FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2009


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

For the transition period from to

Commission file number: 001-33881

MEDASSETS, INC.

(Exact name of registrant as specified in its charter)


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


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

Registrant’s telephone number, including area code: (678) 323-2500
(Former name, former address and former fiscal year, if changed since last report)
N/A

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

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

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


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

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

As of August 6, 2009, the registrant had 56,012,311 shares of $0.01 par value common stock outstanding.

Part I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

MedAssets, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)


	June 30,			December 31,
	2009			2008
	(Unaudited)
ASSETS
Current
Cash and cash equivalents (Note 1)	$	—		$	5,429
Accounts receivable, net of allowances of $1,752 and $2,247 as of June 30, 2009 and December 31, 2008, respectively		56,272			55,048
Deferred tax asset, current		13,780			13,780
Prepaid expenses and other current assets		7,151			5,997

Total current assets		77,203			80,254
Property and equipment, net		48,565			42,417
Other long term assets
Goodwill		511,861			508,748
Intangible assets, net		109,959			124,340
Other		18,947			18,101

Other long term assets		640,767			651,189

Total assets	$	766,535		$	773,860


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	6,571		$	6,725
Accrued revenue share obligation and rebates		30,607			29,698
Accrued payroll and benefits		15,458			21,837
Other accrued expenses		7,829			6,981
Deferred revenue, current portion		25,546			24,280
Deferred purchase consideration (Note 3)		—			19,361
Current portion of notes payable		2,685			30,277
Current portion of finance obligation		156			149

Total current liabilities		88,852			139,308
Notes payable, less current portion		238,667			215,349
Finance obligation, less current portion		9,779			9,860
Deferred revenue, less current portion		5,598			6,411
Deferred tax liability		14,028			15,817
Other long term liabilities		5,360			4,176

Total liabilities		362,284			390,921
Commitments and contingencies
Stockholders’ equity
Common stock, $0.01 par value, 150,000,000 shares authorized; 55,888,000 and 53,917,000 shares issued and outstanding as of June 30, 2009 and December 31, 2008, respectively		559			539
Additional paid in capital		622,069			605,340
Accumulated other comprehensive loss (Note 11)		(1,605	)		(2,088	)
Accumulated deficit		(216,772	)		(220,852	)

Total stockholders’ equity		404,251			382,939

Total liabilities and stockholders’ equity	$	766,535		$	773,860

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

MedAssets, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(In thousands, except per share amounts)
Revenue:
Administrative fees, net	$	25,378		$	25,148		$	52,864		$	52,693
Other service fees		58,831			36,087			110,329			67,300

Total net revenue		84,209			61,235			163,193			119,993

Operating expenses:
Cost of revenue (inclusive of certain amortization expense)		17,613			10,688			34,358			19,151
Product development expenses		5,250			3,611			11,268			6,308
Selling and marketing expenses		15,595			9,544			26,491			22,455
General and administrative expenses		27,481			22,215			54,932			43,275
Depreciation		2,985			2,349			5,895			4,470
Amortization of intangibles		7,000			5,016			14,011			8,793
Impairment of intangibles (Note 3)		—			2,079			—			2,079

Total operating expenses		75,924			55,502			146,955			106,531


Operating income		8,285			5,733			16,238			13,462
Other income (expense):
Interest (expense)		(4,763	)		(5,000	)		(9,756	)		(9,317	)
Other income (expense)		(33	)		(3,362	)		181			(2,329	)

Income (loss) before income taxes		3,489			(2,629	)		6,663			1,816
Income tax expense (benefit)		1,314			(1,053	)		2,583			693

Net income (loss)	$	2,175		$	(1,576	)	$	4,080		$	1,123

Basic and diluted income (loss) per share:
Basic net income (loss)	$	0.04		$	(0.03	)	$	0.08		$	0.02

Diluted net income (loss)	$	0.04		$	(0.03	)	$	0.07		$	0.02

Weighted average shares — basic		54,527			47,288			54,316			45,853
Weighted average shares — diluted		56,968			47,288			56,699			48,485

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

MedAssets, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended June 30,
	2009			2008
	(In thousands)
Operating activities
Net income	$	4,080		$	1,123

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Bad debt expense		2,524			985
Depreciation		7,115			4,729
Amortization of intangibles		14,382			9,296
Loss (gain) on sale of assets		193			(3	)
Noncash stock compensation expense		8,960			4,139
Excess tax benefit from exercise of stock options		(3,313	)		—
Amortization of debt issuance costs		922			414
Noncash interest expense, net		913			402
Impairment of intangibles		—			2,079
Deferred income tax (benefit) expense		(57	)		165
Changes in assets and liabilities:
Accounts receivable		(3,872	)		(5,640	)
Prepaid expenses and other assets		(1,155	)		(915	)
Other long-term assets		(1,895	)		(703	)
Accounts payable		1,966			5,000
Accrued revenue share obligations and rebates		909			(2,364	)
Accrued payroll and benefits		(6,483	)		(956	)
Other accrued expenses		(2,725	)		3,262
Deferred revenue		453			3,361

Cash provided by operating activities		22,917			24,374

Investing activities
Purchases of property, equipment and software		(6,186	)		(2,790	)
Capitalized software development costs		(7,071	)		(4,953	)
Acquisitions, net of cash acquired (Note 3)		(18,275	)		(209,423	)

Cash used in investing activities		(31,532	)		(217,166	)

Financing activities
Proceeds from notes payable		60,932			100,000
Repayment of notes payable and capital lease obligations		(65,206	)		(24,136	)
Repayment of finance obligations		(329	)		(320	)
Debt issuance costs		—			(6,167	)
Excess tax benefit from exercise of stock options		3,313			—
Interest accrued on note receivable from stockholders		—			(14	)
Issuance of common stock, net of offering costs		4,476			534

Cash provided by financing activities		3,186			69,897

Net decrease in cash and cash equivalents		(5,429	)		(122,895	)
Cash and cash equivalents, beginning of period		5,429			136,952

Cash and cash equivalents, end of period	$	—		$	14,057

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

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share amounts)

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

1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION

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

The accompanying unaudited Condensed Consolidated Financial Statements, and Condensed Consolidated Balance Sheet as of December 31, 2008, derived from audited financial statements, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and as required by Regulation S-X, Rule 10-01 of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements. Actual results could differ from those estimates. Operating results for the three and six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2009.

The accompanying unaudited Condensed Consolidated Financial Statements and notes thereto should be read in conjunction with the audited Consolidated Financial Statements for the year ended December 31, 2008 included in our Form 10-K as filed with the SEC on March 12, 2009. These financial statements include the accounts of MedAssets, Inc. and our wholly owned subsidiaries. All significant intercompany accounts have been eliminated in consolidation.

Cash and Cash Equivalents

All of our highly liquid investments with original maturities of three months or less at the date of purchase are carried at fair value and are considered to be cash equivalents. During 2008, we voluntarily changed our cash management practice in an effort to reduce our amount of interest expense and indebtedness. Currently, all of our excess cash on hand is voluntarily used to repay our swing-line credit facility on a daily basis. As a result of this new practice, our cash and cash equivalents were zero at June 30, 2009. Cash and cash equivalents were $5,429 as of December 31, 2008. See Note 5 for immediately available cash under our revolving credit facility.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — An Amendment of SFAS No. 133 (or “SFAS No. 161”). SFAS No. 161 seeks to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures regarding the impact on financial position, financial performance, and cash flows. To achieve this increased transparency, SFAS No. 161 requires (1) the disclosure of the fair value of derivative instruments and gains and losses in a tabular format; (2) the disclosure of derivative features that are credit risk-related; and (3) cross-referencing within the footnotes. We adopted SFAS No. 161 on January 1, 2009. The adoption of SFAS No. 161 did not have a material impact on our condensed consolidated financial statements.

Business Combinations

In April 2009, the FASB issued Staff Position No. 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arises from Contingencies (or “FSP No. 141(R)-1”). FSP No. 141(R)-1 amends and clarifies SFAS 141(R) to address application issues on the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This FASB Staff Position is effective for fiscal years beginning on or after December 15, 2008. The FASB Staff Position is effective for us beginning January 1, 2009 and will apply to business combinations completed on or after that date. The adoption of FSP No. 141(R)-1 did not have a material impact on our condensed consolidated financial statements.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)

Fair Value Measurements

In April 2009, the FASB issued FSP FAS No. 107-1 and APB 28-1 to amend FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, and APB Opinion No. 28, Interim Financial Reporting, which is effective for the Company June 30, 2009. The FSP requires a publicly traded company to include disclosures about fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, the guidance requires an entity to disclose either in the body or the accompanying notes of its summarized financial information the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position, as required by FASB Statement No. 107. The adoption of this guidance did not have a significant impact on our condensed consolidated financial statements.

