that acknowledge our ownership of all intellectual property developed by the individual during the course of his or her work with us. The agreements also require each person to maintain the confidentiality of all proprietary information disclosed to them. Other parties may not comply with the terms of their agreements with us, and we may not be able to enforce our rights adequately against these parties. The disclosure to, or independent development by, a competitor of any trade secret, know-how or other technology not protected by a patent could materially adversely affect any competitive advantage we may have over any such competitor.
 
We cannot assure you that the steps we have taken to protect our intellectual property rights will be adequate to deter misappropriation of our rights or that we will be able to detect unauthorized uses and take timely and effective steps to enforce our rights. If unauthorized uses of our proprietary products and services were to occur, we might be required to engage in costly and time-consuming litigation to enforce our rights. We cannot assure you that we would prevail in any such litigation. If others were able to use our intellectual property, our business could be subject to greater pricing pressure.
 
 
We could be subject to intellectual property infringement claims as the number of our competitors grows and our applications’ functionality overlaps with competitor products. While we do not believe that we have infringed or are infringing on any proprietary rights of third parties, we cannot assure you that infringement claims will not be asserted against us or that those claims will be unsuccessful. Any intellectual property rights claim against us or our customers, with or without merit, could be expensive to litigate, cause us to incur substantial costs and divert management resources and attention in defending the claim. Furthermore, a party making a claim against us could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to provide products or services. In addition, we cannot assure you that licenses for any intellectual property of third parties that might be required for our products or services will be available on commercially reasonable terms, or at all. As a result, we may also be required to develop alternative non-infringing technology, which could require significant effort and expense.
 
In addition, a number of our contracts with our customers contain indemnity provisions whereby we indemnify them against certain losses that may arise from third-party claims that are brought in connection with the use of our products.
 
Our exposure to risks associated with the use of intellectual property may be increased as a result of acquisitions, as we have a lower level of visibility into the development process with respect to such technology or the care taken to safeguard against infringement risks. In addition, third parties may make infringement and similar or related claims after we have acquired technology that had not been asserted prior to our acquisition.
 
 
A portion of the data that we use is either purchased or licensed from third parties or is obtained from our customers for specific customer engagements. We also obtain a portion of the data that we use from public records. We believe that we have all rights necessary to use the data that is incorporated into our products and services. However, in the future, data providers could withdraw their data from us if there is a competitive reason to do so; if legislation is passed restricting the use of the data; or if judicial interpretations are issued restricting use of the data that we currently use in our products and services. If a substantial number of data providers were to withdraw their data, our ability to provide products and services to our clients could be materially adversely impacted.


17


Table of Contents

 
A significant portion of the products or technologies acquired, licensed or developed by us may incorporate so-called “open source” software, and we may incorporate open source software into other products in the future. Such open source software is generally licensed by its authors or other third parties under open source licenses, including, for example, the GNU General Public License, the GNU Lesser General Public License, “Apache-style” licenses, “Berkeley Software Distribution,” “BSD-style” licenses and other open source licenses. We attempt to monitor our use of open source software in an effort to avoid subjecting our products to conditions we do not intend; however, there can be no assurance that our efforts have been or will be successful. There is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses, and therefore the potential impact of these terms on our business is somewhat unknown and may result in unanticipated obligations regarding our products and technologies. For example, we may be subjected to certain conditions, including requirements that we offer our products that use particular open source software at no cost to the user; that we make available the source code for modifications or derivative works we create based upon, incorporating or using the open source software; and/or that we license such modifications or derivative works under the terms of the particular open source license.
 
If an author or other party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal costs defending ourselves against such allegations. If our defenses were not successful, we could be subject to significant damages; be enjoined from the distribution of our products that contained the open source software; and be required to comply with the foregoing conditions, which could disrupt the distribution and sale of some of our products. In addition, if we combine our proprietary software with open source software in a certain manner, under some open source licenses we could be required to release the source code of our proprietary software, which could substantially help our competitors develop products that are similar to or better than ours.
 
 
We depend upon licenses from third-party vendors for some of the technology and data used in our applications, and for some of the technology platforms upon which these applications operate, including Microsoft and Oracle. We also use third-party software to maintain and enhance, among other things, content generation and delivery, and to support our technology infrastructure. Some of this software is proprietary and some is open source. These technologies might not continue to be available to us on commercially reasonable terms or at all. Most of these licenses can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. Our inability to obtain any of these licenses could delay development until equivalent technology can be identified, licensed and integrated, which will harm our business, financial condition and results of operations.
 
Most of our third-party licenses are non-exclusive and our competitors may obtain the right to use any of the technology covered by these licenses to compete directly with us. Our use of third-party technologies exposes us to increased risks, including, but not limited to, risks associated with the integration of new technology into our solutions, the diversion of our resources from development of our own proprietary technology and our inability to generate revenue from licensed technology sufficient to offset associated acquisition and maintenance costs. In addition, if our vendors choose to discontinue support of the licensed technology in the future, we might not be able to modify or adapt our own solutions.
 
 
We have grown through, and anticipate that we will continue to grow through, acquisitions of competitive and complementary businesses. We evaluate potential acquisitions on an ongoing basis and regularly pursue acquisition opportunities. We may not be successful in identifying acquisition opportunities, assessing the


18


Table of Contents

value, strengths and weaknesses of these opportunities and consummating acquisitions on acceptable terms. Furthermore, suitable acquisition opportunities may not even be made available or known to us. In addition, we may compete for certain acquisition targets with companies having greater financial resources than we do. We anticipate that we may finance acquisitions through cash provided by operating activities, borrowings under our existing credit facility and other indebtedness. Borrowings necessary to finance acquisitions may not be available on terms acceptable to us, or at all. Future acquisitions may also result in potentially dilutive issuances of equity securities. Acquisitions may expose us to particular business and financial risks that include, but are not limited to:
 
  •  diverting management’s attention;
 
  •  incurring additional indebtedness and assuming liabilities, known and unknown;
 
  •  incurring significant additional capital expenditures, transaction and operating expenses and nonrecurring acquisition-related charges;
 
  •  experiencing an adverse impact on our earnings from the amortization of acquired intangible assets, as well as from any future impairment of goodwill and other acquired intangible assets as a result of certain economic, competitive or regulatory changes impacting the fair value of these assets;
 
  •  failing to integrate the operations and personnel of the acquired businesses;
 
  •  entering new markets with which we are not familiar; and
 
  •  failing to retain key personnel of, vendors to and customers of the acquired businesses.
 
If we are unable to successfully implement our acquisition strategy or address the risks associated with acquisitions, or if we encounter unforeseen expenses, difficulties, complications or delays frequently encountered in connection with the integration of acquired entities and the expansion of operations, our growth and ability to compete may be impaired, we may fail to achieve acquisition synergies and we may be required to focus resources on integration of operations rather than on our primary product and service offerings.
 
 
We have and may continue to have a significant amount of indebtedness. At December 31, 2009, we had total indebtedness of $215.2 million. Our interest expense for the year ended December 31, 2009 was $18.1 million. As the rate at which interest is assessed on our outstanding indebtedness is variable, a modest interest rate increase could result in a substantial increase in interest expense. As a method to mitigate this risk, during 2007, we entered into an interest rate collar for $155.0 million of our indebtedness and the terms of such hedging agreement expire June 30, 2010, prior to the maturity date of our indebtedness (the interest rate collar sets a maximum interest rate of 6.0% and a minimum interest rate of 2.85%). During 2009, we entered into a London Inter-bank Offered Rate (or “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).
 
Our substantial indebtedness could adversely affect our financial health in the following ways:
 
  •  a material portion of our cash flow from operations must be dedicated to the payment of interest on and principal of our outstanding indebtedness, thereby reducing the funds available to us for other purposes, including working capital, acquisitions and capital expenditures;
 
  •  our substantial degree of leverage could make us more vulnerable in the event of a downturn in general economic conditions or other adverse events in our business or our industry;


19


Table of Contents

 
  •  our substantial degree of leverage could impair our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes limiting our ability to maintain the value of our assets and operations; and
 
  •  our revolving credit facility matures in October 2011 and our term loan facility matures in October 2013. If cash flow from operations is less than our debt service responsibilities, we may face financial risk that could increase interest expense and hinder our ability to refinance our debt obligations.
 
In addition, our existing credit facility contains, and future indebtedness may contain, financial and other restrictive covenants, ratios and tests that limit our ability to incur additional debt and engage in other activities that may be in our long-term best interests. For example, our existing credit facility includes covenants restricting, among other things, our ability to incur indebtedness, create liens on assets, engage in certain lines of business, engage in certain mergers or consolidations, dispose of assets, make certain investments or acquisitions, engage in transactions with affiliates, enter into sale leaseback transactions, enter into negative pledges or pay dividends or make other restricted payments. Our existing credit facility also includes financial covenants, including requirements that we maintain compliance with a consolidated leverage ratio and a consolidated fixed charge coverage ratio.
 
Our ability to comply with the covenants and ratios contained in our existing credit facility or in the agreements governing our future indebtedness may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Our existing credit facility prohibits us from making dividend payments on our common stock if we are not in compliance with each of our financial covenants and our restricted payment covenant. We are currently in compliance with our existing covenants; however, any future event of default, if not waived or cured, could result in the acceleration of the maturity of our indebtedness under our existing credit facility. If we were unable to repay those amounts, the lenders under our existing credit facility could proceed against the security granted to them to secure that indebtedness. If the lenders accelerate the payment of our indebtedness, our assets may not be sufficient to repay in full such indebtedness.
 
Due to the challenging conditions of the financial markets and uncertain economic environment, our lenders may not be able to fund our borrowings under our revolving credit facility.
 
Financial institutions that have extended commitments under our revolving credit facility may be unable or unwilling to fund borrowings under their existing commitments to us if they are adversely affected by the conditions of the U.S. and international capital and credit markets. Our financial condition and results of operations could be adversely affected if we are unable to borrow against a significant portion of the commitments under our revolving credit facility because of lender defaults.
 
 
We may need to raise additional funds in order to:
 
  •  finance unanticipated working capital requirements;
 
  •  develop or enhance our technological infrastructure and our existing products and services;
 
  •  fund strategic relationships;
 
  •  respond to competitive pressures; and
 
  •  acquire complementary businesses, technologies, products or services.
 
Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of unanticipated opportunities, develop or enhance technology or services or otherwise respond to competitive pressures would be significantly limited. If we raise additional funds by issuing equity or convertible debt


20


Table of Contents

securities, the percentage ownership of our then-existing stockholders will be reduced, and these securities may have rights, preferences or privileges senior to those of our existing stockholders.
 
 
Rules and regulations applicable to sales and use tax vary significantly from state to state. In addition, the applicability of these rules given the nature of our products and services, is subject to change.
 
We may lose sales or incur significant costs should various tax jurisdictions be successful in imposing sales and use taxes on a broader range of products and services. A successful assertion by one or more tax jurisdictions that we should collect sales or other taxes on the sale of our solutions could result in substantial tax liabilities for past sales, decrease our ability to compete and otherwise harm our business.
 
If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our services, we may be liable for past taxes in addition to taxes going forward. Liability for past taxes may also include very substantial interest and penalty charges. If we are required to collect and pay back taxes and the associated interest and penalties and if our customers fail or refuse to reimburse us for all or a portion of these amounts, we will have incurred unplanned costs that may be substantial. Moreover, imposition of such taxes on our services going forward will effectively increase the cost of such services to our customers and may adversely affect our ability to retain existing customers or to gain new customers in the areas in which such taxes are imposed.
 
 
We initially evaluate the collectability of our accounts receivable based on a number of factors, including a specific client’s ability to meet its financial obligations to us, the length of time the receivables are past due and historical collections 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. Many of our customers are under intense financial pressure whose operations are characterized by declining or negative margins. If circumstances related to specific clients change, especially those of our larger clients, as a result of economic conditions or otherwise, such as a limited ability to meet financial obligations due to bankruptcy, or if conditions deteriorate such that our past collection experience is no longer relevant, the amount of accounts receivable that we are able to collect may be less than our previous estimates as we experience bad debt in excess of reserves previously recorded.
 
 
Certain of our customer contracts contain terms that result in revenue that is deferred and cannot be recognized until the occurrence of certain events. For example, accounting principles do not allow us to recognize revenue associated with the implementation of products and services until the implementation has been completed, at which time we begin to recognize revenue over the life of the contract or the estimated customer relationship period, whichever is longer. In addition, subscription-based fees generally commence only upon completion of implementation. As a result, the period of time between contract signing and recognition of associated revenue may be lengthy, and we are not able to predict with certainty the period in which implementation will be completed.
 
Certain of our contracts provide that some portion or all of our fees are at risk and refundable if our products and services do not result in the achievement of certain financial performance targets. To the extent that any revenue is subject to contingency for the non-achievement of a performance target, we only recognize revenue upon customer confirmation that the financial performance targets have been achieved. If a customer fails to provide such confirmation in a timely manner, our ability to recognize revenue will be delayed.


21


Table of Contents

Our Spend Management segment relies on participating vendors to provide periodic reports of their sales volumes to our customers and resulting administrative fees to us. If a vendor fails to provide such reporting in a timely and accurate manner, our ability to recognize administrative fee revenue will be delayed or prevented.
 
Certain of our fees are based on timing and volume of customer invoices processed and payments received, which are often dependent upon factors outside of our control.
 
Other fluctuations in our quarterly results of operations may be due to a number of other factors, some of which are not within our control, including:
 
  •  the extent to which our products and services achieve or maintain market acceptance;
 
  •  the purchasing and budgeting cycles of our customers;
 
  •  the lengthy sales cycles for our products and services;
 
  •  the impact of transaction fee and contingency fee arrangements with customers;
 
  •  changes in our or our competitors’ pricing policies or sales terms;
 
  •  the timing and success of our or our competitors’ new product and service offerings;
 
  •  client decisions regarding renewal or termination of their contracts;
 
  •  the amount and timing of operating costs related to the maintenance and expansion of our business, operations and infrastructure;
 
  •  the amount and timing of costs related to the development or acquisition of technologies or businesses;
 
  •  the financial condition of our current and potential clients;
 
  •  unforeseen legal expenses, including litigation and settlement costs; and
 
  •  general economic, industry and market conditions and those conditions specific to the healthcare industry.
 
We base our expense levels in part upon our expectations concerning future revenue, and these expense levels are relatively fixed in the short term. If we have lower revenue than expected, we may not be able to reduce our spending in the short term in response. Any significant shortfall in revenue would have a direct and material adverse impact on our results of operations. We believe that our quarterly results of operations may vary significantly in the future and that period-to-period comparisons of our results of operations may not be meaningful. You should not rely on the results of one quarter as an indication of future performance. If our quarterly results of operations fall below the expectations of securities analysts or investors, the price of our common stock could decline substantially.
 
If we lose key personnel or if we are unable to attract, hire, integrate and retain key personnel, our business would be harmed.
 
Our future success depends in part on our ability to attract, hire, integrate and retain key personnel. Our future success also depends on the continued contributions of our executive officers and other key personnel, each of whom may be difficult to replace. In particular, John A. Bardis, our chairman, president and chief executive officer and Rand A. Ballard, our chief operating officer and chief customer officer, are critical to the management of our business and operations and the development of our strategic direction. The loss of services of Messrs. Bardis or Ballard or any of our other executive officers or key personnel could have a material adverse effect on our business. The replacement of any of these key individuals would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.


22


Table of Contents

 
 
Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss or corruption or cause the information that we collect to be incomplete or contain inaccuracies that our customers regard as significant. Complex software such as ours may contain errors or failures that are not detected until after the software is introduced or updates and new versions are released. We continually introduce new software and updates and enhancements to our software. Despite testing by us, from time to time we have discovered defects or errors in our software, and such defects or errors may appear in the future. Defects and errors that are not timely detected and remedied could expose us to risk of liability to customers and the government and could cause delays in the introduction of new products and services, result in increased costs and diversion of development resources, require design modifications, decrease market acceptance or customer satisfaction with our products and services or cause harm to our reputation. If any of these events occur, it could materially adversely affect our business, financial condition or results of operations.
 
Furthermore, our customers might use our software together with products from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our software does not cause these problems, the existence of these errors might cause us to incur significant costs, divert the attention of our technical personnel from our product development efforts, impact our reputation and lead to significant customer relations problems.
 
If our products or services fail to provide accurate information, or if our content or any other element of our products or services is associated with incorrect, inaccurate or faulty coding, billing, or claims submissions to Medicare or any other third-party payor, we could be liable to customers or the government which could adversely affect our business.
 
Our products and content were developed based on the laws, regulations and third-party payor rules in existence at the time such software and content was developed. If we interpret those laws, regulations or rules incorrectly; the laws, regulations or rules materially change at any point after the software and content was developed; we fail to provide up-to-date, accurate information; or our products, or services are otherwise associated with incorrect, inaccurate or faulty coding, billing or claims submissions, then customers could assert claims against us or the government or qui tam relators on behalf of the government could assert claims against us under the Federal False Claims Act or similar state laws. The assertion of such claims and ensuing litigation, regardless of its outcome, could result in substantial costs to us, divert management’s attention from operations, damage our reputation and decrease market acceptance of our services. We attempt to limit by contract our liability to customers for damages. We cannot, however, limit liability the government could seek to impose on us under the False Claims Act. Further, the allocations of responsibility and limitations of liability set forth in our contracts may not be enforceable or otherwise protect us from liability for damages.
 
 
The timely development, implementation and continuous and uninterrupted performance of our hardware, network, applications, the Internet and other systems, including those which may be provided by third parties, are important facets in our delivery of products and services to our customers. Our ability to protect these processes and systems against unexpected adverse events is a key factor in continuing to offer our customers our full complement of products and services on time in an uninterrupted manner.
 
Our operations are vulnerable to interruption by damage from a variety of sources, many of which are not within our control, including without limitation: (1) power loss and telecommunications failures; (2) software and hardware errors, failures or crashes; (3) computer viruses and similar disruptive problems; (4) fire, flood and other natural disasters; and (5) attacks on our network or damage to our software and systems carried out by hackers or Internet criminals.


23


Table of Contents

System failures that interrupt our ability to develop applications or provide our products and services could affect our customers’ perception of the value of our products and services. Delays or interruptions in the delivery of our products and services could result from unknown hardware defects, insufficient capacity or the failure of our website hosting and telecommunications providers to provide continuous and uninterrupted service. We also depend on service providers that provide customers with access to our products and services. In addition, computer viruses may harm our systems causing us to lose data, and the transmission of computer viruses could expose us to litigation. In addition to potential liability, if we supply inaccurate information or experience interruptions in our ability to capture, store and supply information, our reputation could be harmed and we could lose customers. Any significant interruptions in our products and services could damage our reputation in the marketplace and have a negative impact on our business, financial condition and results of operations.
 
Unauthorized disclosure of confidential information provided to us by our customers or third parties, whether through breach of our secure network by an unauthorized party, employee theft or misuse, or otherwise, could harm our business.
 
The difficulty of securely transmitting confidential information has been a significant issue when engaging in sensitive communications over the Internet. Our business relies on using the Internet to transmit confidential information. We believe that any well-publicized compromise of Internet security may deter companies from using the Internet for these purposes.
 
Our services present the potential for embezzlement, identity theft, or other similar illegal behavior by our employees or subcontractors with respect to third parties. If there was a disclosure of confidential information, or if a third party were to gain unauthorized access to the confidential information we possess, our operations could be seriously disrupted, our reputation could be harmed and we could be subject to claims pursuant to our agreements with our customers or other liabilities. In addition, if this were to occur, we could be perceived to have facilitated or participated in illegal misappropriation of funds, documents, or data and therefore be subject to civil or criminal liability or regulatory action. While we maintain professional liability insurance coverage in an amount that we believe is sufficient for our business, we cannot assure you that this coverage will prove to be adequate or will continue to be available on acceptable terms, if at all. A claim that is brought against us that is uninsured or under-insured could harm our business, financial conditions and results of operations. Even unsuccessful claims could result in substantial costs and diversion of management resources.
 
Risks Related to Government Regulation
 
 
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.


24


Table of Contents

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. Although there has not been any further inquiry by the Senate Subcommittee since March 2006, the Senate, the Department of Justice, the Federal Trade Commission or other state or federal governing entity could at any time develop new rules, regulations or laws governing the group purchasing 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 pricing arrangements in a manner that negatively impacts our business and financial results. 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 have fully complied with all of these requests.
 
If we fail to comply with federal and state laws governing submission of false or fraudulent claims to government healthcare programs and financial relationships among healthcare providers, we may be subject to civil and criminal penalties or loss of eligibility to participate in government healthcare programs.
 
We are subject to federal and state laws and regulations designed to protect patients, governmental healthcare programs, and private health plans from fraudulent and abusive activities. These laws include anti-kickback restrictions and laws prohibiting the submission of false or fraudulent claims. These laws are complex and their application to our specific products, services and relationships may not be clear and may be applied to our business in ways that we do not anticipate. Federal and state regulatory and law enforcement authorities have recently increased enforcement activities with respect to Medicare and Medicaid fraud and abuse regulations and other reimbursement laws and rules. From time to time we and others in the healthcare industry have received inquiries or subpoenas to produce documents in connection with such activities. We could be required to expend significant time and resources to comply with these requests, and the attention of our management team could be diverted to these efforts. Furthermore, if we are found to be in violation of any federal or state fraud and abuse laws, we could be subject to civil and criminal penalties, and we could be excluded from participating in federal and state healthcare programs such as Medicare and Medicaid. The occurrence of any of these events could significantly harm our business and financial condition.
 
Provisions in Title XI of the Social Security Act, commonly referred to as the federal Anti-Kickback Statute, prohibit the knowing and willful offer, payment, solicitation or receipt of remuneration, directly or indirectly, in return for the referral of patients or arranging for the referral of patients, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered, in whole or in part, by a federal healthcare program such as Medicare or Medicaid. The definition of “remuneration” has been broadly interpreted to include anything of value such as gifts, discounts, rebates, waiver of payments or providing anything at less than its fair market value. Many states have adopted similar prohibitions against kickbacks and other practices that are intended to induce referrals which are applicable to all patients regardless of whether the patient is covered under a governmental health program or private health plan. We attempt to scrutinize our business relationships and activities to comply with the federal anti-kickback statute and similar laws; and we attempt to structure our sales and group purchasing arrangements in a manner that is consistent with the requirements of applicable safe harbors to these laws. We cannot assure you, however, that our arrangements will be protected by such safe harbors or that such increased enforcement activities will not directly or indirectly have an adverse effect on our business financial condition or results of operations. Any


25


Table of Contents

determination by a state or federal agency that any of our activities or those of our vendors or customers violate any of these laws could subject us to civil or criminal penalties, could require us to change or terminate some portions of or operations or business, could disqualify us from providing services to healthcare providers doing business with government programs and, thus, could have an adverse effect on our business.
 
Our business, particularly our Revenue Cycle Management segment, is also subject to numerous federal and state laws that forbid the submission or “causing the submission” of false or fraudulent information or the failure to disclose information in connection with the submission and payment of claims for reimbursement to Medicare, Medicaid, federal healthcare programs or private health plans. These laws and regulations may change rapidly, and it is frequently unclear how they apply to our business. Errors created by our products or consulting services that relate to entry, formatting, preparation or transmission of claim or cost report information may be determined or alleged to be in violation of these laws and regulations. Any failure of our products or services to comply with these laws and regulations could result in substantial civil or criminal liability, could adversely affect demand for our services, could invalidate all or portions of some of our customer contracts, could require us to change or terminate some portions of our business, could require us to refund portions of our services fees, could cause us to be disqualified from serving customers doing business with government payors and could have an adverse effect on our business.
 
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 ARRA. 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, federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system, including those recently initiated to counter the effects of the current economic turmoil, as well as, the healthcare reform legislation currently under consideration by the U.S. Congress. These programs and plans may contain proposals to increase governmental involvement in healthcare, create a


26


Table of Contents

universal healthcare system, lower reimbursement rates or otherwise significantly change the environment in which healthcare industry providers currently operate. We do not know what effect, if any, such proposals may have on our business.
 
 
Our customers derive a substantial portion of their revenue from third-party private and governmental payors including Medicare, Medicaid and other government sponsored programs. Our sales and profitability depend, in part, on the extent to which coverage of and reimbursement for the products our customers purchase or otherwise obtain through us is available from governmental health programs, private health insurers, managed care plans and other third-party payors. These third-party payors exercise significant control over and increasingly use their enhanced bargaining power to secure discounted reimbursement rates and impose other requirements that may negatively impact our customers’ ability to obtain adequate reimbursement for products and services they purchase or otherwise obtain through us as a group purchasing member.
 
If third-party payors do not approve products for reimbursement or fail to reimburse for them adequately, our customers may suffer adverse financial consequences which, in turn, may reduce the demand for and ability to purchase our products or services. In addition CMS, which administers the Medicare and federal aspects of state Medicaid programs, has issued complex rules requiring pharmaceutical manufacturers to calculate and report drug pricing for multiple purposes, including the limiting of reimbursement for certain drugs. These rules generally exclude from the pricing calculation administrative fees paid by drug manufacturers to GPOs such as the company if the fees meet CMS’ “bona fide service fee” definition. There can be no assurance that CMS will continue to allow exclusion of GPO administrative fees from the pricing calculation, or that other efforts by payors to limit reimbursement for certain drugs will not have an adverse impact on our business. Further, we do not know what effect, if any, the healthcare reform legislation currently under consideration by the U.S. Congress will have on third-party reimbursement.
 
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;


27


Table of Contents

 
  •  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. In other words, we must now directly comply with certain aspects of the Privacy and Security Rules, and are also 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 security involving protected health information.
 
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 in the healthcare sector. We are 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 and 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 has been a trend across the United States among state tax authorities to challenge the tax exempt status of hospitals and other healthcare facilities claiming such status on the basis that they are operating as charitable and/or religious organizations. The outcome of these cases has been mixed with some facilities retaining their tax-exempt status while others have been denied the ability to continue operating under as not-for profit, tax-exempt entities under state law. In addition, many states have removed sales tax exemptions previously available to not-for-profit entities, and both the IRS and the United States Congress are investigating the practices of non-for profit hospitals. Those facilities denied tax exemptions could be subject to the imposition of tax penalties and assessments which could have a material adverse impact on their cash flow, financial strength and possibly ongoing viability. If the tax exempt status of any of our customers is revoked or compromised by new legislation or interpretation of existing legislation, that customer’s financial health could be adversely affected, which could adversely impact our sales and revenue.


28


Table of Contents

 
 
There has been significant volatility in the market price and trading volume of equity securities, which is often unrelated or disproportionate to the financial performance of the companies issuing the securities. These broad market fluctuations may negatively affect the market price of our common stock. The market price of our common stock could fluctuate significantly in response to the factors described above and other factors, many of which are beyond our control, including:
 
  •  actual or anticipated changes in our or our competitors’ growth rates;
 
  •  the public’s response to our press releases or other public announcements, including our filings with the SEC and announcements of technological innovations or new products or services by us or by our competitors;
 
  •  actions of our historical equity investors, including sales of common stock by our directors and executive officers;
 
  •  any major change in our senior management team;
 
  •  legal and regulatory factors unrelated to our performance;
 
  •  general economic, industry and market conditions and those conditions specific to the healthcare industry; and
 
  •  changes in stock market analyst recommendations regarding our common stock, other comparable companies or our industry generally.
 
You may not be able to resell your shares at or above the market price you paid to purchase your shares due to fluctuations in the market price of our common stock caused by changes in the market as a whole or our operating performance or prospects.
 
 
Those affiliated with the Company beneficially own a substantial amount of our outstanding common stock. The interests of our executive officers, directors and their affiliated entities may differ from the interests of the other stockholders. These stockholders, if they act together, could exert substantial influence over matters requiring approval by our stockholders, including the election of directors, the amendment of our certificate of incorporation and by-laws and the approval of mergers or other business combination transactions. These transactions might include proxy contests, tender offers, mergers or other purchases of common stock that could give you the opportunity to realize a premium over the then-prevailing market price for shares of our common stock. As to these matters and in similar situations, you may disagree with these stockholders as to whether the action opposed or supported by them is in the best interest of our stockholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our stockholders of an opportunity to receive a premium for their stock as part of a sale of our company and may negatively affect the market price of our common stock.
 
 
Provisions of our certificate of incorporation and by-laws and Delaware law may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management.


29


Table of Contents

For example, our amended and restated certificate of incorporation provides for a staggered board of directors, whereby directors serve for three-year terms, with approximately a third of the directors coming up for re-election each year. Having a staggered board could make it more difficult for a third party to acquire us through a proxy contest. Other provisions that may discourage, delay or prevent a change in control or changes in management include:
 
  •  limitations on the removal of directors;
 
  •  advance notice requirements for stockholder proposals and nominations;
 
  •  the inability of stockholders to act by written consent or to call special meetings; and
 
  •  the ability of our board of directors to designate the terms of, including voting, dividend and other special rights, and issue new series of preferred stock without stockholder approval.
 
In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.
 
A change of control may also impact employee benefit arrangements, which could make an acquisition more costly and could prevent it from going forward. For example, our option plans allow for all or a portion of the options granted under these plans to vest upon a change of control. Finally, upon any change in control, the lenders under our senior secured credit facility would have the right to require us to repay all of our outstanding obligations.
 
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
 
 
We do not intend to declare or pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS.
 


30


Table of Contents

ITEM 2.   PROPERTIES.
 
 
We do not own any real property and lease our existing facilities. Our principal executive offices are located in leased office space in Alpharetta, Georgia. Our facilities accommodate product development, marketing and sales, information technology, administration, training, graphic services and operations personnel. As of December 31, 2009, we leased office space to support our operations in the following locations:
 
                             
        Principal
       
        Business
       
    Floor Area
  Function or
       
Location
  (Sq. Feet)   Segment  
End of Term
 
Renewal Option
 
Alpharetta, Georgia
  21,914     Corporate       March 31, 2015       Period of five additional years  
Alpharetta, Georgia
  89,424     RCM       March 31, 2015       Period of five additional years  
Atlanta, Georgia
  7,712     SM       December 31, 2012       None  
Bellevue, Washington
  5,535     RCM       June 30, 2013       Period of five additional years  
Billerica, Massachusetts
  13,009     RCM       June 30, 2010       None  
Bridgeton, Missouri
  26,341     SM       June 30, 2013       Two periods of five additional years  
Cape Girardeau, Missouri(1)
  58,664     SM       July 31, 2017       Period of three additional years  
Centennial, Colorado
  13,653     SM       February 29, 2016       Two periods of three additional years  
Dallas, Texas
  55,420     RCM       February 28, 2011       Two periods of five additional years  
El Segundo, California
  31,536     RCM / SM       January 18, 2018       Period of five additional years  
Franklin, Tennessee
  7,081     SM       July 1, 2011       Period of three additional years  
Mahwah, New Jersey
  26,000     RCM       June 30, 2010       Period of five additional years  
Nashville, Tennessee
  17,794     RCM       July 31, 2011       Two periods of five additional years  
Plano, Texas
  49,606     RCM       December 31, 2021       Two periods of five additional years  
Raleigh, North Carolina
  3,115     RCM       April 30, 2011       Period of three additional years  
Richardson, Texas
  24,959     RCM       October 31, 2011       Period of five additional years  
Richardson, Texas
  3,588     RCM       May 31, 2013       Period of three additional years  
Saddle River, New Jersey
  19,361     RCM       January 31, 2016       None  
Southborough, Massachusetts
  4,342     RCM       March 31, 2014       Period of five additional years  
Yakima, Washington
  10,000     RCM       October 31, 2010       Period of two additional years  
 
 
(1) See “Finance Obligation” in Note 6 to our Consolidated Financial Statements for a discussion of the capital lease treatment of our Cape Girardeau facility, lease term ending July 31, 2017.
 
In June 2009, we entered into a new lease agreement acquiring 100,528 square feet of office space in Plano, Texas. The lease agreement contains two phases of varying amounts of office space to be occupied commencing at different times during the term of the lease. Phase One commenced on September 1, 2009 and consisted of 49,606 square feet. Phase Two will commence on or around March 1, 2011 and will consist of 50,922 square feet. The term of the lease is twelve years and four months and expires on December 31, 2021. The lease contains an option to extend the lease term for two additional five year periods after the initial expiration date. The total rental commitment under the lease agreement is approximately $22.0 million and is included in the table above.
 
In August 2009, we amended the lease for our office in Nashville, Tennessee acquiring 6,832 square feet of additional office space. The lease amendment is effective on November 15, 2009 and the term of the lease remained unchanged.
 
As of December 31, 2009, we did not have any other off-balance sheet arrangements that have or are reasonably likely to have a current or future significant effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


31


Table of Contents

In January 2010, we amended our Centennial, Colorado lease and acquired 4,281 square feet of additional office space. The lease amendment will be effective March 1, 2010 and the term of the lease remained unchanged.
 
ITEM 3.   LEGAL PROCEEDINGS.
 
 
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. Other than the Med-Data dispute noted below, we are not presently involved in any other 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.
 
In August 2007, the former owner of Med-Data Management, Inc. (or “Med-Data”) disputed our earn-out calculation made under the Med-Data Asset Purchase Agreement and alleged that we failed to fulfill our obligations with respect to the earn-out. In November 2007, the former owner filed a complaint alleging that we failed to act in good faith with respect to the operation of Med-Data subsequent to the acquisition which affected the earn-out calculation. The Company refutes these allegations and is vigorously defending itself against these allegations. On March 21, 2008 we filed an answer, denying the plaintiffs’ allegations and also filed a counterclaim, alleging that the plaintiffs fraudulently induced us to enter into the purchase agreement by intentionally concealing the status of their relationship with their largest customer. Discovery has been completed and briefing has been completed on MedAssets’ and plaintiffs’ dispositive motions, but we currently cannot estimate any probable outcome and have not recorded a loss contingency in our Consolidated Statement of Operations. The maximum earn-out payable under the Asset Purchase Agreement is $4.0 million. In addition, the plaintiffs claim that Ms. Hodges, one of the plaintiffs, is entitled to the accelerated vesting of options to purchase 140,000 shares of our common stock that she received in connection with her employment agreement with the Company.
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
None.
 