Subsequent Events

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (or “SFAS No. 165”). SFAS No. 165 establishes general standards regarding the disclosure of, and the accounting for events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS No. 165 is effective for interim and annual financial periods ending after June 15, 2009. The adoption of SFAS No. 165 did not have a significant impact on our condensed consolidated financial statements.

Accounting for Transfers of Financial Assets

In June 2009, the FASB issued SFAS 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140 (or “SFAS No. 166”). SFAS No. 166 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. SFAS No. 166 is applicable for annual periods ending after November 15, 2009 and interim periods thereafter. We are currently assessing the impact, if any, that the adoption of SFAS No. 166 would have on our condensed consolidated financial statements.

Consolidation of Variable Interest Entities

In June 2009, the FASB issued SFAS 167, Amendments to FASB Interpretation No. 46(R) (or “SFAS No. 167”). SFAS No. 167 eliminates FASB Interpretation No. 46(R)’s exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary of a variable interest entity, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. SFAS No. 167 also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity, or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying Interpretation 46(R)’s provisions. SFAS No. 167 is applicable for annual periods after November 15, 2009 and interim periods thereafter. We are currently assessing the impact, if any, that the adoption of SFAS No. 167 would have on our condensed consolidated financial statements.

GAAP Hierarchy

In June 2009, FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (or “SFAS No. 168”). SFAS No. 168 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We do not expect the adoption of SFAS No. 168 will have a significant impact on our condensed consolidated financial statements.

3. ACQUISITION AND RESTRUCTURING ACTIVITIES

Accuro Acquisition

During the three months ended June 30, 2009, we finalized the acquisition purchase price and related purchase price allocation of Accuro

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)

Healthcare Solutions, Inc. (collectively with its subsidiaries, “Accuro”), which was acquired on June 2, 2008 (the “Accuro Acquisition”).

In connection with the purchase consideration paid upon the closing of the Accuro Acquisition, which occurred on June 2, 2008, we recorded an initial liability (or the “deferred purchase consideration”) of $18,500 on our balance sheet, representing the present value of $20,000 in deferred purchase consideration payable on the first anniversary date of the closing of the Accuro Acquisition as required by the purchase agreement. During the three and six months ended June 30, 2009, we recognized approximately $258 and $639, respectively, in imputed interest expense to accrete the Accuro deferred purchase consideration to its face value by the first anniversary of the Accuro Acquisition closing date or June 2, 2009.

On June 2, 2009, we reduced the $20,000 deferred purchase consideration by approximately $224 due to certain adjustments allowed for under the purchase agreement and we paid $19,776 (inclusive of $1,501 of imputed interest) in cash to the former shareholders of Accuro to satisfy the deferred purchase consideration obligation. We acquired all the outstanding stock of Accuro for a total purchase price of $357,635 comprised of $228,248 in cash including $5,355 in acquisition related costs and approximately 8,850,000 unregistered shares of our common stock valued at $129,387.

During the three and six months ended June 30, 2008, we deemed several intangible assets to be impaired in combination with our purchase of Accuro. We incurred certain impairment expenses (primarily related to acquired developed technology from prior acquisitions, revenue cycle management tradename and internally developed software product write-offs) of approximately $2,079. These expenses have been recorded to the impairment line item within our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2008.

Accuro Purchase Price Allocation

The following table details the final purchase price and purchase price allocation for the Accuro Acquisition (unaudited):


	Preliminary
	Purchase					Final
	Price					Purchase
	Allocation					Price
	December					Allocation
	31, 2008		Adjustments			June 30, 2009
Current assets	$	9,113	$	(124	)	$	8,989
Property and equipment		4,853		—			4,853
Other long term assets		169		—			169
Goodwill		275,899		3,113			279,012
Intangible assets		87,700		—			87,700

Total assets acquired		377,734		2,989			380,723
Current liabilities		14,474		3,282			17,756
Other long term liabilities		5,401		(69	)		5,332

Total liabilities assumed		19,875		3,213			23,088

Total purchase price	$	357,859	$	(224	)	$	357,635

During the six months ended June 30, 2009, we made certain adjustments to finalize the purchase price allocation of Accuro. These adjustments have been recognized as assets acquired or liabilities assumed in the Accuro Acquisition and included in the allocation of the cost to acquire Accuro and, accordingly, have resulted in a net increase to goodwill of approximately $3,113. The adjustments primarily relate to the following:

•

a $3,463 increase associated with restructuring activities, consisting of estimated severance costs, facility lease termination penalties, system migration and standardization as well as other restructuring costs (as further described below);

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)

	•		a $224 decrease related to adjustments to the final deferred purchase consideration; and

	•		a $126 decrease associated with adjusting assets acquired and liabilities assumed to fair value.

Accuro Restructuring Plan

In connection with the Accuro Acquisition, our management approved, committed and initiated a plan to restructure our operations resulting in certain management, system and organizational changes within our Revenue Cycle Management segment. As a result of the finalization of our purchase price allocation, we adjusted our preliminary purchase price allocation by approximately $3,463 during the six months ended June 30, 2009 comprised of (i) facility lease termination costs of approximately $3,407 in connection with exiting Accuro’s primary office facility in Dallas, TX; (ii) system migration and standardization costs of approximately $354 to bring certain Accuro systems up to our internal technology standards; (iii) estimated severance costs of approximately $108 related to involuntary terminations of acquired employees; and (iv) a reduction of approximately $406 related to other liabilities assumed in connection with the acquisition. Any future increases or decreases to the estimates of executing the restructuring plan will be recorded as an adjustment to operating expense.

The changes in the plan are summarized as follows (unaudited):


	Accrued							Accrued,
	December 31,		Adjustments		Cash			June 30,
	2008		to Costs		Payments			2009
Accuro Restructuring Plan
Severance	$	920	$	108	$	(657	)	$	371
Other		709		3,355		(390	)		3,674

Total Accuro Restructuring Costs	$	1,629	$	3,463	$	(1,047	)	$	4,045

We expect that the remaining severance and other costs will be paid out prior to December 31, 2009 with the exception of the Dallas lease termination penalty, of which $2,361 will be paid ratably from September 2009 through January 2011 and the remaining $1,046 will be paid in February 2011.

Unaudited Pro Forma Financial Information

The unaudited financial information for the three and six months ended June 30, 2008 presented in the table below summarizes the combined results of operations of MedAssets and Accuro, on a pro forma basis, as if the acquisition had occurred on January 1, 2008. Accuro’s results of operations have been included in our consolidated results of operations subsequent to the acquisition date of June 2, 2008 and are included in our condensed consolidated statement of operations for the three and six months ended June 30, 2009.

The 2008 pro forma results include the following non-recurring expenses included in Accuro’s pre-acquisition financial statements that were directly attributable to the acquisition:

	•		$1,317 related to transaction costs Accuro incurred in relation to its potential initial public offering prior to the Accuro Acquisition;

	•		$1,462 related to one-time contractual severance payments made to certain employees as part of the purchase agreement;

	•		$2,222 related to one-time change of control payments made to certain employees as part of the purchase agreement; and,

	•		$2,184 related to the one-time acceleration of unvested Accuro stock options that were repurchased as part of the purchase agreement.

The unaudited pro forma financial information for the three and six months ended June 30, 2008 presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2008:

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)


	Three Months Ended June 30,					Six Months Ended June 30,
	2009		2008			2009		2008
	(Unaudited, in thousands, except per share data)
Net revenue	$	84,209	$	73,270		$	163,193	$	148,533
Net income (loss)	$	2,175	$	(6,498	)	$	4,080	$	(4,912	)
Basic net income (loss) per share	$	0.04	$	(0.12	)	$	0.08	$	(0.09	)
Diluted net income (loss) per share	$	0.04	$	(0.12	)	$	0.07	$	(0.09	)

4. DEFERRED REVENUE

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

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


	June 30,			December 31,
	2009			2008
	(Unaudited)
Software and implementation fees	$	14,079		$	13,839
Service fees		16,155			14,206
Administrative fees, net		874			1,313
Other fees		36			1,333

Deferred revenue, total		31,144			30,691
Less: Deferred revenue, current portion		(25,546	)		(24,280	)

Deferred revenue, non-current portion	$	5,598		$	6,411

As of June 30, 2009 and December 31, 2008, deferred revenue included in our Condensed Consolidated Balance Sheets that were contingent upon meeting performance targets were $1,989 and $1,174, respectively.