 
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Our common stock is publicly traded on the Nasdaq Global Select Market under the ticker symbol “MDAS.” The following chart sets forth, for the periods indicated, the high and low sales prices of our common stock on the Nasdaq Global Select Market.
 
 
                 
    Price Range
 
    of Common Stock  
Period
  High     Low  
 
Fourth Quarter 2009
  $ 24.74     $ 18.20  
Third Quarter 2009
  $ 23.81     $ 17.22  
Second Quarter 2009
  $ 19.73     $ 13.73  
First Quarter 2009
  $ 16.00     $ 11.05  
Fourth Quarter 2008
  $ 16.30     $ 10.70  
Third Quarter 2008
  $ 18.52     $ 15.00  
Second Quarter 2008
  $ 18.92     $ 12.99  
First Quarter 2008
  $ 23.08     $ 14.70  
 
At February 18, 2010 the last reported sale price for our common stock was $20.26 per share. As of February 18, 2010 there were 193 holders of record of our common stock and approximately 7,200 beneficial holders.


32


Table of Contents

 
We did not pay any dividends during the fiscal years ended December 31, 2009 and 2008, respectively. We currently anticipate that we will retain all of our future earnings, if any, for use in the expansion and operation of our business and do not anticipate paying any cash dividends for the foreseeable future. The payment of dividends, if any, is subject to the discretion of our board of directors and will depend on many factors, including our results of operations, financial condition and capital requirements, earnings, general business conditions, restrictions imposed by our current and any future financing arrangements, legal restrictions on the payment of dividends and other factors our board of directors deems relevant. Our current credit facility includes restrictions on our ability to pay dividends.
 
 
The information regarding securities authorized for issuance under the Company’s equity compensation plans is set forth below, as of December 31, 2009:
 
                         
    Number of
             
    Securities to be
          Number of Securities
 
    Issued Upon
          Remaining Available for
 
    Exercise of
          Future Issuance
 
    Outstanding
    Weighted-Average
    Under Equity
 
    Options,
    Exercise Price of
    Compensation Plans
 
    Warrants
    Outstanding Options,
    (Excluding Securities
 
    and Rights
    Warrants and Rights
    Reflected in Column (a))
 
Plan Category
  (a)     (b)     (c)  
 
Equity compensation plans approved by security holders
    8,977,945 (1)   $ 11.58       1,836,540 (2)
Equity compensation plans not approved by security holders
                 
                         
Total(3)
    8,977,945     $ 11.58       1,836,540  
 
 
(1) This amount includes 6,244,181 common stock options, 2,696,261 stock-settled stock appreciation rights (or “SSARs”) and 37,503 common stock warrants issued under our Long Term Performance Incentive Plan (effected in 2008), 2004 Long Term Equity Incentive Plan, and 1999 Stock Incentive Plan.
 
(2) All securities remaining available for future issuance are issuable under our Long Term Performance Incentive Plan. See Note 10 to our Consolidated Financial Statements for discussion of the equity plans.
 
(3) The above number of securities to be issued upon exercise of outstanding options, warrants and rights does not include 200,675 options issued in connection with our acquisition of OSI Systems, Inc. in June 2003. These options have a weighted average exercise price of $1.67.
 
 
Set forth below is information regarding shares of common stock and preferred stock issued, and options and warrants granted, by us in the period covered by this Annual Report on Form 10-K that were not registered under the Securities Act. Also included is the consideration, if any, received by us for such shares, options and warrants and information relating to the section of the Securities Act, or rule of the SEC, under which exemption from registration was claimed. All then outstanding shares of preferred stock, including those shares described below, were immediately converted to common stock upon the closing of our initial public offering in December 2007. We had no preferred stock outstanding as of December 31, 2009, 2008 or 2007.
 
 
During the fiscal years ended December 31, 2009 and 2008, we issued approximately 227,000 and 84,000, respectively, of unregistered shares of our common stock in connection with stock option exercises related to options issued in connection with our acquisition of OSI Systems, Inc. in June 2003. We received approximately $0.3 million and $0.1 million in consideration in connection with these stock option exercises for the fiscal years ended December 31, 2009 and 2008, respectively.


33


Table of Contents

In June 2008, we issued approximately 8,850,000 unregistered shares of our common stock to holders of Accuro securities as part of the purchase price paid for the Accuro acquisition, pursuant to the terms of the merger agreement.
 
 
In June 2008, we issued approximately 190,000 unregistered shares of our common stock in connection with the exercise of a warrant for shares of our common stock. Approximately 55,000 shares issuable under the terms of the warrant were surrendered as consideration for the cashless exercise of the warrant.
 
In May 2007, we sold warrants to purchase 8,000 shares of common stock to Capitol Health Group, a healthcare industry lobbying firm, for professional services. The warrants had an exercise price of $10.44 per share for an aggregate price of $0.1 million. The warrants were exercised on June 30, 2007. In fiscal year ended 2007, warrants to purchase an aggregate of 43,692 shares of common stock were exercised, at exercise prices ranging from $0.01 to $10.44 per share for an aggregate exercise price of $0.1 million.
 
 
All then outstanding shares of preferred stock, including those shares described below, were immediately converted to common stock upon the closing of our initial public offering in December 2007. We had no preferred stock outstanding as of December 31, 2008 or 2007.
 
In May 2007, we sold an aggregate of 1,712,076 shares of our Series I convertible preferred stock in connection with our acquisition of XactiMed.
 
In July 2007, we sold an aggregate of 625,920 shares of our Series J convertible preferred stock in connection with our acquisition of the outstanding shares of MD-X, inclusive of 73,637 shares issued to an officer of MD-X for $1.0 million.
 
The sales of the above securities were deemed to be exempt from registration in reliance on Section 4(2) of the Securities Act or Regulation D promulgated thereunder as transactions by an issuer not involving any public offering. All recipients were accredited investors, as those terms are defined in the Securities Act and the regulations promulgated thereunder. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.
 
 
During fiscal year ended December 31, 2007, we granted options to purchase an aggregate of 2,705,521 shares of common stock to employees, consultants and directors under our 2004 Long-Term Performance Incentive Plan at exercise prices ranging from $9.29 to $16.00 per share for an aggregate purchase price of $27,938,352.
 
During fiscal year ended December 31, 2007, we issued an aggregate of 859,187 shares of common stock to employees, consultants and directors pursuant to the exercise of stock options issued pursuant to the exercise of stock options under our 1999 Stock Incentive Plan and 2004 Long-Term Incentive Plan at exercise prices ranging from $0.63 to $10.44 per share for an aggregate consideration of $3.4 million.
 
During fiscal year ended December 31, 2007, 8,000 shares of restricted common stock were granted to members of our advisory board.
 
The sales of the above securities were deemed to be exempt from registration in reliance in Rule 701 promulgated under Section 3(b) under the Securities Act as transactions pursuant to a compensatory benefit plan or a written contract relating to compensation.


34


Table of Contents

 
The following graph compares the cumulative total stockholder return on the Company’s common stock from December 13, 2007 to December 31, 2009 with the cumulative total return of (i) the companies traded on the NASDAQ Global Select Market (the “NASDAQ Composite Index”) and (ii) the NASDAQ Computer & Data Processing Index.
 
 
(PERFORMANCE GRAPH)
 
 
* Assumes $100 invested in the Company’s common stock on December 13, 2007 and in each index on November 30, 2007, and the reinvestment of all dividends.
 
                                                                       
      12/13/2007     12/07     12/08     3/09     6/09     9/09     12/09
MedAssets Inc. 
      100.00         116.78         71.22         69.51         94.88         110.10         103.46  
NASDAQ Composite
      100.00         99.71         58.93         57.11         68.59         79.42         85.12  
NASDAQ Computer & Data Processing
      100.00         103.08         58.90         60.18         74.14         82.69         94.11  
                                                                       


35


Table of Contents

ITEM 6.   SELECTED FINANCIAL DATA.
 
Our historical financial data as of and for the fiscal years ended December 31, 2009, 2008 and 2007 have been derived from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and such data as of and for the fiscal year ended December 31, 2006 and 2005 has been derived from audited consolidated financial statements not included in this Annual Report on Form 10-K.
 
Historical results of operations are not necessarily indicative of results of operations or financial condition in the future or to be expected in the future. Refer to Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations for a summary of management’s primary metrics to measure the consolidated financial performance of our business, which includes 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 summary historical consolidated financial data and notes should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes to those financial statements included elsewhere in this Annual Report on Form 10-K.
 
                                         
    Fiscal Year Ended December 31,  
    2009     2008(1)     2007(2)     2006(3)     2005  
    (In thousands, except per share data)  
 
Statement of Operations Data:
                                       
Net revenue:
                                       
Revenue Cycle Management
  $ 205,918     $ 151,717     $ 80,512     $ 48,834     $ 20,650  
Spend Management
    135,363       127,939       108,006       97,401       77,990  
                                         
Total net revenue
    341,281       279,656       188,518       146,235       98,640  
Operating expenses:(4)
                                       
Cost of revenue (inclusive of certain depreciation and amortization expense; Note 2)
    74,651       51,548       27,983       15,601       7,491  
Product development expenses
    18,994       16,393       7,785       7,163       3,078  
Selling and marketing expenses
    45,282       43,205       35,748       32,205       23,740  
General and administrative expenses
    110,661       91,481       64,817       55,363       39,146  
Depreciation
    13,211       9,793       7,115       4,822       3,257  
Amortization of intangibles
    28,012       23,442       15,778       11,738       7,780  
Impairment of property and equipment, intangibles and in process research and development (5)
          2,272       1,204       4,522       368  
                                         
Total operating expenses
    290,811       238,134       160,430       131,414       84,860  
                                         
Operating income
    50,470       41,522       28,088       14,821       13,780  
Other income (expense)
                                       
Interest expense
    (18,114 )     (21,271 )     (20,391 )     (10,921 )     (6,995 )
Other income (expense)
    417       (1,921 )     3,115       (3,917 )     (837 )
                                         
Income (loss) before income taxes
    32,773       18,330       10,812       (17 )     5,948  
Income tax expense (benefit)
    12,826       7,489       4,516       (8,860 )     (10,517 )
                                         
Net income
    19,947       10,841       6,296       8,843       16,465  
Preferred stock dividends and accretion
                (16,094 )     (14,713 )     (14,310 )
                                         
Net income (loss) attributable to common stockholders
  $ 19,947     $ 10,841     $ (9,798 )   $ (5,870 )   $ 2,155  
Income (loss) per share basic
  $ 0.36     $ 0.22     $ (0.75 )   $ (0.67 )   $ 0.10  
Income (loss) per share diluted
  $ 0.34     $ 0.21     $ (0.75 )   $ (0.67 )   $ 0.08  
Shares used in per share calculation basic
    54,841       49,843       12,984       8,752       22,064  
Shares used in per share calculation diluted(6)
    57,865       52,314       12,984       8,752       25,938  
 
 
(1) Amounts include the results of operations of Accuro (as part of the Revenue Cycle Management segment) from June 2, 2008, the date of acquisition.
(2) Amounts include the results of operations of XactiMed (as part of the Revenue Cycle Management segment) from May 18, 2007 and MD-X (as part of the Revenue Cycle Management segment) from July 2, 2007, the respective dates of acquisition.


36


Table of Contents

 
(3) Amounts include the results of operations of Avega Health Systems Inc., or Avega, (as part of the Revenue Cycle Management segment) from January 1, 2006, the date of acquisition.
 
(4) We adopted generally accepted accounting principles relating to stock compensation, on January 1, 2006. Total share-based compensation expense for each period presented is as follows:
 
                                         
    Fiscal Year Ended December 31,  
    2009     2008     2007     2006     2005  
          (In thousands)              
 
Cost of revenue
  $ 3,063     $ 1,983     $ 877     $ 834     $  
Product development
    866       721       350       517        
Selling and marketing
    2,920       1,894       1,050       597        
General and administrative
    9,803       3,952       3,334       1,309       423  
                                         
Total share-based compensation expense
  $ 16,652     $ 8,550     $ 5,611     $ 3,257     $ 423  
                                         
 
(5) The impairment of intangibles during 2008 primarily relates to acquired developed technology from prior acquisitions, revenue cycle management tradenames and internally developed software products deemed impaired due to the integration of Accuro’s operations and products. The impairment of intangibles during 2007 and 2006 primarily relates to the write-off of in-process research and development from XactiMed and Avega at the time of acquisition. In 2005, impairment of intangibles primarily relates to software impairments.
 
(6) For the years ended December 31, 2007 and 2006, the effect of dilutive securities has been excluded because the effect is antidilutive as a result of the net loss attributable to common stockholders.
 
 
                                         
    Fiscal Year Ended December 31,  
    2009     2008     2007     2006     2005  
    (In thousands, except per share data)  
 
Cash and cash equivalents(1)
  $ 5,498     $ 5,429     $ 136,972     $ 23,459     $ 68,331  
Current assets
    95,980       80,254       190,208       57,380       98,300  
Total assets
    778,544       773,860       526,379       277,204       219,713  
Current liabilities
    99,344       139,308       75,513       67,387       52,280  
Total non-current liabilities(2)
    241,828       251,613       221,351       181,159       98,523  
Total liabilities
    341,172       390,921       296,864       248,546       150,803  
Redeemable convertible preferred stock(1)
                      196,030       169,644  
Total stockholder’s equity (deficit)(1)
    437,372       382,939       229,515       (167,372 )     (100,734 )
Cash dividends declared per share(3)
  $     $     $ 2.48     $ 2.66          
 
 
(1) In September 2008, we instituted an auto borrowing and repayment plan whereby our excess cash balances are voluntarily used by the credit agreement administrative agent to pay down outstanding loan balances under our revolving credit facility on a daily basis. We initiated this auto borrowing and repayment plan in order to reduce the amount of interest expense incurred. At December 31, 2009 and 2008, we had a positive cash and cash equivalents balance because we had a zero balance on our revolving credit facility. As a result of our initial public offering of our common stock which closed on December 18, 2007, we received $216.6 million of net cash proceeds and subsequently paid down indebtedness by $120.0 million on the same date. In conjunction with the offering, all redeemable convertible preferred shares were converted to common shares.
 
(2) Inclusive of capital lease obligations and long-term notes payable.
 
(3) On October 30, 2006, our board of directors declared a special dividend payable to common stockholders and preferred stockholders, to the extent entitled to participate in dividends payable on the common stock in the amount of $70.0 million in the aggregate, or $2.66 per share. On July 23, 2007, our board of directors declared an additional special dividend payable to common stockholders and preferred stockholders,


37


Table of Contents

to the extent entitled to participate in dividends payable on the common stock in the amount of $70.0 million in the aggregate, or $2.48 per share.
 
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion of our financial condition and results of operations should be read in conjunction with this entire Annual Report on Form 10-K, including the “Risk Factors” section and our consolidated financial statements and the notes to those financial statements appearing elsewhere in this report. The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this report that could cause our actual future growth, results of operations, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, such forward-looking statements. See “Note On Forward-Looking Statements” herein.
 
 
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 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.
 
MedAssets delivered strong financial performance in 2009. Our full-year results included total consolidated net revenue of $341.3 million, a 22.0% increase over 2008, net income almost doubled to reach $19.9 million, or earnings of $0.34 per diluted share and adjusted EBITDA of $111.4 million, up 24.2% over last year. These results were primarily driven by growth in our comprehensive revenue cycle services capabilities as well as increased demand for our reimbursement technology tools. In particular, we saw strength in our charge capture audit, claims management and contract management tools. Although our core GPO volume grew in the low single digits during the year, we continued to experience significant growth in our supply chain consulting business.
 
During 2009, we launched a number of product and service capabilities. In our Spend Management segment, we upgraded our Strategic Information (SI) analytics tool, and introduced Service Line Analytics to help our customers identify and drive sustainable financial improvement in the management of high-cost medical devices, supplies, pharmaceuticals, and other ancillary cost drivers. We also expanded and improved our suite of solutions in the Revenue Cycle Management segment, such as the addition and integration of capabilities from our Accuro acquisition as well as the development and launch of our RAC (recovery audit contractor) solution set.
 
Despite the challenges of the economic environment over the last 12 to 18 months, we finished the year with solid business momentum heading into 2010. We are confident that our business model and solution sets will continue to provide our customer base the requisite direction, support and increased cash flow that they need in the near-term and the long-term as the economic effects from 2009 continues to impact their provision of care.
 
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.