5. NOTES PAYABLE

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


	June 30,			December 31,
	2009			2008
	(Unaudited)
Notes payable — senior	$	241,166		$	245,176
Other		186			450

Total notes payable		241,352			245,626
Less: current portion		(2,685	)		(30,277	)

Total long-term notes payable	$	238,667		$	215,349

Our credit agreement contains certain provisions that require us to pay a portion of our outstanding obligations one quarter subsequent to the end of each fiscal year in the form of an excess cash flow payment on our term loan. The amount is determined based on defined percentages of excess cash flow required in the credit agreement. Our current portion of notes payable does not include an amount with respect to any 2010 excess cash flow payment.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)

We will reclassify a portion of our long-term notes payable to current at such time that any 2010 excess cash flow payment becomes estimable.

Interest paid during the six months ended June 30, 2009 and 2008 was approximately $7,711 and $7,835, respectively. During the six months ended June 30, 2009, we made payments on our notes payable balance which included an annual excess cash flow payment to our lender in accordance with our credit facility amounting to approximately $27,516, scheduled principal payments on our senior term loan of $1,250, and repayments of approximately $268 related to other notes payable. In addition, we had net borrowings on our revolving credit facility of approximately $24,760 during the six months ended June 30, 2009. The applicable weighted average interest rate (inclusive of the applicable bank margin) on our term loan facility, revolving credit facility and swing-line component of our revolving credit facility at June 30, 2009 was 4.35%, 3.61% and 4.75%, respectively. Approximately $24,755 was drawn on our revolving credit facility and approximately $84,245 (after giving effect to $1,000 of outstanding but undrawn letters of credit on such date) of availability existed under the facility as of June 30, 2009.

Future maturities of principal of notes payable as of June 30, 2009 are as follows:


	Amount
	(Unaudited)
2009	$	1,249
2010		2,686
2011		27,254
2012		2,499
2013		207,664
Thereafter		—

Total notes payable	$	241,352

6. COMMITMENTS AND CONTINGENCIES

Performance Targets

In the ordinary course of contracting with our customers, we may agree to make some or all of our fees contingent upon a customer’s achievement of financial improvement targets from the use of our services and software. These contingent fees are not recognized as revenue until a customer confirms achievement of the performance targets. We generally receive written customer acknowledgement as and when the performance targets are achieved. Prior to customer confirmation that a performance target has been achieved, we record invoiced contingent fees as deferred revenue on our condensed consolidated balance sheet. Often, recognition of this revenue occurs in periods subsequent to the recognition of the associated costs. In the event any performance target is not achieved, we may be obligated to refund or reduce a portion of our fees.

Legal Proceedings

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 true status of their relationship with their largest customer. Discovery has been substantially completed, but we currently cannot estimate any probable outcome. The maximum earn-out payable under the Asset Purchase Agreement is $4,000. 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.

As of June 30, 2009, we have not recorded a liability or an asset related to the Med-Data earn-out on our condensed consolidated balance sheet. Other than the Med-Data dispute noted above, as of June 30, 2009, we are not presently involved in any other legal proceedings, the outcome of which, if determined adversely to us, would have a material adverse effect on our business, operating results or financial condition.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)

7. STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

Common Stock

During the six months ended June 30, 2009 and 2008, we issued approximately 931,000 and 151,000 shares of common stock, respectively, in connection with employee stock option exercises for aggregate exercise proceeds of $4,476 and $556, respectively.

During the six months ended June 30, 2009, we issued 20,000 shares of restricted common stock to a former member of our senior advisory board in exchange for advisory services previously rendered. The market value of the common stock on the date of issuance was approximately $354, which has been recorded as non-cash share-based expense in our accompanying condensed consolidated statement of operations for the six months ended June 30, 2009. The restricted shares of common stock vested immediately.

During the six months ended June 30, 2009, approximately 2,700 shares of restricted common stock were forfeited due to the resignation of a member of our Board of Directors (the “Board”).

During the six months ended June 30, 2008, we issued approximately 8,850,000 unregistered shares of our common stock in connection with our acquisition of Accuro. We valued this equity issuance at $14.62 per share, which was computed using the five-day average of our closing share price for the period beginning two days before the April 29, 2008 announcement of the Accuro Acquisition and ending two days after the announcement in accordance with EITF 99-12, Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination.

During the six months ended June 30, 2008, we issued approximately 190,000 unregistered shares of our common stock in connection with a cashless exercise of a warrant.

During the six months ended June 30, 2008, we issued approximately 20,000 shares of our common stock to an unrelated charitable foundation. The market value of the common stock on the date of issuance was approximately $348, which has been recorded as non-cash, non-employee share-based expense in our accompanying condensed consolidated statements of operations for the six months ended June 30, 2008.

During the six months ended June 30, 2008, we issued approximately 5,000 shares of restricted common stock to a member of our senior advisory board in exchange for advisory services. The estimated fair value of the restricted common stock at the date of issuance was approximately $80. The restricted shares of common stock vest ratably over three years.

During the six months ended June 30, 2008, we recorded an approximate $554 reduction to non-cash share-based compensation expense to mark shares of common stock collateralizing certain shareholder notes receivable to market value. These shares were subsequently retired and are no longer outstanding.

Share-Based Compensation

As of June 30, 2009, we had outstanding equity awards under our share-based compensation plans in the form of restricted common stock, common stock options, and stock-settled stock appreciation rights (“SSARs”). The share-based compensation cost related to equity awards that has been charged against income was $4,574 and $2,399 for the three months ended June 30, 2009 and 2008, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements related to equity awards was $1,729 and $916 for the three months ended June 30, 2009 and 2008, respectively.

The share-based compensation cost related to equity awards that has been charged against income was $8,960 and $4,139 for the six months ended June 30, 2009 and 2008, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements related to equity awards was $3,386 and $1,579 for the six months ended June 30, 2009 and 2008, respectively.

There were no capitalized share-based compensation costs at June 30, 2009 or 2008.

As of June 30, 2009, we had approximately 1,981,391 shares reserved under our equity incentive plans available for grant. Total share-based compensation expense (inclusive of restricted common stock, common stock options, and SSARs) for the three and six months ended June 30, 2009 and 2008 is reflected in our condensed consolidated statements of operations as noted below:

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)


	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(Unaudited)
Cost of revenue	$	769	$	457	$	1,629	$	1,105
Product development		296		134		605		256
Selling and marketing		764		511		1,562		988
General and administrative		2,745		1,297		5,164		1,790

Total share-based compensation expense	$	4,574	$	2,399	$	8,960	$	4,139

Management Equity Award Grant

On January 5, 2009, the compensation committee of our Board granted equity awards totaling approximately 3,584,000 underlying shares to certain employees under our Long-Term Performance Incentive Plan. The equity awards are comprised of both restricted common stock and SSARs and are subject to service-based and/or performance-based vesting criteria. The restricted common stock awards have a grant date fair value of $14.74 and the SSARs have a base price of $14.74 which was equal to our closing stock price on the date of grant. The grant date fair market value of the SSARs equity awards was $4.62 as determined using the Black-Scholes valuation model. The following table shows the number of equity awards by type of award granted on January 5, 2009 (unaudited):


	Number of
	Equity
Award Type	Awards

Restricted common stock — service based vesting		340,000
Restricted common stock — performance based vesting		675,000

Restricted common stock awards		1,015,000

SSARs — service based vesting		1,200,000
SSARs — performance based based vesting		1,369,000

SSARs awards		2,569,000

Total management equity awards granted		3,584,000

The compensation committee resolved that the Company’s Cash Earnings per Share growth, or Cash EPS growth, will be used as the performance criteria for the SSARs and restricted common stock awards subject to performance-based vesting. Cash EPS, a non-GAAP measure, is defined as the Company’s fully-diluted net income per share excluding non-cash acquisition-related intangible amortization, non-cash share-based compensation expense and certain board approved non-recurring items on a tax-adjusted basis. The Company’s management team and Board believe the use of Cash EPS as the measure for vesting terms is appropriate as it can be used to analyze the Company’s operating performance on a consistent basis by removing the impact of certain non-cash and non-recurring items from the Company’s operations, and by reflecting organic growth and accretive business transactions. However, as Cash EPS is a non-GAAP measure, it may not be the sole or best measure for investors to gauge the Company’s overall financial performance. The audit committee of the Board will be responsible for validating the calculation of Cash EPS growth over the relevant period.

Performance-Based Equity Awards

Approximately 1,369,000 SSARs are subject to performance-based vesting and vest upon the achievement of a 25% compounded annual growth rate of Cash EPS for the three-year period ending December 31, 2011. None of the performance-based SSARs will vest unless the Company achieves the aforementioned 25% Cash EPS growth rate.

Approximately 675,000 shares of restricted common stock are subject to performance-based vesting criteria and will vest as follows:

•

50% vesting based on achievement of a 15% compounded annual growth rate of Cash EPS for the three-year period ending December 31, 2011

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)

	•		Pro rata vesting of between 50% and 100% based on achievement of a compounded annual growth rate of Cash EPS between 15% and 25% for the three-year period ending December 31, 2011

	•		100% vesting based on achievement of a 25% compounded annual growth rate of Cash EPS for the three-year period ending December 31, 2011

In addition to meeting the performance targets as discussed above, the grantees must be employed by the Company for a full four years through December 31, 2012 in order for the awards that are subject to performance-based vesting criteria to vest.

Share-based compensation expense for performance-based equity awards is recognized on a straight-line basis over the expected vesting term. We evaluate the probability of performance achievement each reporting period and, if necessary, adjust share-based compensation expense based on expected performance achievement.

We have recorded non-cash employee share-based compensation expense related to performance-based SSARs of $374 and $747, respectively, for the three and six months ended June 30, 2009. As of June 30, 2009, there was $5,536 of total unrecognized compensation cost related to the outstanding performance-based SSARs that will be recognized on a straight-line basis over the next 3.5 years.

We have recorded non-cash employee share-based compensation expense related to performance-based restricted common stock of $588 and $1,175, for the three and six months ended June 30, 2009, respectively. As of June 30, 2009, there was $8,706 of total unrecognized compensation cost related to the outstanding performance-based restricted common stock that will be recognized on a straight-line basis over the next 3.5 years.

Service-Based Equity Awards

The remaining equity awards, comprised of approximately 1,200,000 SSARs and approximately 340,000 shares of restricted common stock are solely service-based and vest over a four-year period, of which the restricted common stock awards vest 100% on December 31, 2012 and the SSARs vest 25% annually beginning on December 31, 2009.

Share-based compensation expense for service-based equity awards is recognized on an accelerated basis over the expected vesting term. We have recorded non-cash employee share-based compensation expense related to service-based SSARs of $682 and $1,364 for the three and six months ended June 30, 2009, respectively. As of June 30, 2009, there was $4,100 of total unrecognized compensation cost related to the outstanding service-based SSARs that will be recognized on an accelerated basis over a weighted average period of 1.51 years.

We have recorded non-cash employee share-based compensation expense related to service-based restricted common stock of $616 and $1,233 for the three and six months ended June 30, 2009, respectively. As of June 30, 2009, there was $3,705 of total unrecognized compensation cost related to the outstanding service-based restricted common stock that will be recognized on an accelerated basis over a weighted average period of 1.51 years.

Board Equity Award Grant

On January 15, 2009, the compensation committee granted equity awards totaling approximately 126,500 underlying shares to the members of our Board and senior advisory board under our Long-Term Performance Incentive Plan as compensation for 2009 board service. These grants are part of our standard board compensation plan. The equity awards are comprised of approximately 8,500 shares of restricted common stock and 118,000 SSARs and vest ratably each month through December 31, 2009. The restricted common stock awards have a grant date fair value of $12.98 and the SSARs have a base price of $12.98 which was equal to our closing stock price on the date of grant. The grant date fair market value of the SSARs equity awards was $3.79 as determined using the Black-Scholes valuation model.

We have recorded non-cash share-based compensation expense related to the Board and senior advisory board service-based SSARs of approximately $112 and $223, for the three and six months ended June 30, 2009, respectively, and will recognize an additional $223 over the remainder of 2009. We have recorded non-cash share-based compensation expense related to the Board and senior advisory board service-based restricted common stock of $23 and $50 for the three and six months ended June 30, 2009, respectively, and will

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)

recognize an additional $25 over the remainder of 2009.

In addition, we have recorded non-cash share-based compensation expense related to previously issued restricted common stock to our senior advisory board of approximately $10 and $26 during the three months ended June 30, 2009 and 2008, respectively. We have recorded non-cash share-based compensation expense related to previously issued restricted common stock to our senior advisory board of approximately $26 and $46 during the six months ended June 30, 2009 and 2008, respectively. We will recognize additional non-cash share-based compensation expense of $20, $11 and $2 for the years ended December 31, 2009, 2010, and 2011, respectively, related to restricted common stock issued for advisory services.

Common Stock Option Awards

During the six months ended June 30, 2009 and 2008, we granted service-based stock options for the purchase of approximately 179,000 and 873,000 shares, respectively. The stock options granted during the six months ended June 30, 2009 have a weighted average exercise price of $14.21 and have a service vesting period of five years. The stock options granted during the six months ended June 30, 2008 have a weighted average exercise price of $16.35 and have a service vesting period of five years, with the exception of 41,000 shares vesting ratably over a ten-month period.

The exercise price of all stock options described above was equal to the market price of our common stock on the date of grant (or “common stock grant-date fair value”), and therefore the intrinsic value of each option grant was zero. The common stock grant-date fair value of options granted during the six months ended June 30, 2009 and 2008 represents the market value of our common stock as of the close of market on the date prior to the grant date.

The weighted-average grant-date fair value of each option granted during the six months ended June 30, 2009 and 2008 was $4.63 and $7.13, respectively.

We have recorded non-cash employee share-based compensation expense related to common stock option awards of $1,816 and $2,193 for the three months ended June 30, 2009 and 2008, respectively. We have recorded non-cash employee share-based compensation expense related to common stock option awards of $3,787 and $4,298 for the six months ended June 30, 2009 and 2008, respectively. There was $10,615 of total unrecognized compensation cost related to outstanding stock option awards that will be recognized over a weighted average period of 1.7 years.

A summary of changes in outstanding options during the six months ended June 30, 2009 is as follows (unaudited):


						Weighted
				Weighted		Average
				Average		Remaining
				Exercise		Contractual	Aggregate
	Shares			Price		Term	Intrinsic Value
Options outstanding as of January 1, 2009		7,995,000		$	8.63	7 years	$	50,918
Granted		179,000			14.21
Exercised		(931,000	)		4.81
Forfeited		(107,000	)		12.44

Options outstanding as of June 30, 2009		7,136,000		$	9.21	7 years	$	73,035

Options exercisable as of June 30, 2009		2,675,000		$	7.03	6 years	$	33,221

The total fair value of stock options vested during the six months ended June 30, 2009 and 2008 was $2,679 and $1,432, respectively.

The total intrinsic value of stock options exercised during the six months ended June 30, 2009 and 2008, was $10,535 and $1,929, respectively. Our policy for issuing shares upon stock option exercise is to issue new shares of common stock.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)

The following table summarizes the exercise price range, weighted average exercise price, and remaining contractual lives for the number of stock options outstanding as of June 30, 2009 and 2008 (unaudited):


	June 30,	June 30,
	2009	2008

Range of exercise prices	$0.63 - $17.86	$0.63 - $17.86
Number of options outstanding	7,136,000	7,502,000
Weighted average exercise price	$9.21	$7.63
Weighted average remaining contractual life	7.1 years	8.0 years

Equity Award Valuation

Under the provisions of SFAS No. 123(R), Share Based Compensation (or “SFAS No. 123(R)”), we calculate the grant-date estimated fair value of share-based awards using a Black-Scholes valuation model. Determining the estimated fair value of share-based awards is judgmental in nature and involves the use of significant estimates and assumptions, including the expected term of the share-based awards, risk-free interest rates over the vesting period, expected dividend rates, the price volatility of the Company’s shares and forfeiture rates of the awards. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and adjusted, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The forfeiture rate is estimated based on historical experience. We base fair value estimates on assumptions we believe to be reasonable but that are inherently uncertain. Actual future results may differ from those estimates.