38


Table of Contents

For the fiscal years ended December 31, 2009, 2008 and 2007, our primary results of operations included the following:
 
                                                                 
    Fiscal Year Ended December 31,     Fiscal Year Ended December 31,  
    2009     2008     Change           2008     2007     Change        
    Amount     Amount     Amount     %     Amount     Amount     Amount     %  
    (In millions)     (In millions)  
 
Gross fees(1)
  $ 396.5     $ 332.5     $ 64.0       19.2 %   $ 332.5     $ 236.0     $ 96.5       40.9 %
Revenue share obligation(1)
    (55.2 )     (52.9 )     (2.3 )     4.3       (52.9 )     (47.5 )     (5.4 )     11.4  
                                                                 
Total net revenue
    341.3       279.6       61.7       22.1       279.6       188.5       91.1       48.3  
Operating income
    50.5       41.5       9.0       21.7       41.5       28.1       13.4       47.7  
Net income
  $ 19.9     $ 10.8     $ 9.1       84.3 %   $ 10.8     $ 6.3     $ 4.5       71.4 %
Adjusted EBITDA(1)
  $ 111.4     $ 89.7     $ 21.7       24.2 %   $ 89.7     $ 60.6     $ 29.1       48.0 %
Adjusted EBITDA margin(1)
    32.6 %     32.1 %                     32.1 %     32.1 %                
Diluted cash EPS(1)
  $ 0.82     $ 0.65     $ 0.17       26.2 %   $ 0.65       nm *     nm *     nm *
 
 
(1) These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.
 
The comparison of 2007 non-GAAP adjusted diluted EPS and non-GAAP diluted cash EPS to 2008 performance is not meaningful due to the significant non-recurring preferred stock dividends accrued or paid in 2007 prior to the Company’s initial public offering in December of that year.
 
For the fiscal years ended December 31, 2009 and 2008, we generated non-GAAP gross fees of $396.5 million and $332.5 million, respectively, and total net revenue of $341.3 million and $279.6 million, respectively. The increases in non-GAAP gross fees and total net revenue in the fiscal year ended December 31, 2009 compared to the fiscal year ended December 31, 2008 were primarily attributable to:
 
  •  the Accuro acquisition;
 
  •  organic growth in our Revenue Cycle Management segment from our reimbursement technologies, revenue cycle services and decision support software; and
 
  •  organic growth in our Spend Management segment from our technology solutions consulting services.
 
For the fiscal years ended December 31, 2009 and 2008, we generated operating income of $50.5 million and $41.5 million, respectively. The increase in operating income compared to the prior year was primarily attributable to the net revenue increase discussed above partially offset by the following:
 
  •  increases in the amortization of acquired intangibles;
 
  •  increased share-based compensation expense from our Long Term Performance Incentive Plan;
 
  •  increased cost of revenue attributable to a higher percentage of net revenue being derived from service-based engagements within our Revenue Cycle Management and Spend Management segments; and
 
  •  higher operating expenses, exclusive of those mentioned above, relating to such items as legal expense, new employee compensation expense and bad debt expense partially mitigated by certain cost control initiatives.
 
For the fiscal year ending December 31, 2009, increases in non-GAAP Adjusted EBITDA and non-GAAP Adjusted EBITDA margin compared to the fiscal year ended December 31, 2008 were primarily attributable to the net revenue increase discussed above, as well as lower expense growth due to certain management cost control initiatives and lower cash-based incentive compensation expense during the year. In addition, we had a reduction in certain discretionary expenses within our operating infrastructure such as advertising and marketing costs as well as a higher percentage of our product development being capitalized during the year. This increase in non-GAAP Adjusted EBITDA and non-GAAP Adjusted EBITDA margin was


39


Table of Contents

offset primarily by increased cost of revenue from segment revenue and product mix including a shift to more service-based revenue and increased corporate operating expenses.
 
For the twelve months ended December 31, 2008 and 2007, we generated non-GAAP gross fees of $332.5 million and $236.0 million, respectively, and total net revenue of $279.6 million and $188.5 million, respectively. The increases in non-GAAP gross fees and total net revenue compared to the fiscal year ended December 31, 2007 were primarily attributable to:
 
  •  the Accuro acquisition; and
 
  •  strong performance by our Spend Management segment primarily due to higher purchasing volumes by existing customers under our group purchasing organization contracts with our manufacturer and distributor vendors in addition to an increase in contingent revenue with respect to meeting certain performance targets during the fiscal year.
 
For the twelve months ended December 31, 2008 and 2007, we generated operating income of $41.5 million and $28.1 million, respectively. The increase in operating income compared to the prior year was primarily attributable to the net revenue increase discussed above partially offset by the following:
 
  •  increases in the amortization of acquired intangibles;
 
  •  non-recurring charges incurred during the fiscal year ended December 31, 2008, including $2.3 million in intangible asset impairment charges, primarily related to the Accuro acquisition, and a $3.9 million interest rate swap cancellation charge;
 
  •  expenses related to acquisition integration efforts at our Revenue Cycle Management segment; and
 
  •  higher general and administrative costs associated with being a publicly-traded company.
 
For the fiscal year ending December 31, 2008, increases in non-GAAP Adjusted EBITDA compared to the fiscal year ended December 31, 2007 were primarily attributable to the following:
 
  •  a $20.7 million increase in non-GAAP Adjusted EBITDA from our Revenue Cycle Management segment and a $13.5 million increase from our Spend Management segment, offset by $5.2 million of increased corporate expenses excluding interest, income taxes, depreciation and amortization, and other non-recurring or non-cash items; and
 
  •  continued market acceptance of our SaaS-based solutions and acquisition-based growth at the Revenue Cycle Management segment and growth in our administrative fee net revenue in our Spend Management segment.
 
 
We deliver our solutions through two business segments, Revenue Cycle Management (or “RCM”) and Spend Management (or “SM”). 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 13 of the Notes to our Consolidated Financial Statements herein for discussion on Segment Adjusted EBITDA and certain items of our segment results of operations and financial position.
 
 
Our Revenue Cycle Management segment provides a comprehensive suite of SaaS-based software services 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


40


Table of Contents

Consolidated Statements of Operations and consists of the following components, which are also discussed in Note 1 of our Consolidated Financial Statements:
 
  •  Subscription and implementation fees.  We earn fixed subscription fees on a monthly or annual basis on multi-year contracts for customer access to our software as a service (“SaaS”) based solutions. We also charge our customers upfront fees for implementation services. Implementation fees are earned over the subscription period or estimated customer relationship period, whichever is longer.
 
  •  Transaction fees.  For certain 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. 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 statement of operations.
 
  •  Service fees.  For certain 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.
 
 
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, our 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 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 the customer confirms achievement of those contractual performance targets. Prior to customer confirmation 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 Consolidated Statements of Operations is shown net of the revenue share obligation.


41


Table of Contents

  •  Other service fees.  The following items are included as “Other service fees” in our Consolidated Statement of Operations:
 
  •  Consulting fees.  We consult with our customers regarding the costs and utilization of medical devices and implantable physician preference items, or 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.
 
 
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. 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 allocated amounts for rent, depreciation or amortization 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, specifically related to service-type arrangements, 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, 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.
 
  •  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 (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.
 
 
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 items or events have had a material impact on


42


Table of Contents

our results of operations for the periods discussed below or may have a material impact on our results of operations in future periods:
 
 
On January 5, 2009, the compensation committee of our Board granted equity awards totaling 3.6 million underlying shares to certain employees at a fair value of $14.74 per share, of which approximately 36% of the total grant was allocated to the Company’s named executive officers (or “NEOs”), under the Company’s Long-Term Performance Incentive Plan. Our stock-based compensation expense increased significantly in 2009 and is expected to be higher in future periods as compared to prior periods as a result of the issuance of equity awards under the Long-Term Performance Incentive Plan. See Note 10 of the Notes to our Consolidated Financial Statements herein for further information.
 
Cash-based Incentive Compensation
 
Historically, we have fully funded our discretionary bonus and incentive pool. During 2009, we did not fund a significant majority of our discretionary bonus and incentive pool. This decrease in compensation expense provided for a favorable impact on our operating expenses, net income and Adjusted EBITDA for the fiscal year ended December 31, 2009 as compared to the fiscal years ended December 31, 2008 and 2007.
 
 
The results of operations of acquired businesses (the “Revenue Cycle Management Acquisitions”) are included in our consolidated results of operations from the date of acquisition. Since January 1, 2007, material acquisitions include (for details regarding these acquisitions, see Note 5 of the Notes to Consolidated Financial Statements):
 
  •  Accuro, acquired on June 2, 2008, provides SaaS-based revenue cycle management products and services to a broad range of healthcare providers.
 
  •  MD-X, acquired on July 2, 2007, provides revenue cycle products and services for hospitals and health systems.
 
  •  XactiMed, acquired on May 18, 2007, provides SaaS-based revenue cycle products and services that focus on claims management, remittance management, and denial management.
 
 
  •  Deferred revenue and cost adjustment.  Upon acquiring Accuro and XactiMed, we made certain purchase accounting adjustments to reduce the acquired deferred revenue and deferred cost to the fair value of outstanding services and products to be provided post-acquisition. On June 2, 2008, we reduced the acquired deferred revenue and deferred cost from Accuro by $7.6 million and $7.0 million, respectively. On May 18, 2007, we reduced the acquired deferred revenue from XactiMed by $3.2 million. These changes only impacted our Revenue Cycle Management segment.
 
  •  In-process research and development, or “IPR&D.”  Upon acquiring XactiMed, we made certain purchase accounting adjustments to write off acquired IPR&D. During the fiscal year ended December 31, 2007, we incurred charges of $1.2 million related to the XactiMed acquisition to impair the value of acquired intangibles associated with software development costs for products that were not yet available for general release and had no alternative future use at the time of acquisition. The charge only impacted our Revenue Cycle Management segment.
 
 
In May 2008, in connection with the completion of the Accuro acquisition, we entered into the third amendment to our existing credit agreement. The amendment increased our term loan facility by $50.0 million and the commitments to loan amounts under our revolving credit facility from $110.0 million to $125.0 million.


43


Table of Contents

The amendment also increased the applicable margins on the rate of interest we pay under our credit agreement. Upon closing this amendment, we received $50.0 million of proceeds (less debt issuance costs) under our increased term loan facility, and we borrowed $50.0 million under our revolving credit facility. The proceeds of the $100.0 million in increased borrowings and existing cash on hand were used to fund the cash portion of the Accuro acquisition purchase price.
 
 
In June 2008, we terminated two floating-to-fixed rate LIBOR-based interest rate swaps that were originally set to terminate July 2010. In consideration of the early terminations, we paid to the swap counterparty, and incurred an expense of, $3.9 million for the fiscal year ended December 31, 2008. Accordingly, the swaps are no longer recorded on our Consolidated Balance Sheet as of December 31, 2008.
 
 
During 2008, certain of our assets were deemed to be impaired as they no longer provided future economic benefit. Such assets primarily included certain acquired trade names, developed technology, and internally developed software. Hence, we recorded non-cash impairment charges totaling $2.3 million during the fiscal year ended December 31, 2008.
 
 
On December 18, 2007, we closed on our initial public offering of common stock. As a result of the offering, we issued 14,781,781 shares of common stock for proceeds of $216.6 million (net of underwriting fees of $16.6 million and other offering costs of $3.4 million).


44


Table of Contents

Results of Operations
 
Consolidated Tables
 
The following tables set forth our consolidated results of operations grouped by segment for the periods shown:
 
                         
    Fiscal Year Ended December 31,  
    2009     2008     2007  
    (In thousands)  
 
Net revenue:
                       
Revenue Cycle Management
  $ 205,918     $ 151,717     $ 80,512  
Spend Management
                       
Gross administrative fees(1)
    163,454       158,618       142,320  
Revenue share obligation(1)
    (55,231 )     (52,853 )     (47,528 )
Other service fees
    27,140       22,174       13,214  
                         
Total Spend Management
    135,363       127,939       108,006  
                         
Total net revenue
    341,281       279,656       188,518  
Operating expenses:
                       
Revenue Cycle Management
    183,876       142,854       76,445  
Spend Management
    77,042       73,108       66,974  
                         
Total segment operating expenses
    260,918       215,962       143,419  
Operating income
                       
Revenue Cycle Management
    22,042       8,863       4,067  
Spend Management
    58,321       54,831       41,032  
                         
Total segment operating income
    80,363       63,694       45,099  
Corporate expenses(2)
    29,893       22,172       17,011  
                         
Operating income
    50,470       41,522       28,088  
Other income (expense):
                       
Interest expense
    (18,114 )     (21,271 )     (20,391 )
Other income (expense)
    417       (1,921 )     3,115  
                         
Income before income taxes
    32,773       18,330       10,812  
Income tax
    12,826       7,489       4,516  
                         
Net income
    19,947       10,841       6,296  
Reportable segment adjusted EBITDA(3):
                       
Revenue Cycle Management
    64,257       43,375       22,711  
Spend Management
  $ 68,265     $ 64,175     $ 50,632  
Reportable segment adjusted EBITDA margin(4):
                       
Revenue Cycle Management
    31.2 %     28.6 %     28.2 %
Spend Management
    50.4 %     50.2 %     46.9 %
 
 
(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. Corporate does not represent an operating segment of the Company.
 
(3) Management’s primary metric of segment profit or loss is Segment Adjusted EBITDA. See Note 13 of the Notes to 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.


45


Table of Contents

 
The following table sets forth our consolidated results of operations as a percentage of total net revenue for the periods shown:
 
                         
    Fiscal Year Ended December 31,  
    2009     2008     2007  
 
Net revenue:
                       
Revenue Cycle Management
    60.3 %     54.3 %     42.7 %
Spend Management
                       
Gross administrative fees(1)
    47.9       56.7       75.5  
Revenue share obligation(1)
    (16.2 )     (18.9 )     (25.2 )
Other service fees
    8.0       7.9       7.0  
                         
Total Spend Management
    39.7       45.7       57.3  
                         
Total net revenue
    100.0       100.0       100.0  
Operating expenses:
                       
Revenue Cycle Management
    53.9       51.1       40.6  
Spend Management
    22.6       26.1       35.5  
                         
Total segment operating expenses
    76.5       77.2       76.1  
Operating income
                       
Revenue Cycle Management
    6.5       3.2       2.2  
Spend Management
    17.1       19.6       21.8  
                         
Total segment operating income
    23.6       22.7       23.7  
Corporate expenses(2)
    8.8       7.9       9.0  
                         
Operating income
    14.8       14.8       14.9  
Other income (expense):
                       
Interest expense
    (5.3 )     (7.6 )     (10.8 )
Other income (expense)
    0.1       (0.7 )     1.6  
                         
Income before income taxes
    9.6       6.6       5.7  
Income tax
    3.8       2.7       2.4  
                         
Net income
    5.8 %     3.9 %     3.3 %
 
 
(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. Corporate does not represent an operating segment of the Company.


46


Table of Contents

 
Comparison of the Fiscal Years Ended December 31, 2009 and 2008
 
                                                 
    Fiscal Year Ended December 31,  
    2009     2008              
          % of
          % of
    Change  
    Amount     Revenue     Amount     Revenue     Amount     %  
    (In thousands)  
 
Net revenue:
                                               
Revenue Cycle Management
  $ 205,918       60.3 %   $ 151,717       54.3 %   $ 54,201       35.7 %
Spend Management
                                               
Gross administrative fees(1)
    163,454       47.9       158,618       56.7       4,837       3.0  
Revenue share obligation(1)
    (55,231 )     (16.2 )     (52,853 )     (18.9 )     (2,378 )     4.5  
Other service fees
    27,140       8.0       22,174       7.9       4,965       22.4  
                                                 
Total Spend Management
    135,363       39.7       127,939       45.7       7,424       5.8  
                                                 
Total net revenue
  $ 341,281       100.0 %   $ 279,656       100.0 %   $ 61,625       22.0 %
 
 
(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 fiscal year ended December 31, 2009 was $341.3 million, an increase of $61.6 million, or 22.0%, from revenue of $279.7 million for the fiscal year ended December 31, 2008. The increase in total net revenue was comprised of a $54.2 million increase in Revenue Cycle Management revenue and a $7.4 million increase in Spend Management revenue.
 
Revenue Cycle Management revenue.  Revenue Cycle Management revenue for the fiscal year ended December 31, 2009 was $205.9 million, an increase of $54.2 million, or 35.7%, from revenue of $151.7 million for the fiscal year ended December 31, 2008. The increase was primarily the result of the following:
 
  •  Accuro related revenue.  The operating results of Accuro were included in our full fiscal year ended December 31, 2009 and were only included in the comparable prior period for approximately seven months from the date of the Accuro Acquisition on June 2, 2008. In 2009, $34.9 million of the net revenue increase was attributable to the Accuro Acquisition.
 
    Given the significant impact of the Accuro Acquisition on our Revenue Cycle Management segment, we believe acquisition-affected measures are useful for the comparison of our year over year net revenue growth. Revenue Cycle Management net revenue for the fiscal year ended December 31, 2009 was $205.9 million, an increase of $25.7 million, or 14.2%, from Revenue Cycle Management non-GAAP acquisition-affected net revenue of $180.3 million for the fiscal year ended December 31, 2008. The following table sets forth the reconciliation of Revenue Cycle Management non-GAAP acquisition-affected net revenue to GAAP net revenue:
 
                                 
    Fiscal Year Ended December 31,  
    2009     2008     Change  
    Amount     Amount     Amount     %  
    (Unaudited, in thousands)  
 
Revenue Cycle Management net revenue
  $ 205,918     $ 151,717     $ 54,201       35.7 %
Accuro Acquisition-related RCM adjustment(1)
          28,540       (28,540 )     (100.0 )
                                 
Total RCM acquisition-affected net revenue(1)
  $ 205,918     $ 180,257     $ 25,661       14.2 %
                                 
 
 
(1) These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.
 