The fair value of each option grant has been estimated as of the date of grant using the Black-Scholes option-pricing model with the following assumptions for the six months ended June 30, 2009 and 2008 (unaudited):


	Six Months Ended	Six Months Ended
	June 30, 2009	June 30, 2008

Range of calculated volatility	33.35% - 34.73%	32.16% - 35.31%
Dividend yield	0%	0%
Range of risk free interest rate	1.36% - 1.98%	3.00% - 3.56%
Range of expected term	4.0 - 5.0 years	5.4 - 6.5 years

It is not practicable for us to estimate the expected volatility of our share price given our limited history as a public company. In accordance with SFAS No. 123(R), we have estimated grant-date fair value of our shares using 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 its 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.

8. INCOME TAXES

Income tax expense recorded during the six months ended June 30, 2009 and 2008, reflected an effective income tax rate of 38.8% and 38.2%, respectively. During the three months ended June 30, 2009, we recorded estimated research and development tax credits related to our 2007 and 2008 tax years that had an approximate 9.7% favorable impact on our effective tax rate for the six months ended June 30, 2009. In addition, we recorded adjustments to reconcile our 2008 income tax provision to our 2008 income tax return which had an approximate 8.1% unfavorable impact on our effective tax rate for the six months ended June 30, 2009. The June 30, 2009 effective tax rate also included the recording of additional state tax liabilities related to our expansion into certain states with higher statutory rates, partially due to the Accuro Acquisition.

9. INCOME PER SHARE

We calculate earnings per share (or “EPS”) in accordance with the provisions of SFAS No. 128, Earnings Per Share. Basic EPS is

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)

calculated by dividing reported net income available to common shareholders by the weighted-average number of common shares outstanding for the reporting periods. Diluted EPS reflects the potential dilution that could occur if our stock options, stock warrants, SSARs and unvested restricted stock were included in our common shares outstanding during the reporting periods.


	Three Months Ended June 30,
	2009		2008
	(Unaudited)
Numerator for Basic and Diluted Income (Loss) Per Share:
Net income (loss)	$	2,175	$	(1,576	)
Denominator for basic income (loss) per share weighted average shares		54,527,000		47,288,000
Effect of dilutive securities:
Stock options		2,181,000		—
Stock settled stock appreciation rights		12,000
Restricted stock and stock warrants		248,000		—

Denominator for diluted income (loss) per share — adjusted weighted average shares and assumed conversions		56,968,000		47,288,000
Basic income (loss) per share:
Basic net income (loss) per common share	$	0.04	$	(0.03	)

Diluted net income (loss) per share:
Diluted net income (loss) per common share	$	0.04	$	(0.03	)


	Six Months Ended June 30,
	2009		2008
	(Unaudited)
Numerator for Basic and Diluted Income Per Share:
Net income	$	4,080	$	1,123
Denominator for basic income per share weighted average shares		54,316,000		45,853,000
Effect of dilutive securities:
Stock options		2,157,000		2,596,000
Stock settled stock appreciation rights		8,000		—
Restricted stock and stock warrants		218,000		36,000

Denominator for diluted income per share — adjusted weighted average shares and assumed conversions		56,699,000		48,485,000
Basic income per share:
Basic net income per common share	$	0.08	$	0.02

Diluted net income per share:
Diluted net income per common share	$	0.07	$	0.02

The effect of diluted securities has been excluded for the three months ended June 30, 2008 because the effect is anti-dilutive as a result of the net loss during the period. The effect of certain dilutive securities has been excluded for the three and six months ended June 30, 2009 because the effect of the potentially dilutive securities is anti-dilutive as a result of the securities being out of the money. The following table provides a summary of those potentially dilutive securities that have been excluded from the calculation of basic and diluted EPS:

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)


	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
	(Unaudited)
Stock options		89,000		2,450,000		177,000		—
Stock settled stock appreciation rights		144,000		—		257,000		—
Restricted stock and stock warrants		—		36,000		—		—

Total potentially dilutive securities		233,000		2,486,000		434,000		—

10. SEGMENT INFORMATION

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

	•		Revenue Cycle Management. Our Revenue Cycle Management segment provides a comprehensive suite of software and services spanning the hospital 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 increase regulatory compliance.

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

SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information (or “SFAS No. 131”), defines reportable segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing financial performance. SFAS No. 131 indicates that financial information about segments should be reported on the same basis as that which is used by the chief operating decision maker in the analysis of performance and allocation of resources.

Management of the Company, including our chief operating decision maker, uses what we refer to as Segment Adjusted EBITDA as its primary measure of profit or loss to assess segment performance and to determine the allocation of resources. We define Segment Adjusted EBITDA as segment net income (loss) before net interest expense, income tax expense (benefit), depreciation and amortization (“EBITDA”) as adjusted for other non-recurring, non-cash or non-operating items. Our chief operating decision maker uses Segment Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period to period. Segment Adjusted EBITDA includes expenses associated with sales and marketing, general and administrative and product development activities specific to the operation of the segment. General and administrative corporate expenses that are not specific to the segments, are not included in the calculation of Segment Adjusted EBITDA. All reportable segment revenues are presented net of inter-segment eliminations and represent revenues from external customers.

The following tables present Segment Adjusted EBITDA and financial position information as utilized by our chief operating decision maker. A reconciliation of Segment Adjusted EBITDA to consolidated net income is included. General corporate expenses are included in the “Corporate” column. Other assets and liabilities are included to provide a reconciliation to total assets and total liabilities.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)


	Three Months Ended June 30, 2009
	RCM			SM			Corporate			Total
	(Unaudited, in thousands)
Results of Operations:
Revenue:
Gross administrative fees(1)	$	—		$	39,344		$	—		$	39,344
Revenue share obligation(1)		—			(13,966	)		—			(13,966	)
Other service fees		50,770			8,061			—			58,831

Total net revenue		50,770			33,439			—			84,209
Total operating expenses		46,615			21,742			7,567			75,924

Operating income (loss)		4,155			11,697			(7,567	)		8,285
Interest (expense)		—			—			(4,763	)		(4,763	)
Other income (expense)		(181	)		33			115			(33	)

Income (loss) before income taxes	$	3,974		$	11,730		$	(12,215	)	$	3,489
Income tax (benefit)		1,522			4,381			(4,589	)		1,314

Net income (loss)		2,452			7,349			(7,626	)		2,175

Segment Adjusted EBITDA	$	14,495		$	14,173		$	(5,154	)	$	23,514


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


	As of June 30, 2009
	RCM		SM		Corporate			Total
	(Unaudited, in thousands)
Financial Position:
Accounts receivable, net	$	42,234	$	33,917	$	(19,879	)	$	56,272
Other assets		572,502		95,606		42,155			710,263

Total assets		614,736		129,523		22,276			766,535
Accrued revenue share obligation		—		30,607		—			30,607
Deferred revenue		27,878		3,266		—			31,144
Other liabilities		33,029		28,506		238,998			300,533

Total liabilities	$	60,907	$	62,379	$	238,998		$	362,284


	Three Months Ended June 30, 2008
	RCM			SM			Corporate			Total
	(Unaudited, in thousands)
Results of Operations:
Revenue:
Gross administrative fees(1)	$	—		$	37,879		$	—		$	37,879
Revenue share obligation(1)		—			(12,731	)		—			(12,731	)
Other service fees		31,320			4,767			—			36,087

Total net revenue		31,320			29,915			—			61,235
Total operating expenses		32,750			17,173			5,579			55,502

Operating (loss) income		(1,430	)		12,742			(5,579	)		5,733
Interest (expense)		(3	)		—			(4,997	)		(5,000	)
Other income (expense)		15			(25	)		(3,352	)		(3,362	)

Income (loss) before income taxes	$	(1,418	)	$	12,717		$	(13,928	)	$	(2,629	)
Income tax (benefit)		(734	)		5,283			(5,602	)		(1,053	)

Net income (loss)		(684	)		7,434			(8,326	)		(1,576	)

Segment Adjusted EBITDA	$	7,799		$	15,313		$	(4,075	)	$	19,037


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

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)


	Six Months Ended June 30, 2009
	RCM			SM			Corporate			Total
	(Unaudited, in thousands)
Results of Operations:
Revenue:
Gross administrative fees(1)	$	—		$	80,276		$	—		$	80,276
Revenue share obligation(1)		—			(27,412	)		—			(27,412	)
Other service fees		97,790			12,539			—			110,329

Total net revenue		97,790			65,403			—			163,193
Total operating expenses		92,138			39,943			14,874			146,955

Operating income (loss)		5,652			25,460			(14,874	)		16,238
Interest (expense)		(1	)		—			(9,755	)		(9,756	)
Other income (expense)		(145	)		85			241			181

Income (loss) before income taxes	$	5,506		$	25,545		$	(24,388	)	$	6,663
Income tax (benefit)		2,134			9,904			(9,455	)		2,583

Net income (loss)		3,372			15,641			(14,933	)		4,080

Segment Adjusted EBITDA	$	26,821		$	30,425		$	(10,403	)	$	46,843


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


	Six Months Ended June 30, 2008
	RCM			SM			Corporate			Total
	(Unaudited, in thousands)
Results of Operations:
Revenue:
Gross administrative fees(1)	$	—		$	77,766		$	—		$	77,766
Revenue share obligation(1)		—			(25,073	)		—			(25,073	)
Other service fees		56,426			10,874			—			67,300

Total net revenue		56,426			63,567			—			119,993
Total operating expenses		59,001			37,072			10,458			106,531

Operating (loss) income		(2,575	)		26,495			(10,458	)		13,462
Interest (expense)		(3	)		—			(9,314	)		(9,317	)
Other income (expense)		29			(33	)		(2,325	)		(2,329	)

Income (loss) before income taxes	$	(2,549	)	$	26,462		$	(22,097	)	$	1,816
Income tax (benefit)		(973	)		9,608			(7,942	)		693

Net income (loss)		(1,576	)		16,854			(14,155	)		1,123

Segment Adjusted EBITDA	$	12,041		$	31,340		$	(8,314	)	$	35,067


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

SFAS No. 131 requires that the total of the reportable segments’ measures of profit or loss be reconciled to the Company’s consolidated operating results. The following table reconciles Segment Adjusted EBITDA to consolidated net income for each of the three and six months ended June 30, 2009 and 2008:

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(Unaudited, in thousands)						(Unaudited, in thousands)
RCM Adjusted EBITDA	$	14,495		$	7,799		$	26,821		$	12,041
SM Adjusted EBITDA		14,173			15,313			30,425			31,340

Total reportable Segment Adjusted EBITDA		28,668			23,112			57,246			43,381
Depreciation		(2,465	)		(1,943	)		(4,903	)		(3,675	)
Amortization of intangibles		(7,000	)		(5,016	)		(14,011	)		(8,793	)
Amortization of intangibles (included in cost of revenue)		(802	)		(371	)		(1,590	)		(762	)
Interest expense, net of interest income(1)		3			(3	)		12			2
Income tax		(5,903	)		(4,549	)		(12,038	)		(8,635	)
Impairment of intangibles(2)		—			(1,916	)		—			(1,916	)
Share-based compensation expense(3)		(2,685	)		(1,462	)		(5,499	)		(2,965	)
Accuro & XactiMed purchase accounting adjustments(4)		(15	)		(1,102	)		(204	)		(1,359	)

Total reportable segment net income		9,801			6,750			19,013			15,278
Corporate net (loss)		(7,626	)		(8,326	)		(14,933	)		(14,155	)

Consolidated net income (loss)	$	2,175		$	(1,576	)	$	4,080		$	1,123


(1)		Interest income is included in other income (expense) and is not netted against interest expense in our condensed consolidated statement of operations.

(2)		Impairment of intangibles during the three and six months ended June 30, 2008 primarily related to acquired developed technology from prior acquisitions, revenue cycle management tradename and internally developed software products, primarily because of the acquired Accuro products.

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

(4)		These adjustments include the effect on revenue of adjusting acquired deferred revenue balances, net of any reduction in associated deferred costs, to fair value as of the respective acquisition dates for Accuro and XactiMed, Inc. (or “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.

11. DERIVATIVE FINANCIAL INSTRUMENTS

Effective January 1, 2009, we adopted SFAS No. 161 which was issued in March 2008. SFAS No. 161 requires companies to provide enhanced qualitative and quantitative disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (or “SFAS No. 133”). As of June 30, 2009, we had an interest rate swap, an interest rate collar and a par forward contract as described below. These derivatives were highly effective and, as a result, we did not record any gain or loss from ineffectiveness in our condensed consolidated statements of operations for the three or six months ended June 30, 2009.

Interest rate swap

On May 21, 2009, we entered into a London Inter-bank Offered Rate (or “LIBOR”) interest rate swap with a notional amount of $138,276 beginning June 30, 2010, which effectively converts a portion of our variable rate term loan credit facility to a fixed rate debt. The notional amount subject to the swap has pre-set quarterly step downs corresponding to our anticipated principal reduction schedule. The interest rate swap converts the three-month LIBOR rate on the corresponding notional amount of debt to an effective fixed rate of 1.99% (exclusive of the applicable bank margin charged by our lender). The interest rate swap terminates on March 31, 2012 and qualifies as a highly effective cash flow hedge under SFAS No. 133.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)

As such, the fair value of the derivative will be recorded in our condensed consolidated balance sheet. The interest rate swap matures on March 31, 2012. As of June 30, 2009, the interest rate swap had a market value of $426 ($265 net of tax). The asset is included in other long-term assets in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2009. The unrealized gain (loss) is recorded in other comprehensive income, net of tax, in the accompanying condensed consolidated statement of stockholders’ equity. If we assess any portion of our instruments to be ineffective, we will reclassify the ineffective portion to current period earnings or loss accordingly.

We determined the fair values of the swap using Level 2 inputs as defined under SFAS No. 157 because our valuation techniques included inputs that are considered significantly observable in the market, either directly or indirectly. Our valuation technique assessed the swap by comparing each fixed interest payment, or cash flow, to a hypothetical cash flow utilizing an observable market 3-month floating LIBOR rate as of June 30, 2009. Future hypothetical cash flows utilize projected market-based LIBOR rates. Each fixed cash flow and hypothetical cash flow is then discounted to present value utilizing a market observable discount factor for each cash flow. The discount factor fluctuates based on the timing of each future cash flow. The fair value of the swap represents a cumulative total of the differences between the discounted cash flows that are fixed from those that are hypothetical using floating rates.

We considered the credit worthiness of the counterparty of the hedged instrument. Given the current situation in the credit markets and specific challenges related to financial institutions, the Company continues to believe that the size, international presence and US government cash infusion, and track record of the counterparty will allow them to perform under the obligations of the contract and are not a risk of default that would change the highly effective status of the hedged instruments.

Interest rate collar

On June 24, 2008, we entered into an interest rate collar to hedge our interest rate exposure on a notional $155,000 of our outstanding term loan credit facility. The collar sets a maximum interest rate of 6.00% and a minimum interest rate of 2.85% on LIBOR applicable to a $155,000 notional term loan debt. This collar effectively limits our LIBOR interest exposure on this portion of our term loan debt to within that range (2.85% to 6.00%). The collar also does not hedge the applicable margin payable to our lenders on our indebtedness. Settlement payments are made between the hedge counterparty and us on a quarterly basis, coinciding with our term loan installment payment dates, for any rate overage on the maximum rate and any rate deficiency on the minimum rate on the notional amount outstanding. The collar terminates on September 30, 2010 and no consideration was exchanged with the counterparty to enter into the hedging arrangement.

The collar is a highly effective cash flow hedge under SFAS 133, as the payment and interest rate terms of the instrument coincide with that of our term loan and the instrument was designed to perfectly hedge our variable cash flow risk. Accordingly, as of June 30, 2009, we recorded the fair value of the collar on our balance sheet as a liability of approximately $3,129 ($1,946 net of tax) in other long-term liabilities, and the offsetting loss was recorded in accumulated other comprehensive loss, net of tax, in our stockholders’ equity. If we assess any portion of this to be ineffective, we will reclassify the ineffective portion to current period earnings or loss accordingly.

We determined the fair values of the collar using Level 2 inputs as defined under SFAS 157 because our valuation technique included inputs that are considered significantly observable in the market, either directly or indirectly. Our valuation technique assesses the present value of future expected cash flows using a market observable discount factor that is based on a 3-month LIBOR yield curve adjusted for interest rate volatility. The assumptions utilized to assess volatility are also observable in the market.