  •  Non-acquisition related product and service revenue growth.  The increase in net revenue from non-Accuro related products and services was approximately $19.3 million, or 17.3%. The increase was primarily attributable to stronger demand for our products and services and consisted of a $10.3 million increase from our revenue cycle services; a $7.0 million increase from our claims and denial


47


Table of Contents

  management tools; and a $3.5 million increase from our decision support software. The increase was partially offset by a $1.5 million decrease primarily relating to our charge integrity consulting services.
 
Spend Management net revenue. Spend Management net revenue for the fiscal year ended December 31, 2009 was $135.4 million, an increase of $7.4 million, or 5.8%, from revenue of $127.9 million for the fiscal year ended December 31, 2008. The net revenue increase was the result of a net increase in gross administrative fees of $4.8 million, or 3.0%, partially offset by a $2.4 million increase in revenue share obligation, and an increase in other service fees of $5.0 million.
 
  •  Gross administrative fees.  Non-GAAP gross administrative fee revenue increased by $4.8 million, or 3.0%, as compared to the prior period, primarily due to slightly higher purchasing volumes by new and existing customers under our group purchasing organization contracts with our manufacturer and distributor vendors. This net increase in non-GAAP gross administrative fee revenue was comprised of a $7.0 million, or 4.5% increase, in non-GAAP gross administrative fee revenue not associated with performance targets. This increase was partially offset by a $2.2 million decrease in contingent revenue, which is recognized upon confirmation from certain customers that respective performance targets had been achieved, during the fiscal year ended December 31, 2009 compared to the fiscal year ended December 31, 2008. 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 vary in their timing and may not result in discernable trends. In addition, a decrease in customer patient volume and supply utilization, the effect of continued hospital budget challenges and the lingering effect of the weakened economy may negatively impact non-GAAP gross administrative fees in the future.
 
  •  Revenue share obligation.  Non-GAAP revenue share obligation increased $2.4 million, or 4.5%, 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 33.8% and 33.3% for the fiscal years ended December 31, 2009 and 2008, respectively. We have not had any significant changes in our customer revenue mix during the year that would cause a notable 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 $5.0 million, or 22.4%, increase in other service fees primarily related to $5.8 million in higher revenues from medical device consulting and strategic sourcing services partially offset by a $0.8 million decrease in our market research services. The growth in supply chain consulting was mainly due to an increased number of engagements from new and existing customers.
 


48


Table of Contents

                                                 
    Fiscal Year Ended December 31,  
    2009     2008     Change  
          % of
          % of
             
    Amount     Revenue     Amount     Revenue     Amount     %  
    (In thousands)  
 
Operating expenses:
                                               
Cost of revenue
  $ 74,651       21.9 %   $ 51,548       18.4 %   $ 23,103       44.8 %
Product development expenses
    18,994       5.6       16,393       5.9       2,601       15.9  
Selling and marketing expenses
    45,282       13.3       43,205       15.4       2,077       4.8  
General and administrative expenses
    110,661       32.4       91,481       32.7       19,180       21.0  
Depreciation
    13,211       3.9       9,793       3.5       3,418       34.9  
Amortization of intangibles
    28,012       8.2       23,442       8.4       4,570       19.5  
Impairment of property & equipment and intangibles
          0.0       2,272       0.8       (2,272 )     (100.0 )
                                                 
Total operating expenses
    290,811       85.2       238,134       85.2       52,677       22.1  
Operating expenses by segment:
                                               
Revenue Cycle Management
    183,876       53.9       142,854       51.1       41,022       28.7  
Spend Management
    77,042       22.6       73,108       26.1       3,934       5.4  
                                                 
Total segment operating expenses
    260,918       76.5       215,962       77.2       44,956       20.8  
Corporate expenses
    29,893       8.8       22,172       7.9       7,721       34.8  
                                                 
Total operating expenses
  $ 290,811       85.2 %   $ 238,134       85.2 %   $ 52,677       22.1 %
 
 
Cost of revenue.  Cost of revenue for the fiscal year ended December 31, 2009 was $74.7 million, or 21.9% of total net revenue, an increase of $23.1 million, or 44.8%, from cost of revenue of $51.5 million, or 18.4% of total net revenue, for the fiscal year ended December 31, 2008.
 
Of the increase, $8.5 million was attributable to cost of revenue associated with the Accuro Acquisition. The remaining $14.6 million increase was attributable to the direct costs resulting from the continuing shift in our revenue mix towards our RCM segment, which contributed 60.3% and 54.3% of consolidated net revenue for the fiscal years ended December 31, 2009 and 2008, respectively. Specifically, the increase in SaaS-based revenue and other consulting services within the RCM segment resulted in a higher associated cost of revenue than does GPO activities in our SM segment. In addition, we had an increase in service-related engagements in both our RCM and SM segments, which provides for a higher cost of revenue given these activities are more labor intensive.
 
Excluding the impact of the Accuro Acquisition, our cost of revenue as a percentage of related net revenue increased from 17.0% to 20.8% period over period. This increase is primarily attributable to the reasons described above.
 
Product development expenses.  Product development expenses for the fiscal year ended December 31, 2009 were $19.0 million, or 5.6% of total net revenue, an increase of $2.6 million, or 15.9%, from product development expenses of $16.4 million, or 5.9% of total net revenue, for the fiscal year ended December 31, 2008.
 
The increase during the fiscal year ended December 31, 2009 was attributable to a $3.0 million increase in product development expenses associated with our Revenue Cycle Management segment as we continue to develop, enhance and integrate these products and services. The increase was partially offset by a $0.4 million decrease in product development expenses in our Spend Management segment. We expect to maintain or increase our product development spending during the 2010 fiscal year.

49


Table of Contents

Excluding the impact of the Accuro Acquisition, our product development expenses as a percentage of related net revenue increased from 4.5% to 5.3% for the reasons described above.
 
Selling and marketing expenses.  Selling and marketing expenses for the fiscal year ended December 31, 2009 were $45.3 million, or 13.3% of total net revenue, an increase of $2.1 million, or 4.8%, from selling and marketing expenses of $43.2 million, or 15.4% of total net revenue, for the fiscal year ended December 31, 2008.
 
The increase during the fiscal year ended December 31, 2009 was primarily attributable to a $1.0 million increase in share-based compensation; a $1.0 million increase in expenses relating to our annual customer and vendor meeting; and a $0.8 million increase in compensation expense to new employees. These increases were offset by a $0.7 million decrease in other general selling and marketing expense.
 
Excluding the impact of the Accuro Acquisition, selling and marketing expenses, as a percentage of related net revenue, decreased from 16.8% to 16.6% period over period for the reasons described above.
 
General and administrative expenses.  General and administrative expenses for the fiscal year ended December 31, 2009 were $110.7 million, or 32.4% of total net revenue, an increase of $19.2 million, or 21.0%, from general and administrative expenses of $91.5 million, or 32.7% of total net revenue, for the fiscal year ended December 31, 2008.
 
The increase during the fiscal year ended December 31, 2009 includes $1.6 million of general and administrative expenses attributable to the Accuro Acquisition. Also contributing to the increase was a $5.9 million increase in share-based compensation; a $3.6 million increase in compensation expense to new employees; a $2.1 million increase in bad debt expense to reserve for potential uncollectible accounts along with certain bankruptcies that occurred with respect to customers of our Revenue Cycle Management segment; $1.6 million of higher legal expenses primarily for discovery and document production in connection with a lawsuit in which the Company was retained as an expert witness by the plaintiffs; a $1.2 million increase in travel expenses; a $0.8 million increase in meals and entertainment expense; a $0.7 million increase in rent expense; and a $0.6 million increase in telecommunications expense. The remaining increase was attributable to general operating infrastructure expenses.
 
Excluding the impact of the Accuro Acquisition, our general and administrative expenses as a percentage of related net revenue increased from 35.5% to 38.6% period over period. This increase is primarily attributable to the reasons described above.
 
Depreciation.  Depreciation expense for the fiscal year ended December 31, 2009 was $13.2 million, or 3.9% of total net revenue, an increase of $3.4 million, or 34.9%, from depreciation of $9.8 million, or 3.5% of total net revenue, for the fiscal year ended December 31, 2008.
 
This increase was primarily attributable to depreciation resulting from the additions of property and equipment acquired in the Accuro Acquisition and internally developed software placed into service.
 
Amortization of intangibles.  Amortization of intangibles for the fiscal year ended December 31, 2009 was $28.0 million, or 8.2% of total net revenue, an increase of $4.6 million, or 19.5%, from amortization of intangibles of $23.4 million, or 8.4% of total net revenue, for the fiscal year ended December 31, 2008. This increase primarily resulted from the amortization of certain identified intangible assets acquired in the Accuro Acquisition slightly offset by fully amortized assets in our SM segment.
 
Impairment of property & equipment and intangibles.  The impairment of intangibles for the fiscal year ended December 31, 2009 was zero compared to $2.3 million for the fiscal year ended December 31, 2008.
 
Impairment during the fiscal year ended December 31, 2008 relates to acquired developed technology from prior acquisitions, revenue cycle management tradenames and internally developed software products that were deemed to be impaired, primarily in conjunction with the product integration of the Accuro Acquisition.


50


Table of Contents

 
Revenue Cycle Management expenses.  Revenue Cycle Management expenses for the fiscal year ended December 31, 2009 were $183.9 million, or 53.9% of total net revenue, an increase of $41.0 million, or 28.7%, from $142.9 million, or 51.1% of total net revenue for the fiscal year ended December 31, 2008.
 
Of the $41.0 million increase in operating expenses, $17.0 million of expenses are attributable to the Accuro Acquisition. Revenue Cycle Management operating expenses also increased as a result of an $11.7 million increase in cost of revenue in connection with direct labor costs associated with revenue growth; a $7.8 million increase in compensation expense primarily related to new employees; $2.1 million of increased bad debt expense to reserve for potentially uncollectible accounts; $2.0 million of higher share-based compensation expense; and $1.4 million of increased legal expenses primarily for discovery and document production in connection with a lawsuit in which the Company was retained as an expert witness by the plaintiffs. The increase was partially offset by a $1.8 million impairment charge of intangible assets that occurred during the fiscal year ended December 31, 2008 that did not re-occur in 2009.
 
As a percentage of Revenue Cycle Management segment revenue, segment expenses decreased to 89.3% from 94.2% for the fiscal year ended December 31, 2009 and 2008, respectively, for the reasons described above.
 
Spend Management expenses.  Spend Management expenses for the fiscal year ended December 31, 2009 were $77.0 million, or 22.6% of total net revenue, an increase of $3.9 million, or 5.4%, from $73.1 million, or 26.1% of total net revenue for the fiscal year ended December 31, 2008.
 
The increase in Spend Management expenses was primarily attributable to $1.9 million of higher share-based compensation expense; a $1.9 million increase in cost of revenues associated with new customers and the revenue mix shift in the segment toward consulting; $1.2 million of higher compensation expense to new employees; and a $0.9 million increase in education and training expense relating to our annual customer and vendor meeting. The increase was offset by a $1.3 million decrease in the amortization of intangibles as certain of these assets reached the end of their useful life; and a $0.7 million decrease in general operating expense.
 
As a percentage of Spend Management segment net revenue, segment expenses remained relatively consistent decreasing to 56.9% from 57.1% for the fiscal year ended December 31, 2009 and 2008, respectively, for the reasons described above.
 
Corporate expenses.  Corporate expenses for the fiscal year ended December 31, 2009 were $29.9 million, an increase of $7.7 million, or 34.8%, from $22.2 million for the fiscal year ended December 31, 2008, or 8.8% and 7.9% of total net revenue, respectively. The increase in corporate expenses was primarily attributable to $4.3 million of higher share-based compensation expense associated with our Long-Term Performance Incentive Plan; $1.5 million of increased travel costs; $0.9 million of operating infrastructure expense; $0.6 million of higher depreciation; and $0.4 million of higher rent expense.
 
As a percentage of total net revenue, we expect corporate expenses to have minimal fluctuations in future periods due to the relatively fixed cost nature of our corporate operations.
 
 
Interest expense.  Interest expense for the fiscal year ended December 31, 2009 was $18.1 million, a decrease of $3.2 million, or 14.8%, from interest expense of $21.3 million for the fiscal year ended December 31, 2008. As of December 31, 2009, we had total bank indebtedness of $215.2 million compared to $245.6 million as of December 31, 2008. The decrease in interest expense is attributable to the decrease in our indebtedness and lower interest rates period over period. Our interest expense may vary during 2010 as a result of fluctuations in unhedged interest rates. Also refer to Item 7.A for a quantitative and qualitative analysis of our interest rate risk.
 
Other income (expense).  Other income for the fiscal year ended December 31, 2009 was $0.4 million, comprised principally of $0.4 million in rental income and $0.1 million in interest income offset by


51


Table of Contents

$0.1 million in foreign exchange transaction losses. The decrease in interest income during the fiscal year ended December 31, 2009 compared to the prior year was attributable to the change in our cash management policy that occurred in the third quarter of 2008 which significantly reduced our cash balance. Other expense for the fiscal year ended December 31, 2008 was $1.9 million, comprised principally of a $3.9 million expense to terminate our interest rate swap arrangements, partially offset by approximately $1.5 million in interest income and $0.4 million in rental income.
 
Income tax expense (benefit).  Income tax expense for the fiscal year ended December 31, 2009 was $12.8 million, an increase of $5.3 million from an income tax expense of $7.5 million for the fiscal year ended December 31, 2008, which was primarily attributable to (i) increased income before taxes resulting in higher federal income tax expense of $5.1 million; and, (ii) additional foreign and state income taxes totaling $1.1 million. Partially offsetting this increase was a $0.9 million decrease in income tax expense related to research and development credits recorded during the year. The income tax expense recorded during the fiscal year ended December 31, 2009 and 2008 reflected an annual effective tax rate of 39.1% and 40.9%, respectively. The decrease in the effective tax rate was primarily attributable to research and development tax credits.
 
As of December 31, 2009, a valuation allowance of approximately $0.7 million was recorded against the deferred tax assets on certain state net operating loss carryforwards because apportioned taxable income to certain states may not be sufficient for these loss carryforwards to be utilized. In addition, certain restrictions within Section 382 of the Internal Revenue Code will limit the usage of certain state net operating losses and may make the utilization of these net operating losses uncertain. We will analyze our federal and state net operating loss carryforwards periodically to ensure our valuation allowance is accurately stated.
 
Comparison of the Fiscal Years Ended December 31, 2008 and 2007
 
                                                 
    Fiscal Year Ended December 31,  
    2008     2007     Change  
          % of
          % of
             
    Amount     Revenue     Amount     Revenue     Amount     %  
    (In thousands)  
 
Net revenue:
                                               
Revenue Cycle Management
  $ 151,717       54.3 %   $ 80,512       42.7 %   $ 71,205       88.4 %
Spend Management
                                               
Gross administrative fees(1)
    158,618       56.7       142,320       75.5       16,298       11.5  
Revenue share obligation(1)
    (52,853 )     (18.9 )     (47,528 )     (25.2 )     (5,325 )     11.2  
Other service fees
    22,174       7.9       13,214       7.0       8,960       67.8  
                                                 
Total Spend Management
    127,939       45.7       108,006       57.3       19,933       18.5  
                                                 
Total net revenue
  $ 279,656       100.0 %   $ 188,518       100.0 %   $ 91,138       48.3 %
 
 
(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 fiscal year ended December 31, 2008 was $279.7 million, an increase of $91.1 million, or 48.3%, from revenue of $188.5 million for the fiscal year ended December 31, 2007. The increase in total net revenue was comprised of a $71.2 million increase in Revenue Cycle Management revenue and a $19.9 million increase in Spend Management revenue.
 
Revenue Cycle Management revenue.  Revenue Cycle Management revenue for the fiscal year ended December 31, 2008 was $151.7 million, an increase of $71.2 million, or 88.4%, from revenue of $80.5 million for the fiscal year ended December 31, 2007. The increase was primarily the result of the following:
 
  •  Acquisition related revenue.  $40.2 million of the increase resulted from service revenue attributable to Accuro, which we acquired on June 2, 2008. The operating results of Accuro were included in our fiscal year ended December 31, 2008 from the date of acquisition and were not included in the


52


Table of Contents

  comparable prior period. $7.2 million and $21.0 million of the increase resulted from service revenue attributable to the 2007 acquisitions of XactiMed and MD-X, respectively, which were included in our full fiscal year ended December 31, 2008 compared to only approximately seven and half months and six months, respectively, of operating results in the fiscal year ended December 31, 2007.
 