We considered the credit worthiness of the counterparty of our hedged instrument. The Company believes that given the size of the hedged instrument and the likelihood that the counterparty would have to perform under the contract (i.e. LIBOR goes above 6.00%) mitigates any potential credit risk and risk of non-performance under the contract. In addition, the Company understands the counterparty has been acquired by a much larger financial institution. We believe that the creditworthiness of buyer mitigates risk and would allow the counterparty to be able to perform under the terms of the contract.

Par forward contracts

We have a series of par forward contracts to lock in the rate of exchange in U.S. dollar terms at a specific par forward exchange rate of Canadian dollars to one U.S. dollar, with respect to one specific Canadian customer contract. This three-year customer contract extends through April 30, 2010. The hedged instruments are classified as cash flow hedges and are designed to be highly effective at minimizing exchange risk on the contract. We designated this hedge as effective and recorded the fair value of this instrument as an asset of approximately $123 ($76 net of tax) in other long-term assets as of June 30, 2009. The offsetting unrealized gain is recorded as

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)

accumulated other comprehensive income, net of tax, in our stockholders’ equity as of June 30, 2009. If we assess any material portion of this to be ineffective, we will reclassify that ineffective portion to current period earnings or loss accordingly.

We determined the fair values of the par forward contracts using Level 2 inputs as defined under SFAS 157 because our valuation techniques included inputs that are considered significantly observable in the market, either directly or indirectly. However, these instruments are not traded in active markets, thus they are not valued using Level 1 inputs. Our valuation technique assessed the par forward contract by comparing each fixed cash flow to a hypothetical cash flow utilizing an observable market spot exchange rate as of June 30, 2009, and then discounting each of those cash flows to present value utilizing a market observable discount factor for each cash flow. The discount factor fluctuates based on the timing of each future cash flow. The fair value represents a cumulative total of each par forward contract calculated fair value.

We considered the credit worthiness of the counterparty of the hedged instrument. Given the current situation in the credit markets and specific challenges related to financial institutions, the Company continues to believe that the underlying size, international presence and US government cash infusion, and track record of the counterparty will allow them to perform under the obligations of the contract and are not a risk of default that would change the highly effective status of the hedged instruments.

Interest rate swap termination

On June 24, 2008, we terminated two floating-to-fixed rate LIBOR-based interest rate swaps, originally entered into in November 2006 and July 2007. The swaps were originally set to fully terminate by July 2010. Such early termination with the counterparty was deemed to be a termination of all future obligations between us and the counterparty. In consideration of the early termination, we paid $3,914 to the counterparty on June 26, 2008 plus $903 of accrued interest during the three months ended June 30, 2008. Prior to the termination, the fair values of the swaps were recorded in other long-term liabilities and accumulated other comprehensive loss on our balance sheet. The termination of the swaps resulted in the payment of such liability and the reclassification of the related accumulated other comprehensive loss to current period expense. The result was a charge to expense for the three and six months ending June 30, 2008 of $3,914. We have no assets or liabilities remaining on our condensed consolidated balance sheet with respect to these interest rate swaps as of June 30, 2008.

A summary of fair values of our derivatives as of June 30, 2009 is as follows:

Asset Derivatives

Liability Derivatives

June 30,

2009

Derivatives designated as hedging instruments under

Balance Sheet

Statement 133

Location

Fair Value

Location

Fair Value

(Unaudited)

Interest rate contracts

426

Other long term liabilities

3,129

Foreign exchange contracts

Other long term assets

123

—

Total derivatives designated as hedging instruments under Statement 133

549

3,129

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)

The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
for the Three Month Period Ended June 30, 2009


	Amount of Gain or (Loss)			Location of Gain or (Loss)	Amount of Gain or (Loss)
	Recognized in OCI on			Reclassified from	Reclassified from
Derivatives in Statement 133	Derivative (Effective			Accumulated OCI into	Accumulated OCI into
Cash Flow Hedging	Portion)			Income	Income (Effective Portion)
Relationships	2009			(Effective Portion)	2009
(Unaudited)
Interest rate contracts	$	337		n/a	$	—
Foreign exchange contracts		(99	)	n/a		—


Total gain recognized in other comprehensive income	$	238			$	—

The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
for the Six Month Period Ended June 30, 2009


	Amount of Gain or (Loss)			Location of Gain or (Loss)	Amount of Gain or (Loss)
	Recognized in OCI on			Reclassified from	Reclassified from
Derivatives in Statement 133	Derivative (Effective			Accumulated OCI into	Accumulated OCI into
Cash Flow Hedging	Portion)			Income	Income (Effective Portion)
Relationships	2009			(Effective Portion)	2009
(Unaudited)
Interest rate contracts	$	598		n/a	$	—
Foreign exchange contracts		(115	)	n/a		—


Total gain recognized in other comprehensive income	$	483			$	—

12. FAIR VALUE MEASUREMENTS

We measure fair value for financial instruments, such as derivatives and non-financial assets, when a valuation is necessary, such as for impairment of long-lived and indefinite-lived assets when indicators of impairment exist in accordance with SFAS No. 157, Fair Value Measurements (or “SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. We adopted the provisions of SFAS No. 157 for financial instruments effective January 1, 2008 and for non-financial assets effective January 1, 2009.

Refer to Note 11 for information and fair values of our derivative instruments measured on a recurring basis under SFAS No. 157.

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

	•		Cash and cash equivalents. The carrying value reported in the condensed consolidated balance sheets for these items approximates fair value due to the high credit standing of the financial institutions holding these items and their liquid nature;

	•		Accounts receivable, net. The carrying value reported in the condensed consolidated balance sheets is net of allowances for doubtful accounts which includes a degree of counterparty non-performance risk;

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(continued)

(In thousands, except share and per share amounts)

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

	•		Finance obligation. The carrying value of our finance obligation reported in the condensed consolidated balance sheets approximates fair value based on current interest rates which contain an element of default risk; and,

	•		Notes payable. The carrying value of our long-term notes payable reported in the condensed consolidated balance sheets approximates fair value since they bear interest at variable rates or fixed rates which contain an element of default risk. Refer to Note 5.

13. RELATED PARTY TRANSACTION

In 2009, we entered into an agreement with John Bardis, our chief executive officer, for the use of an airplane owned by JJB Aviation, LLC (“JJB”), a limited liability company owned by Mr. Bardis. We pay Mr. Bardis at market-based rates for the use of the airplane for business purposes. The audit committee of the Board reviews such usage of the airplane annually. During the six months ended June 30, 2009 and 2008, we incurred charges of $695 and $205, respectively, related to transactions with Mr. Bardis.

14. SUBSEQUENT EVENTS

We have evaluated subsequent events through the filing of this Form 10-Q on August 10, 2009, and determined there have not been any events that have occurred that would require adjustments to our unaudited Condensed Consolidated Financial Statements.

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

NOTE ON FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” (as defined in Section 27A of the U.S. Securities Act of 1933, as amended, 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 Quarterly Report on Form 10-Q, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements reflect our current beliefs and expectations and are based on information currently available to us. As such, no assurance can be given that our future growth, results of operations, performance and business prospects and opportunities covered by such forward-looking statements will be achieved. We have no intention or obligation to update or revise these forward-looking statements to reflect new events, information or circumstances.

A number of important factors could cause our actual results to differ materially from those indicated by such forward-looking statements, including those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as filed with the SEC on March 12, 2009.

Overview

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.

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 cash diluted earnings per share (“Cash EPS”).