Revenue Cycle Management non-GAAP acquisition-affected net revenue for the fiscal year ended December 31, 2008 was $180.3 million, an increase of $14.2 million, or 8.6%, from Revenue Cycle Management non-GAAP acquisition affected net revenue of $166.1 million for the fiscal year ended December 31, 2007. Given the significant impact of the Revenue Cycle Management Acquisitions on our Revenue Cycle Management segment, we believe acquisition-affected measures are useful for the comparison of our year over year net revenue growth. The following table sets forth the reconciliation of Revenue Cycle Management non-GAAP acquisition-affected net revenue to GAAP net revenue:
 
                                 
    Fiscal Year Ended December 31,  
    2008     2007     Change  
    Amount     Amount     Amount     %  
          (Unaudited, in thousands)        
 
Revenue Cycle Management net revenue
  $ 151,717     $ 80,512     $ 71,205       88.4 %
Acquisition related RCM adjustments(1):
                               
Accuro
    28,540       64,510       (35,970 )     (55.8 )
MD-X
          14,925       (14,925 )     (100.0 )
XactiMed
          6,104       (6,104 )     (100.0 )
                                 
Total acquisition related RCM adjustments(1)
    28,540       85,539       (56,999 )     (66.6 )
                                 
Total RCM acquisition-affected net revenue(1)
  $ 180,257     $ 166,051     $ 14,206       8.6 %
 
 
(1) These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.
 
  •  Non-acquisition related products and services.  The increase in net revenue from non-acquisition related products and services was approximately $2.8 million or 4.9%. This increase was comprised of $4.7 million, or 21.6%, in our software-related subscription fees which was primarily driven by the continued market demand for our RCM compliance services.
 
Partially offsetting the increase in our software-related subscription fees was an approximate $1.9 million decrease in revenue from our decision support software and services. This decrease was primarily attributable to a $2.2 million revenue loss due to a scheduled and planned step down in software support and maintenance fees from a large decision support customer. We believe that the delay in the release of the fourth version of our decision support software limited the growth of revenue from our decision support software and services during 2007 and 2008.
 
Spend Management net revenue.  Spend Management net revenue for the fiscal year ended December 31, 2008 was $127.9 million, an increase of $19.9 million, or 18.5%, from revenue of $108.0 million for the fiscal year ended December 31, 2007. The revenue increase was primarily the result of an increase in administrative fees of $16.3 million, or 11.5%, partially offset by a $5.3 million increase in revenue share obligations, and an increase in other service fees of $8.9 million.
 
  •  Gross administrative fees.  Non-GAAP gross administrative fee revenue increased by $16.3 million, or 11.5%, as compared to the prior period, primarily due to higher purchasing volumes by existing customers under our group purchasing organization contracts with our manufacturer and distributor vendors which totaled $13.1 million. Also contributing to the above increase, we experienced a net $3.2 million increase in contingent revenue recognized upon confirmation from certain customers that the respective performance targets had been achieved during the fiscal year ended December 31, 2008 compared to the fiscal year ended December 31, 2007.


53


Table of Contents

 
  •  Revenue share obligation.  Non-GAAP revenue share obligation increased $5.3 million, or 11.2%, as compared to the prior period. We analyze the impact that our non-GAAP revenue share obligation has on our results of operations by analyzing the revenue share ratio. The revenue share ratio for the fiscal year ended December 31, 2008 was 33.3%, which was relatively consistent with the revenue share ratio of 33.4% for the fiscal year ended December 31, 2007.
 
  •  Other service fees.  The $8.9 million of growth, or 67.8%, in other service fees consisted of $6.2 million in higher revenues from our medical device consulting and strategic sourcing services and $2.7 million from our data analysis subscription services. The consulting growth was mainly due to more consulting hours and an increased number of consulting engagements from new and existing customers, including a new engagement with a large health system whose services began in the second quarter 2008. Additionally, we realized growth in the number of our subscription-based customers.
 
                                                 
    Fiscal Year Ended December 31,  
    2008     2007     Change  
          % of
          % of
             
    Amount     Revenue     Amount     Revenue     Amount     %  
    (In thousands)  
 
Operating expenses:
                                               
Cost of revenue
  $ 51,548       18.4 %   $ 27,983       14.8 %   $ 23,565       84.2 %
Product development expenses
    16,393       5.9       7,785       4.1       8,608       110.6  
Selling and marketing expenses
    43,205       15.4       35,748       19.0       7,457       20.9  
General and administrative expenses
    91,481       32.7       64,817       34.4       26,664       41.1  
Depreciation
    9,793       3.5       7,115       3.8       2,678       37.6  
Amortization of intangibles
    23,442       8.4       15,778       8.4       7,664       48.6  
Impairment of property & equipment
                                               
and intangibles
    2,272       0.8       1,204       0.6       1,068       88.7  
                                                 
Total operating expenses
    238,134       85.2       160,430       85.1       77,704       48.4  
Operating expenses by segment:
                                               
Revenue Cycle Management
    142,854       51.1       76,445       40.6       66,409       86.9  
Spend Management
    73,108       26.1       66,974       35.5       6,134       9.2  
                                                 
Total segment operating expenses
    215,962       77.2       143,419       76.1       72,543       50.6  
Corporate expenses
    22,172       7.9       17,011       9.0       5,161       30.3  
                                                 
Total operating expenses
  $ 238,134       85.2 %   $ 160,430       85.1 %   $ 77,704       48.4 %
 
 
Cost of revenue.  Cost of revenue for the fiscal year ended December 31, 2008 was $51.5 million, or 18.4% of total net revenue, an increase of $23.5 million, or 84.2%, from cost of revenue of $28.0 million, or 14.8% of total net revenue, for the fiscal year ended December 31, 2007. Of the increase, $18.5 million was attributable to cost of revenue associated with the operations acquired in the Revenue Cycle Management Acquisitions.
 
Excluding the cost of revenue associated with the Revenue Cycle Management Acquisitions, the cost of revenue for the fiscal year ended December 31, 2008 was $24.4 million, or 13.1% of related net revenue, an increase of $5.0 million, or 26.3%, from cost of revenue for the fiscal year ended December 31, 2007 of $19.3 million or 11.8% of related revenue. This increase was attributable to our direct costs totaling $2.9 million associated with signing and renewing several larger Spend Management segment client service agreements; $1.2 million in higher share-based compensation expense; and a moderate revenue mix shift towards our revenue cycle products and services totaling $0.9 million, which provides a higher cost of revenue than our Spend Management revenue.


54


Table of Contents

The Revenue Cycle Management Acquisitions increased our total cost of revenue, as a percentage of net revenue, during the fiscal year ended December 31, 2008 from 14.8% to 18.4% primarily due to the mix of acquired Revenue Cycle Management revenue being more service, implementation and consulting based. A higher percentage of direct internal and external resources are required to derive related service revenue, specifically with respect to our accounts receivable collection services.
 
Product development expenses.  Product development expenses for the fiscal year ended December 31, 2008 were $16.4 million, or 5.9% of total net revenue, an increase of $8.6 million, or 110.6%, from product development expenses of $7.8 million, or 4.1% of total net revenue, for the fiscal year ended December 31, 2007.
 
The increase during the fiscal year ended December 31, 2008 includes $8.4 million of product development expenses attributable to the operations of the Revenue Cycle Management Acquisitions as we continue to make significant investments in product development. Excluding the product development expenses associated with these recently acquired businesses, product development expenses increased by $0.3 million, period over period.
 
Excluding the impact of the Revenue Cycle Management Acquisitions, our product development expenses as a percentage of related net revenue remained consistent, decreasing from 4.1% to 3.8%.
 
Selling and marketing expenses.  Selling and marketing expenses for the fiscal year ended December 31, 2008 were $43.2 million, or 15.4% of total net revenue, an increase of $7.5 million, or 20.9%, from selling and marketing expenses of $35.7 million, or 19.0% of total net revenue, for the fiscal year ended December 31, 2007.
 
This increase primarily consists of (i) $6.0 million of selling and marketing expenses attributable to the operations of the Revenue Cycle Management Acquisitions, which mainly consist of compensation payable to additional sales and marketing personnel of the acquired businesses; (ii) $0.8 million of higher share-based compensation expense compared to the fiscal year ended December 31, 2007; and, (iii) $0.6 million of higher meeting expenses associated with our annual customer and vendor meeting due to a larger number of attendees.
 
Excluding the impact of the Revenue Cycle Management Acquisitions, selling and marketing expenses, as a percentage of related net revenue, decreased from 20.7% to 19.0% period over period which was primarily attributable to the revenue growth of our Revenue Cycle Management business which incurs less selling and marketing expenses, as a percentage of revenue, than our Spend Management business.
 
General and administrative expenses.  General and administrative expenses for the fiscal year ended December 31, 2008 were $91.5 million, or 32.7% of total net revenue, an increase of $26.7 million, or 41.1%, from general and administrative expenses of $64.8 million, or 34.4% of total net revenue, for the fiscal year ended December 31, 2007.
 
The increase during the fiscal year ended December 31, 2008 includes $16.6 million of general and administrative expenses attributable to the operations of the Revenue Cycle Management Acquisitions. The increase in organic general and administrative expenses is primarily attributable to $5.2 million of higher corporate expenses, mainly due to additional costs associated with being a publicly-traded company (personnel), excluding share-based compensation; higher employee compensation from new and existing personnel in our Revenue Cycle Management and Spend Management segments of $2.1 million and $0.7 million, respectively; $0.7 million of higher legal expenses from certain legal actions and claims arising in the normal course of business; $0.5 million in higher bad debt expense to reserve for potential uncollectible accounts; and $0.9 million of general increases to operating infrastructure in both our Revenue Cycle Management and Spend Management segments.
 
Excluding the impact of the Revenue Cycle Management Acquisitions, general and administrative expenses increased by $10.1 million from the prior period, or 18.1% to $66.0 million, or 35.3% of related net revenue.


55


Table of Contents

Depreciation.  Depreciation expense for the fiscal year ended December 31, 2008 was $9.8 million, or 3.5% of total net revenue, an increase of $2.7 million, or 37.6%, from depreciation of $7.1 million, or 3.8% of total net revenue, for the fiscal year ended December 31, 2007.
 
This increase primarily resulted from $1.7 million of depreciation of fixed assets acquired in the Revenue Cycle Management Acquisitions, and depreciation resulting from increased capital expenditures subsequent to 2007 for computer software developed for internal use, computer hardware related to personnel growth, and furniture and fixtures.
 
Amortization of intangibles.  Amortization of intangibles for the fiscal year ended December 31, 2008 was $23.4 million, or 8.4% of total net revenue, an increase of $7.7 million, or 48.6%, from amortization of intangibles of $15.8 million, or 8.4% of total net revenue, for the fiscal year ended December 31, 2007. This increase primarily resulted from the amortization of certain identified intangible assets acquired in the Revenue Cycle Management Acquisitions.
 
Impairment of property & equipment and intangibles.  The impairment of intangibles for the fiscal year ended December 31, 2008 was $2.3 million compared to $1.2 million for the fiscal year ended December 31, 2007.
 
Impairment during the fiscal year ended December 31, 2008 relates to acquired developed technology from prior acquisitions, revenue cycle management tradenames and internally developed software products that were deemed to be impaired, primarily in conjunction with the product integration of the Accuro Acquisition. The 2007 impairment charge relates to the write off of acquired in-process research and development in conjunction with the XactiMed acquisition. The impairment charges in both periods were primarily incurred at the Revenue Cycle Management segment.
 
 
Revenue Cycle Management expenses.  Revenue Cycle Management expenses for the fiscal year ended December 31, 2008 were $142.9 million, or 51.1% of total net revenue, an increase of $66.4 million, or 86.9%, from $76.4 million for the fiscal year ended December 31, 2007.
 
The primary reason for the $66.4 million increase in operating expenses is $61.9 million of expenses that are attributable to the operations acquired in the Revenue Cycle Management Acquisitions. We also incurred growth in personnel-related expenses to support future implementations, customer service and related revenue growth. As a percentage of Revenue Cycle Management segment net revenue, segment expenses decreased slightly from 95.0% during the fiscal year ended December 31, 2007 to 94.2% during the fiscal year ended December 31, 2008.
 
Excluding the expenses attributable to the recently acquired businesses, Revenue Cycle Management operating expenses increased by $4.5 million, or 9.2%, primarily due to $1.9 million of increased share-based compensation; $1.0 million of higher cost of revenue associated with our revenue growth; $0.6 million of higher general operating costs; $0.5 million of impairment of intangible assets; $0.3 million in higher professional fees; and $0.2 million of higher sales and service training costs related to the segment for the annual customer and vendor meeting.
 
Spend Management expenses.  Spend Management expenses for the fiscal year ended December 31, 2008 were $73.1 million, or 26.1% of total net revenue, an increase of $6.1 million, or 9.2%, from $67.0 million for the fiscal year ended December 31, 2007.
 
The growth in Spend Management expenses was primarily due to higher compensation expense to new and existing consulting and support staff, contributing $5.0 million of the overall increase. We also incurred higher share-based compensation expense to new and existing employees of $0.7 million compared to the prior period. Partially offsetting these expense increases was a $1.2 million decrease in the amortization of identified intangible assets as certain of these assets are amortized under an accelerated method and are nearing the end of their useful life.


56


Table of Contents

As a percentage of Spend Management segment net revenue, segment expenses decreased from 35.5% during the fiscal year ended December 31, 2007 to 26.1% during the fiscal year ended December 31, 2008, primarily because of a decline in the amortization of identified intangibles.
 
Corporate expenses.  Corporate expenses for the fiscal year ended December 31, 2008 were $22.2 million, an increase of $5.2 million, or 30.3%, from $17.0 million for the fiscal year ended December 31, 2007, or 7.9% and 9.0% of total net revenue, respectively. These changes were mainly as a result of increased compensation payable to new and existing employees of $2.1 million, including the addition of certain senior staff functions; increased legal expenses from certain legal actions and claims arising in the normal course of business of $0.7 million; increased travel expenses of $0.7 million; and other general increases in overhead costs as a result of being a publicly-traded company, such as higher professional fees of $0.5 million and higher insurance expense for our directors and officers of $0.4 million. Partially offsetting these expense increases was an approximate $0.5 million decrease in share-based expense during the fiscal year ended December 31, 2008 compared to that of the prior year.
 
 
Interest expense.  Interest expense for the fiscal year ended December 31, 2008 was $21.3 million, an increase of $0.9 million, or 4.3%, from interest expense of $20.4 million for the fiscal year ended December 31, 2007. As of December 31, 2008, we had total bank indebtedness of $245.6 million compared to $197.5 million as of December 31, 2007. The indebtedness incurred because of the Accuro Acquisition in June 2008 and higher interest rates resulting from the related refinancing are primarily responsible for the increase in our interest expense.
 
Other income (expense).  Other expense for the fiscal year ended December 31, 2008 was $1.9 million, comprised principally of a $3.9 million expense to terminate our interest rate swap arrangements, offset by approximately $1.5 million in interest income and $0.4 million in rental income. Other income for the fiscal year ended December 31, 2007 was $3.1 million, primarily consisting of interest and rental income.
 
Income tax expense (benefit).  Income tax expense for the fiscal year ended December 31, 2008 was $7.5 million, an increase of $3.0 million from an income tax expense of $4.5 million for the fiscal year ended December 31, 2007, which was primarily attributable to (i) increased income before taxes resulting in higher federal income tax expense of $2.6 million; and, (ii) additional state income taxes totaling $2.3 million. Partially offsetting this increase was a $1.4 million decrease in our FIN 48 liability attributable to the resolution of uncertain tax positions in connection with the settlement of our tax years under audit with the Internal Revenue Service. The income tax expense recorded during the fiscal year ended December 31, 2008 and 2007 reflected an annual effective tax rate of 40.9% and 41.8%, respectively.
 
As of December 31, 2008, a valuation allowance of approximately $0.3 million was recorded against the deferred tax assets on certain state net operating loss carryforwards as the apportionment of this taxable income to certain states may not be sufficient for these loss carryforwards to be realized.
 
Critical Accounting Policy Disclosure
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 from such estimates under different conditions.
 
Management believes that the following accounting judgments and uncertainties are the most critical to aid in fully understanding and evaluating our reported financial results, as they require management’s most difficult, subjective or complex judgments. Management has reviewed these critical accounting estimates and related disclosures with the audit committee of our board of directors.


57


Table of Contents

 
In accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, we recognize revenue when (a) there is a persuasive evidence of an arrangement, (b) the fee is fixed or determinable, (c) services have been rendered and payment has been contractually earned, and (d) collectability is reasonably assured.
 
Inclusive in our revenue recognition policies, we are required to make certain critical judgments that impact the period over which revenue is recognized. These judgments are described below.
 
 
We apply the revenue recognition guidance prescribed by generally accepted accounting principles in the United States of America (or “U.S. GAAP”) relating to software for our hosted solutions. We provide subscription-based revenue cycle and spend management services through software tools accessed by our customers while the data is hosted and maintained on our servers. In many arrangements, customers are charged set-up fees for implementation and monthly subscription fees for access to these web-based hosted services. Implementation fees are typically billed at the beginning of the arrangement and recognized as revenue over the greater of the subscription period or the estimated customer relationship period. We estimate the customer relationship period based on historical customer retention rates. We currently estimate our customer relationship period to be between four and five years for our hosted services. Revenue from monthly hosting arrangements is recognized on a subscription basis over the period in which the customer uses the service. Contract subscription periods typically range from three to five years from execution.
 
We consistently monitor our customer relationship periods and as a result, our estimated customer relationship period may change due to the changing attrition rates of our customers. We have historically changed our estimates of customer relationship periods for certain of our web-hosted customers. These changes in estimated customer lives have typically deferred revenue over longer periods.
 
Licensed-Software Fees
 
We license certain revenue cycle decision support software products. Software revenues are derived from three primary sources: (i) software licenses, (ii) software support, and (iii) services, which include consulting, product services and training programs. We recognize revenue for our software arrangements based on generally accepted accounting principles relating to software. We evaluate vendor-specific objective evidence, or VSOE, of fair value based on the price charged when the same element is sold separately. In certain of our multi-element software arrangements we are unable to establish VSOE for certain of our deliverables. The majority of our software licenses are for a term of one year which results in undeterminable VSOE.
 
In arrangements where VSOE cannot be determined for the separate elements of the arrangement, the entire arrangement fee is recognized ratably over the period in which the services are expected to be performed or over the software support period, whichever is longer, beginning with the delivery and acceptance of the software, provided all other revenue recognition criteria are met.
 
As a result, we are required to make assumptions regarding the implementation period of each particular arrangement in order to determine the appropriate period to recognize revenue. We evaluate the expected implementation period in which services are expected to be performed based on historical trends and current customer specific criteria. Our actual implementation periods may differ from our estimates. In the event we have to adjust our estimate, we would record a cumulative adjustment in the period in which the estimate is changed.
 
 
We evaluate goodwill and other intangible assets for impairment annually and whenever events or changes in circumstances indicate the carrying value of the goodwill or other intangible assets may not be recoverable. The Company considers the following to be important factors that could trigger an impairment review and may result in an impairment charge: significant and sustained underperformance relative to historical or projected future operating results; identification of other impaired assets within a reporting unit; significant


58


Table of Contents

and sustained adverse changes in business climate or regulations; significant negative changes in senior management; significant changes in the manner of use of the acquired assets or the strategy for the Company’s overall business; significant negative industry or economic trends; and a significant decline in the Company’s stock price for a sustained period.
 
We complete our impairment evaluation by performing valuation analyses, in accordance with generally accepted accounting principles relating to goodwill and other intangibles. This analysis contains uncertainties because it requires us to make market participant assumptions and to apply judgment to estimate industry economic factors and the profitability and growth of future business strategies to determine estimated future cash flows and an appropriate discount rate. We measure the fair value of a reporting unit or asset group based on market prices (i.e., the amount for which the asset could be sold to a third party), when available. When market prices are not available, we estimate the fair value of the reporting unit or asset group using the income approach and/or the market approach. The income approach uses cash flow projections. Inherent in our development of cash flow projections are assumptions and estimates derived from a review of our operating results, approved business plans, expected growth rates, capital expenditures and cost of capital, similar to those a market participant would use to assess fair value. We also make certain assumptions about future economic conditions and other data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates may change in future periods.
 
Changes in assumptions or estimates can materially affect the fair value measurement of a reporting unit or asset group, and therefore can affect the amount of the impairment. The following are key assumptions we use in making cash flow projections:
 
  •  Business projections. We make assumptions about the demand for our products in the marketplace. These assumptions drive our planning assumptions for volume, mix, and pricing. We also make assumptions about our cost levels. These projections are derived using our internal business plans that are updated at least annually and reviewed by our Board of Directors.
  •  Long-term growth rate. A growth rate is used to calculate the terminal value of the business, and is added to the present value of the debt-free cash flows. The growth rate is the expected rate at which a business unit’s earnings stream is projected to grow beyond the planning period.
  •  Discount rate. When measuring possible impairment, future cash flows are discounted at a rate that is consistent with a weighted-average cost of capital that we anticipate a potential market participant would use. Weighted-average cost of capital is an estimate of the overall risk-adjusted after-tax rate of return required by equity and debt holders of a business enterprise.
  •  Economic projections. Assumptions regarding general economic conditions are included in and affect our assumptions regarding industry sales and pricing estimates. These macro-economic assumptions include, but are not limited to, industry sales volumes and interest rates.
 
Our estimates of future cash flow used in these valuations could differ from actual results. If actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material. Based on our sensitivity analysis, a hypothetical 10% decrease applied to our assumed growth rates or a hypothetical 10% increase applied to our weighted average cost of capital applied to our discounted cash flow analysis would not result in an impairment of our intangible assets nor would it cause us to further evaluate goodwill for impairment.
 
 
We adopted revised generally accepted accounting principles relating to business combinations as of January 1, 2009. The revised guidance retains the purchase method of accounting for acquisitions and requires a number of changes to the previous guidance, including changes in the way assets and liabilities are recognized in purchase accounting. Other changes include requiring the recognition of assets acquired and liabilities assumed arising from contingencies, requiring the capitalization of in-process research and development at fair value, and requiring the expensing of acquisition-related costs as incurred.
 
Our purchase price allocation methodology requires us to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. We estimate the fair value of assets and liabilities


59


Table of Contents

based upon appraised market values, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Management determines the fair value of fixed assets and identifiable intangible assets such as developed technology or customer relationships, and any other significant assets or liabilities. We adjust the purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies, and result in an impairment or a new allocation of purchase price.
 
Given our history of acquisitions, we may allocate part of the purchase price of future acquisitions to contingent consideration as required by generally accepted accounting principles for business combinations. The fair value calculation of contingent consideration will involve a number of assumptions that are subjective in nature and which may differ significantly from actual results. We may experience volatility in our earnings to some degree in future reporting periods as a result of these fair value measurements.
 
 
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 Consolidated Financial Statements.
 
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 fiscal years ended December 31, 2009 and 2008 was 1.7% and 0.7% (or 2.5% and 1.1% of other service fee revenue), respectively. The increase was attributable to approximately $4.1 million for potential uncollectible accounts which includes certain bankruptcies that occurred during the fiscal year with respect to customers in our Revenue Cycle Management segment. In addition, as more revenues are being generated from certain SaaS-based solutions and consulting services within our Revenue Cycle Management segment, we may continue to experience a higher bad debt expense to total revenue ratio percentage.
 
Given the lingering effect of the weakened economy and customer financial constraints, we may experience additional collectibility challenges that affect our ability to collect customer payments in future periods. This could require additional charges to bad debt expense.
 
A hypothetical 10% increase in bad debt expense would result in approximately $0.6 million and $0.2 million of additional bad debt expense for the fiscal years ended December 31, 2009 and 2008, respectively.
 
 
We regularly review our deferred tax assets for recoverability and establish a valuation allowance, as needed, based upon historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of tax-planning strategies. Our tax valuation allowance requires us to make assumptions and apply judgment regarding the forecasted amount and timing of future taxable income.
 
We estimate the company’s effective tax rate based upon the known rates and estimated state tax apportionment. This rate is determined based upon location of company personnel, location of company assets and determination of sales on a jurisdictional basis. We currently file returns in approximately 80 jurisdictions.


60


Table of Contents

We recognize excess tax benefits associated with the exercise of stock options directly to stockholders’ equity when realized. When assessing whether a tax benefit relating to share-based compensation has been realized, we follow the tax law ordering method, under which current year share-based compensation deductions are assumed to be utilized before net operating loss carryforwards and other tax attributes. If tax law does not specify the ordering in a particular circumstance, then a pro-rata approach is used.
 
Effective January 1, 2007, we adopted generally accepted accounting principles relating to the accounting for uncertainty in income taxes. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The cumulative effect of adopting this guidance on January 1, 2007 was recognized as a change in accounting principle, recorded as an adjustment to the opening balance of retained earnings on the adoption date.
 
Upon adoption of this guidance, our policy is to include interest and penalties in our provision for income taxes. The tax years 1999 through 2009 remain open to examination by the Internal Revenue Service and certain state taxing jurisdictions to which we are subject.
 
Each quarter we assess our uncertain tax positions and adjust our reserve accordingly based on the most recent facts and circumstances. If there is a significant change in the underlying facts and circumstances or applicable tax law modifications, we may be exposed to additional benefits or expense. See Note 11 of our consolidated financial statements for the impact of uncertain tax positions in 2009.
 
We expect a significant increase in our cash taxes in future years, primarily attributable to exhausting the majority of our federal net operating loss carryforwards.
 
 
We have a share-based compensation plan, which includes non-qualified stock options, non-vested share awards and stock-settled stock appreciation rights. See Note 1, Summary of Significant Accounting Policies, Note 9, Stockholders’ Equity and Note 10, Share-Based Compensation, to the Notes to Consolidated Financial Statements for a complete discussion of our share-based compensation programs.
 
Prior to our initial public offering, valuing our share price as a privately held company was complex. We used reasonable methodologies, approaches and assumptions consistent with U.S. GAAP for privately-held-company equity securities issued as compensation, in assessing and determining the fair value of our common stock for financial reporting purposes. The fair value of our common stock was determined through periodic valuations.
 
Our stock valuations used a combination of the market-comparable approach and the income approach to estimate the aggregate enterprise value of our company at each valuation date. There was a high degree of subjectivity involved in using option-pricing models and there was no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates resulting from these valuation models, nor was there a means to compare and adjust the estimates to actual values.
 
For grants following the initial public offering, we utilized market-based share prices of our common stock in the Black-Scholes option pricing model to calculate fair value of our common stock option awards. This valuation technique will continue to involve highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of our common stock price over the expected term and estimated forfeitures.
 
It is not practicable for us to estimate the expected volatility of our share price, required by existing accounting requirements, given our limited history as a publicly traded company. Once we have sufficient history as a public company, we will calculate the expected volatility of our share price based on our trading history, which may impact our future share-based compensation. In accordance with generally accepted accounting principles for stock compensation, we have estimated grant-date fair value of our shares using


61


Table of Contents

volatility calculated (“calculated volatility”) from an appropriate industry sector index of comparable entities. We identified similar public entities for which share and option price information was available, and considered the historical volatilities of those entities’ share prices in calculating volatility. Dividend payments were not assumed, as we did not anticipate paying a dividend at the dates in which the various option grants occurred during the year. The risk-free rate of return reflects the weighted average interest rate offered for zero coupon treasury bonds over the expected term of the options. The expected term of the awards represents the period of time that options granted are expected to be outstanding. Based on our limited history, we utilized the “simplified method” as prescribed in Staff Accounting Bulletin No. 107, Share-based Payment, to calculate expected term. For service-based equity awards, compensation cost is recognized using an accelerated method over the vesting or service period and is net of estimated forfeitures. For performance-based equity awards, compensation cost is recognized using a straight-line method over the vesting or performance period and is adjusted each reporting period in which a change in performance achievement is determined and is net of estimated forfeitures.
 
 
Beginning January 1, 2008, we established a company-wide self-insurance plan for employee healthcare and dental insurance. We accrue self-insurance reserves based upon estimates of the aggregate liability of claim costs which are probable and estimable. We obtain third-party insurance coverage to limit our exposure on certain catastrophic claims. Our current insurance policy contains a stop-loss amount of $0.2 million per individual and a maximum aggregated stop-loss limit of $1.0 million per policy year on certain catastrophic claims. Reserves for claim costs are estimated using certain actuarial assumptions followed in the insurance industry and our historical experience.
 
Self-insurance reserves are based on management’s estimates of the costs to settle employee insurance claims. As such, differences between actual costs and management’s estimates could be significant. Additionally, changes in actuarial assumptions used in the development of these reserves could affect net income in a given period. Changes in the nature of claims or the number of employees could also impact our estimate. Our current estimated aggregate maximum payment exposure under the insurance plan, for the current plan year, is approximately $1.5 and $1.0 million as of December 31, 2009 and 2008, respectively. Based on the trend of rising healthcare costs, we may experience higher employee healthcare expense in future periods.
 
A hypothetical 10% change in our self-insured liabilities as of December 31, 2009 would have affected net earnings by approximately $0.2 million and $0.1 million in fiscal year 2009 and 2008, respectively.
 
 
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 and liquidity to meet our cash flow requirements including the following near term obligations: (i) our working capital needs; (ii) our debt service obligations including a required excess cash payment to our lenders; (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.
 
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 credit agreement to fund operations. However, pursuant to the change in our cash management practice in 2008, we currently use the swing-line


62


Table of Contents

component of our revolver 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 revolving credit facility on a routine basis. As of December 31, 2009, 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 December 31, 2009, we are in compliance with all applicable covenant requirements of our 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, 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.
 
 
As of December 31, 2009 and 2008, we had cash and cash equivalents totaling $5.5 million and $5.4 million, respectively.
 
Operating Activities.
 
The following table summarizes the cash provided by operating activities for the fiscal years ended December 31, 2009 and 2008:
 
                                 
    Fiscal Year Ended December 31,  
    2009     2008     Change  
    Amount     Amount     Amount     %  
    (In millions)  
 
Net income
  $ 19.9     $ 10.8     $ 9.1       84.3 %
Non-cash items
    67.6       53.5       14.1       26.4  
Net changes in working capital
    (27.2 )     (12.2 )     (15.0 )     123.0  
                                 
Net cash provided by operations
  $ 60.3     $ 52.1     $ 8.2       15.7 %
 
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, impairment of intangibles and non-cash interest expense. The total for these non-cash expenses was $67.6 million and $53.5 million for the fiscal years ended December 31, 2009 and 2008, respectively.


63


Table of Contents

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 fiscal year ended December 31, 2009, Working capital changes resulting in a reduction to cash flow from operations of $38.4 million were:
 
  •  an increase in accounts receivable of $18.4 million related to the timing of invoicing and cash collections and our revenue growth;
 
  •  an increase in other long term assets of $4.6 million related to the timing of cash payments for our deferred sales expenses;
 
  •  an increase in prepaid expenses and other assets of $2.4 million primarily related to sales incentive compensation payments;
 
  •  a decrease in accrued payroll and benefits of $9.1 million due to payroll cycle timing and cash incentive compensation accruals; and
 
  •  a decrease in other accrued expenses of $3.9 million 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: a $7.7 million working capital increase in trade accounts payable due to the timing of various payment obligations; and a $2.3 million increase in accrued revenue share obligation and rebates due to the timing of cash payments and customer purchasing volume for our GPO.
 
For the fiscal year ended December 31, 2008, Working capital changes resulting in a reduction to cash flow from operations of $20.0 million were:
 
  •  an increase in accounts receivable of $15.2 million related to the timing of invoicing and cash collections and our revenue growth;
 
  •  an increase in other long term assets of $2.7 million related to the timing of cash payments for our deferred sales expenses; and
 
  •  a decrease in other accrued expenses of $1.4 million due to the timing of various payment obligations.
 
The working capital changes resulting in reductions to the 2008 operating cash flow discussed above were partially offset by a $3.5 million increase in deferred revenue for cash receipts not yet recognized as revenue; and a $3.0 million working capital increase in trade accounts payable due to the timing of various payment obligations.
 
Investing Activities.
 
Investing activities used $46.5 million of cash for the fiscal year ended December 31, 2009 which included: $18.3 million related to the deferred purchase consideration of $19.8 million (inclusive of $1.5 million of imputed interest) made in June 2009 as part of the Accuro Acquisition; $16.4 million for investment in software development; and $11.8 million of capital expenditures that are primarily related to the 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.
 
Investing activities used $228.0 million of cash for the fiscal year ended December 31, 2008 which included: $210.0 million for costs associated with the Accuro Acquisition; $11.1 million for investment in software development; and $6.9 million of capital expenditures that were primarily related to the growth in our RCM segment.


64


Table of Contents

Financing Activities.
 
Financing activities used $13.8 million of cash for the fiscal year ended December 31, 2009. We borrowed $71.8 million on our credit facility during the period. We also received $10.4 million from the issuance of common stock and $6.9 million from the excess tax benefit from the exercise of stock options. This was offset by payments made on our credit facility of $102.3 million inclusive of the $27.5 million 2008 excess cash flow payment in addition to payments of $0.7 million that were made on our finance obligation. Our credit agreement requires an annual payment of excess cash flow which amounted to $11.3 million for the fiscal year ended December 31, 2009. We have adequate liquidity to fund this payment and expect to pay it in the first quarter of 2010.
 
Financing activities provided $44.3 million of cash for the fiscal year ended December 31, 2008. We borrowed $199.0 million on our credit facility during the period. We also received $1.9 million from the excess tax benefit from the exercise of stock options and $1.8 million from the issuance of common stock. This was offset by payments made on our credit facility of $151.7 million in addition to payments of $6.2 million in bank fees relating to modifications made to our credit facility and $0.6 million that were made on our finance obligation.
 
 
We are party to a credit agreement, with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, BNP Paribas, as Syndication Agent, CIT Healthcare LLC, as Documentation Agent, and the other lenders party thereto, or the Lenders, as amended. The agreement provides for a (i) term loan facility and (ii) a revolving loan facility with a $125.0 million aggregate loan commitment amount available, including a $10.0 million sub-facility for letters of credit and a $30.0 million swing-line facility. We utilize the revolving credit facility for working capital and other general corporate purposes.
 
Borrowings under the Credit Agreement bear interest, at our option, equal to the Eurodollar Rate for a Eurodollar Rate Loan (as defined in the Credit Agreement), or the Base Rate for a Base Rate Loan (as defined in the Credit Agreement), plus an applicable margin. Under the revolving loan facility we also pay a quarterly commitment fee on the undrawn portion of the revolving loan facility ranging from 0.25% to 0.50% based on the same consolidated leverage ratio and a quarterly fee equal to the applicable margin for Eurodollar Rate Loans on the aggregate amount of outstanding letters of credit. See table below for a summary of the pricing tiers for all applicable margin rates. As of December 31, 2009, our applicable margin on our revolving credit facility and term loan facility was tier four and tier two, respectively.
 
                                         
Revolving credit facility
    Consolidated
               
Pricing
  Leverage
  Commitment
  Letter of
  Eurodollar
  Base Rate
Tier
  Ratio   Fee   Credit Fee   Loans   Loans
 
  1     ³ 3.5:1.0     0.50 %     3.50 %     3.50 %     2.50 %
  2     ³ 3.0:1.0 but                                
        < 3.5:1.0     0.375 %     3.25 %     3.25 %     2.25 %
  3     ³ 2.5:1.0 but                                
        < 3.0:1.0     0.375 %     2.75 %     2.75 %     1.75 %
  4     ³ 2.0:1.0 but                                
        < 2.5:1.0     0.30 %     2.50 %     2.50 %     1.50 %
  5     < 2.0:1.0     0.25 %     2.25 %     2.25 %     1.25 %
 
                                     
Term Loan Facility
    Consolidated
           
Pricing
  Leverage
  Eurodollar
  Base Rate
   
Tier
  Ratio   Loans   Loans    
 
  1       ³ 3.0:1.0       4.00 %     3.00 %        
  2       < 3.0:1.0       3.75 %     2.75 %        


65


Table of Contents

The term loan facility matures on October 23, 2013 and the revolving loan facility matures on October 23, 2011. We are required to make quarterly principal amortization payments of approximately $0.6 million on the term loan facility. Such required quarterly principal payments were reduced from $0.8 million after partially prepaying our term loan using proceeds from our initial public offering. No principal payments are due on the revolving loan facility until the revolving facility maturity date. We are also required to prepay our debt obligations based on an excess cash flow calculation for the applicable fiscal year which is determined in accordance with the terms of our credit agreement.
 
In May 2008, we entered into the third amendment to our existing credit agreement in connection with the completion of the Accuro acquisition. The third amendment increased our term loan facility by $50.0 million and the commitments to loan amounts under our revolving credit facility from $110.0 million to $125.0 million. The third amendment also increased the applicable margins on the rate of interest we pay under our credit agreement. As set forth above, the additional debt is subject to certain financial covenants of the original credit agreement. With respect to our revolving credit facility, there are no provisions in the credit agreement that require us to maintain a lock-box arrangement. The Third amendment became effective upon the closing of the Accuro Acquisition on June 2, 2008. We utilized cash on hand and approximately $100.0 million of the increased borrowings to fund the cash portion of the purchase price of Accuro.
 
In July 2008, we entered into the fourth amendment to our existing credit agreement. The fourth amendment increased the swing-line loan sublimit from $10.0 million to $30.0 million. The balance outstanding under our swing-line loan is a component of the revolving credit commitments. The total commitments under the credit facility, including the aggregate revolving credit commitments, were not increased as a result of the fourth amendment.
 
During September 2008, we voluntarily changed our cash management practice to reduce our interest expense by instituting an auto-borrowing plan with the agent under our credit agreement. As a result, all of our excess cash on hand is voluntarily used to repay our swing-line credit facility on a daily basis and we now fund our cash expenditures by using swing-line loans.
 
As of December 31, 2009, we had a zero balance on our swing-line loan and $124.0 million was available under our revolving credit facility (after giving effect to $1.0 million of outstanding but undrawn letters of credit on such date. We also had $215.2 million outstanding of bank debt and a cash balance of $5.5 million as of December 31, 2009.
 
Our credit agreement contains financial and other restrictive covenants, ratios and tests that limit our ability to incur additional debt and engage in other activities. For example, our credit agreement includes covenants restricting, among other things, our ability to incur indebtedness, create liens on assets, engage in certain lines of business, engage in mergers or consolidations, dispose of assets, make investments or acquisitions, engage in transactions with affiliates, enter into sale leaseback transactions, enter into negative pledges or pay dividends or make other restricted payments. Our credit agreement also includes financial covenants including requirements that we maintain compliance with a maximum consolidated total debt to adjusted EBITDA leverage ratio of 4.00 to 1.0 and a minimum consolidated fixed charges coverage ratio of 1.5 to 1.0 as of December 31, 2009. The consolidated total debt to adjusted EBITDA leverage ratio and the consolidated fixed charges coverage ratio thresholds adjust in future periods. The following table shows our future covenant thresholds:
 
                 
Covenant Requirements Table
    Maximum
   
    Consolidated
  Minimum
    Total Debt
  Consolidated
    to Adjusted
  Fixed
    EBITDA
  Charge
    Leverage
  Coverage
Period
  Ratio   Ratio
 
October 1, 2008 through September 30, 2009
    4.5:1.0       1.25:1.0  
October 1, 2009 through September 30, 2010
    4.0:1.0       1.5:1.0  
Thereafter
    3.5:1.0       1.5:1.0  


66


Table of Contents

The components that comprise the calculation of the aforementioned covenants are specifically defined in our credit agreement and require us to make certain adjustments to derive the amounts used in the calculation of each ratio. Based on our analysis as of December 31, 2009, our consolidated total debt to adjusted EBITDA leverage ratio, calculated in accordance with the credit agreement, was approximately 1.9 to 1.0 and our consolidated fixed charges coverage ratio was approximately 4.91 to 1.0, both of which are in compliance with the requirements of our credit agreement. Refer to the table in the earlier part of this section for a summary of the pricing tiers and the applicable rates.
 
The determination of our pricing tier is based on the consolidated leverage ratio that was calculated in the most recent compliance certificate received by our administrative agent which would have been for the nine-month reporting period ended September 30, 2009. In addition, our loans and other obligations under the credit agreement are guaranteed, subject to specified limitations, by our present and future direct and indirect domestic subsidiaries. As of December 31, 2009, we were not in default of any restrictive or financial covenants or ratios under our credit agreement.
 
Summary Disclosure Concerning Contractual Obligations and Commercial Commitments
 
We have contractual obligations under our credit agreement and a capital lease finance obligation. In addition, we maintain operating leases for certain facilities and office equipment. The following table summarizes our long-term contractual obligations as of December 31, 2009:
 
                                         
          Payments Due by Period  
          Less Than
                More than
 
    Total     1 Year     1-3 Years     3-5 Years     5 Years  
    (In thousands)  
 
Bank credit facility(1)
  $ 215,161     $ 13,771     $ 4,998     $ 196,392     $  
Operating leases(2)
    54,881       8,133       14,000       12,873       19,875  
Accuro severance(3)
    3,059       1,877       1,182              
Finance obligations(4)
    16,369       1,096       2,217       2,228       10,828  
Other liabilities(5)
    50       50                    
Tax liability(6)
    257                         257  
                                         
    $ 289,777     $ 24,927     $ 22,397     $ 211,493     $ 30,960  
 
 
(1) Interest payments on our credit facility are not included in the above table. In addition to our regularly scheduled principal reduction payments, we have included an estimated excess cash flow payment required by our lenders of approximately $11.3 million in the above table in the less than one year column. Indebtedness under our credit facility bears interest at an annual rate of LIBOR plus an applicable margin. The applicable weighted average interest rate, inclusive of the LIBOR, the applicable margin and the impact of our interest rate collar, was 5.88% on our term loan facility at December 31, 2009. We had zero outstanding under our revolving credit facility at December 31, 2009. See Note 6 of the Notes to Consolidated Financial Statements for additional information regarding our borrowings.
 
(2) Relates to certain office space and office equipment under operating leases. Amounts represent future minimum rental payments under operating leases with initial or remaining non-cancelable lease terms of one year or more. See Note 7 of the Notes to Consolidated Financial Statements for more information.
 
(3) Represents severance costs and lease term penalties associated with the Accuro Acquisition on June 2, 2008. See Note 5 of the Notes to Consolidated Financial Statements for additional information. The remaining severance of $246 is expected to be paid during the first quarter 2010. The remaining $2,813 is associated with the Dallas lease termination penalty. Approximately $1,767 will be paid ratably from January 2010 through January 2011 with a final payment of $1,046 due in February 2011.
 
(4) Represents a capital lease obligation incurred in a sale and subsequent leaseback transaction of an office building in August 2003. The transaction did not qualify for sale and leaseback treatment under generally accepted accounting principles relating to leases. In July 2007, we extended the terms of our office building lease agreement by an additional four years through July 2017, which increased our total finance


67


Table of Contents

obligation by $1.1 million. See Note 6 of the Notes to Consolidated Financial Statements under the subheading “Finance Obligations” for additional information regarding this transaction and the related obligation.
 
(5) Aggregation of other purchase obligations.
 
(6) Effective January 1, 2007, we adopted generally accepted accounting principles relating to accounting for uncertainty in income taxes. The above amount relates to management’s estimate of uncertain tax positions. As a result of our NOLs, we have several tax periods with open statutes of limitations that will remain open until our NOLs are utilized. As such, we cannot predict the precise timing that this liability will be applied or utilized. Additionally the liability may increase or decrease if management’s estimate of uncertain tax positions changes when new information arises or changes in circumstances occur.
 
Indemnification of product users.  We provide a limited indemnification to users of our products against any patent, copyright, or trade secret claims brought against them. The duration of the indemnifications vary based upon the life of the specific individual agreements. We have not had a material indemnification claim, and we do not believe we will have a material claim in the future. As such, we have not recorded any liability for these indemnification obligations in our financial statements.
 
Acquisition contingent consideration.  In August 2007, the former owner of Med-Data Management, Inc. (or “Med-Data”) disputed our earn-out calculation made under the Med-Data Asset Purchase Agreement and alleged that we failed to fulfill our obligations with respect to the earn-out. In November 2007, the former owner filed a complaint alleging that we failed to act in good faith with respect to the operation of Med-Data subsequent to the acquisition which affected the earn-out calculation. The Company refutes these allegations and is vigorously defending itself against these allegations. On March 21, 2008 we filed an answer, denying the plaintiffs’ allegations and also filed a counterclaim, alleging that the plaintiffs fraudulently induced us to enter into the purchase agreement by intentionally concealing the status of their relationship with their largest customer. Discovery has been completed and briefing has been completed on MedAssets’ and plaintiffs’ dispositive motions, but we currently cannot estimate any probable outcome and have not recorded a loss contingency in our Consolidated Statement of Operations. The maximum earn-out payable under the Asset Purchase Agreement is $4.0 million. In addition, the plaintiffs claim that Ms. Hodges, one of the plaintiffs, is entitled to the accelerated vesting of options to purchase 140,000 shares of our common stock that she received in connection with her employment agreement with the Company.
 
 
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.
 
As of December 31, 2009, we did not have any other off-balance sheet arrangements that have or are reasonably likely to have a current or future significant 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 its financial and operational decision-making, we supplement our Consolidated Financial Statements presented on a GAAP basis in this Annual Report on Form 10-K with the following non-GAAP financial measures: gross fees, gross administrative fees, revenue share obligation, EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Revenue Cycle Management acquisition-affected net revenue and cash diluted earnings per share.


68


Table of Contents

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 7.
 
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.
 
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 Annual Report on Form 10-K, have limitations as analytical


69


Table of Contents

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 Annual Report on Form 10-K, 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 Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
 
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, interest expense and expenses related to the cancellation of an interest rate swap). 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.


70


Table of Contents

The following table reconciles net income to Adjusted EBITDA for the fiscal years ended December 31, 2009, 2008 and 2007:
 
                         
    Fiscal Year Ended December 31,  
    2009     2008     2007  
    (In thousands)  
 
Net income
  $ 19,947     $ 10,841     $ 6,296  
Depreciation
    13,211       9,793       7,115  
Amortization of intangibles
    28,012       23,442       15,778  
Amortization of intangibles (included in cost of revenue)
    3,166       1,581       1,145  
Interest expense, net of interest income(1)
    18,087       19,823       18,213  
Income tax (benefit)
    12,826       7,489       4,516  
                         
EBITDA
    95,249       72,969       53,063  
Impairment of intangibles(2)
          2,272       1,204  
Share-based compensation expense(3)
    16,652       8,550       5,611  
Rental income from capitalizing building lease(4)
    (439 )     (438 )     (438 )
Accuro & XactiMed purchase accounting adjustments(5)
    (24 )     2,449       1,131  
Interest rate swap cancellation(6)
          3,914        
                         
Adjusted EBITDA
  $ 111,438     $ 89,716     $ 60,571  
 
 
(1) Interest income is included in other income (expense) and is not netted against interest expense in our Consolidated Statement of Operations.
 
(2) Impairment of intangibles during the fiscal year ended December 31, 2008 primarily relates to acquired developed technology from prior acquisitions, revenue cycle management tradename and internally developed software products, mainly due to the integration of Accuro’s operations and products. Impairment of intangibles during fiscal year ended December 31, 2007 represents the write-off of in-process research and development from the XactiMed acquisition in May 2007.
 
(3) Represents non-cash share-based compensation to both employees and directors. The increase in 2009 is due to share-based grants made under our 2008 Long-Term Performance Incentive Plan. The increase in 2008 is due to share-based grants made subsequent to our initial public offering. The significant increase in 2007 is due to the adoption of SFAS No. 123(R). 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.
 
(4) 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 Note 6 to our Consolidated Financial Statements for further discussion of this rental income.
 
(5) 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 respective acquisition dates for Accuro and XactiMed. The reduction of the deferred revenue balances 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.
 
(6) During the fiscal year ended December 31, 2008, we recorded an expense associated with the cancellation of our interest rate swap arrangements. In connection with the cancellation, we paid the counterparty $3.9 million in termination fees. We believe such expense is infrequent in nature and is not indicative of continuing operating performance.
 
Revenue Cycle Management Acquisition-Affected Net Revenue.  Revenue Cycle Management acquisition-affected net revenue includes the revenue of Accuro prior to our actual ownership. The Accuro Acquisition


71


Table of Contents

was consummated on June 2, 2008. This measure assumes the acquisition of Accuro occurred on January 1, 2008. Revenue Cycle Management acquisition-affected net revenue is used by management and the Board to better understand the extent of organic period-over-period growth of the Revenue Cycle Management segment. Given the significant impact that this acquisition had on the Company during the fiscal years ended December 31, 2009 and 2008, we believe such acquisition-affected net revenue may be useful and meaningful to investors in their analysis of such growth. Revenue Cycle Management acquisition-affected net revenue is presented for illustrative and informational purposes only and is not intended to represent or be indicative of what our results of operations would have been if these transactions had occurred at the beginning of such period. This measure also should not be considered representative of our future results of operations. Reconciliations of Revenue Cycle Management acquisition-affected net revenue to its most directly comparable GAAP measure can be found in the “Results of Operations” section of Item 7.
 
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 and non-cash tax-adjusted shared-based compensation expense. 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 reward 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.
 
                         
    Twelve Months Ended
 
    December 31,  
Per share data
  2009     2008     2007  
 
Diluted EPS
  $ 0.34     $ 0.21       nm*  
Pre-tax non-cash, acquisition-related intangible amortization
    0.50       0.47       nm*  
Pre-tax non-cash, share-based compensation(1)
    0.29       0.16       nm*  
Pre-tax interest rate swap cancellation(2)
          0.07       nm*  
Pre-tax non-cash, impairment of intangibles(3)
          0.04       nm*  
                         
Tax effect on pre-tax adjustments(4)
    (0.31 )     (0.30 )     nm*  
                         
Non-GAAP diluted cash EPS
  $ 0.82     $ 0.65       nm*  
                         
Weighted average shares — diluted
    57,865       52,314          
 
 
* The comparison of 2007 non-GAAP adjusted diluted EPS and non-GAAP diluted cash EPS to 2008 performance is not meaningful due to the significant non-recurring preferred stock dividends accrued or paid in 2007 prior to the Company’s initial public offering in December of that year.
 
(1) Represents the per share impact, on a tax-adjusted basis of non-cash share-based compensation to both employees and directors. The significant increase in 2009 is due to share-based grants made from the Long-Term Performance Incentive Plan previously discussed. 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 an expense associated with the cancellation of our interest rate swap arrangement during the fiscal year ended December 31, 2008. In connection with the cancellation, we paid the counterparty $3.9 million in termination fees. We believe such expense is infrequent in nature and is not indicative of continuing operating performance.


72


Table of Contents