For the three and six months ended June 30, 2009 and 2008, our primary results of operations included the following (unaudited):


	Three Months Ended												Six Months Ended
	June 30,						Change						June 30,						Change
	2009			2008			Amount			%			2009			2008			Amount			%
	(In millions)												(In millions)
Gross fees(1)	$	98.2		$	73.9		$	24.3			32.9	%	$	190.6		$	145.1		$	45.5			31.4	%
Revenue share obligation(1)		(14.0	)		(12.7	)		(1.3	)		10.2			(27.4	)		(25.1	)		(2.3	)		9.2

Total net revenue		84.2			61.2			23.0			37.6			163.2			120.0			43.2			36.0
Operating income		8.3			5.7			2.6			45.6			16.2			13.5			2.7			20.0
Net income (loss)	$	2.2		$	(1.6	)	$	3.8			-237.5	%	$	4.1		$	1.1		$	3.0			272.7	%
Adjusted EBITDA(1)	$	23.5		$	19.0		$	4.5			23.7	%	$	46.8		$	35.1		$	11.7			33.3	%
Adjusted EBITDA Margin(1)		27.9	%		31.0	%								28.7	%		29.3	%
Cash EPS (1)	$	0.17		$	0.15		$	0.02			13.3	%	$	0.32		$	0.27		$	0.05			18.5	%


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

For the three and six months ended June 30, 2009, increases in non-GAAP gross fees and total net revenue compared to the same periods ending June 30, 2008 were primarily attributable to:

	•		the acquisition of Accuro Healthcare Solutions, Inc. (collectively with its subsidiaries, “Accuro”), which was acquired on June 2, 2008 (the “Accuro Acquisition”);

	•		organic growth in our Revenue Cycle Management segment exclusive of Accuro due to increased demand for our reimbursement technologies, revenue cycle services and decision support software; and,

•

organic growth in our Spend Management segment due to increased demand for our consulting and data analysis services.

Increases in operating income and Cash EPS for the three and six months ended June 30, 2009 compared to the same periods ending June 30, 2008 were primarily attributable to the net revenue increase discussed above partially offset by the following:

	•		increased amortization of acquired intangibles;

	•		increased cost of revenue attributable to a higher percentage of net revenue being derived from the Revenue Cycle Management segment as compared to the Spend Management segment; and

	•		higher general and administrative costs associated with expanded infrastructure and increased personnel.

For the three and six months ended June 30, 2009, increases in non-GAAP Adjusted EBITDA compared to the same periods ending June 30, 2008 were primarily attributable to the net revenue increase discussed above offset primarily by increased cost of revenue from segment revenue and product mix and increased corporate expenses excluding interest, income taxes, depreciation and amortization, and other non-recurring or non-cash expenses.

The non-GAAP Adjusted EBITDA Margin decreased during the three and six months ended June 30, 2009 primarily because of increased negative margins associated with our annual customer and vendor meeting, revenue and margin shift to our RCM segment and unfavorable timing of recognized contingency-based revenue compared to the prior period in our SM segment.

Recent Developments

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

Long-Term Performance Incentive Plan

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 new Long-Term Performance Incentive Plan. See Note 7 of the Notes to our Condensed Consolidated Financial Statements herein for further information.

Segment Structure and Revenue Streams

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

Revenue Cycle Management

Our Revenue Cycle Management segment provides a comprehensive suite of software and 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 consists of the following components:

	•		Subscription and implementation fees. We earn fixed subscription fees on a monthly or annual basis on multi-year contracts for customer access to our 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.

	•		Software-related fees. We earn license, consulting, 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 arrangements and cost-plus arrangements. The related revenues are earned when services are rendered.

Spend Management

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

	•		Other service fees. The following items are included as other service fees in our Condensed Consolidated Statements 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.

Operating Expenses

We classify our operating expenses as follows:

•

Cost of revenue. Cost of revenue primarily consists of the direct labor costs incurred to generate our revenue. Direct labor costs consist primarily of salaries, benefits, and other direct costs and share-based compensation expenses related to personnel who provide services to implement our solutions for our customers. 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 derives from 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, but 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 reclassifications primarily between cost of revenue and operating expense classifications resulting from the implementation of our accounting policies that could affect period over period comparability.

	•		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.

	•		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 intangible assets (with the exception of software), primarily resulting from acquisitions.

Results of Operations

Consolidated Tables

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(Unaudited, in thousands)
Net revenue:
Revenue Cycle Management	$	50,770		$	31,320		$	97,790		$	56,426
Spend Management
Gross administrative fees(1)		39,344			37,879			80,276			77,766
Revenue share obligation(1)		(13,966	)		(12,731	)		(27,412	)		(25,073	)
Other service fees		8,061			4,767			12,539			10,874

Total Spend Management		33,439			29,915			65,403			63,567

Total net revenue		84,209			61,235			163,193			119,993
Operating expenses:
Revenue Cycle Management		46,615			32,750			92,138			59,001
Spend Management		21,742			17,173			39,943			37,072

Total segment operating expenses		68,357			49,923			132,081			96,073
Operating income (loss)
Revenue Cycle Management		4,155			(1,430	)		5,652			(2,575	)
Spend Management		11,697			12,742			25,460			26,495

Total segment operating income		15,852			11,312			31,112			23,920
Corporate expenses(2)		7,567			5,579			14,874			10,458

Operating income		8,285			5,733			16,238			13,462
Other income (expense):
Interest expense		(4,763	)		(5,000	)		(9,756	)		(9,317	)
Other income (expense)		(33	)		(3,362	)		181			(2,329	)

Income (loss) before income taxes		3,489			(2,629	)		6,663			1,816
Income tax expense (benefit)		1,314			(1,053	)		2,583			693

Net income (loss)		2,175			(1,576	)		4,080			1,123
Reportable segment adjusted EBITDA(3):
Revenue Cycle Management		14,495			7,799			26,821			12,041
Spend Management	$	14,173		$	15,313		$	30,425		$	31,340
Reportable segment adjusted EBITDA margin(4):
Revenue Cycle Management		28.6	%		24.9	%		27.4	%		21.3	%
Spend Management		42.4	%		51.2	%		46.5	%		49.3	%


(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.

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

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

Comparison of the Three Months Ended June 30, 2009 and June 30, 2008


	Three Months Ended June 30,
	2009						2008						Change
				% of						% of
	Amount			Revenue			Amount			Revenue			Amount			%
	(Unaudited, in thousands)
Net revenue:
Revenue Cycle Management	$	50,770			60.3	%	$	31,320			51.1	%	$	19,450			62.1	%
Spend Management
Gross administrative fees(1)		39,344			46.7			37,879			61.9			1,465			3.9
Revenue share obligation(1)		(13,966	)		(16.6	)		(12,731	)		(20.8	)		(1,235	)		9.7
Other service fees		8,061			9.6			4,767			7.8			3,294			69.1

Total Spend Management		33,439			39.7			29,915			48.9			3,524			11.8

Total net revenue	$	84,209			100.0	%	$	61,235			100.0	%	$	22,974			37.5	%


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

Total net revenue. Total net revenue for the three months ended June 30, 2009 was $84.2 million, an increase of $23.0 million, or 37.5%, from total net revenue of $61.2 million for the three months ended June 30, 2008. The increase in total net revenue was comprised of a $19.5 million increase in Revenue Cycle Management revenue and an increase of $3.5 million in Spend Management revenue.

Revenue Cycle Management net revenue. Revenue Cycle Management net revenue for the three months ended June 30, 2009 was $50.8 million, an increase of $19.5 million, or 62.1%, from net revenue of $31.3 million for the three months ended June 30, 2008. The increase resulted from both acquisition and non-acquisition sources as described below:

	•		Acquisition related revenue. The operating results of Accuro were included in our three months ended June 30, 2009 and were only included in the comparable prior period for approximately one month from the date of the Accuro Acquisition on June 2, 2008. $13.3 million of the net revenue increase resulted from revenue attributable to Accuro.

			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 three months ended June 30, 2009 was $50.8 million, an increase of $7.4 million, or 17.1%, from Revenue Cycle Management non-GAAP acquisition-affected net revenue of $43.4 million for the three months ended June 30, 2008. The following table sets forth the reconciliation of Revenue Cycle Management non-GAAP acquisition-affected net revenue to GAAP net revenue:


	Three Months Ended June 30,
	2009		2008		Change
	Amount		Amount		Amount			%
	(Unaudited, in thousands)
Revenue Cycle Management net revenue		$50,770		$31,320		$19,450			62.1	%
Acquisition related RCM adjustments(1)		—		12,035		(12,035	)		(100.0	)

Total RCM acquisition-affected net revenue(1)		$50,770		$43,355		$7,415			17.1	%


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

•

Non-acquisition related revenue. The increase in net revenue from non-acquisition related products and services was $6.2 million, or 23.5%. The increase was primarily attributable to a $2.6 million increase in revenue from our revenue cycle services; a $1.9 million increase in revenue from our claims and denial management tools; and a $1.4 million increase in revenue from our decision support software.

Spend Management net revenue. Spend Management net revenue for the three months ended June 30, 2009 was $33.4 million, an increase of $3.5 million, or 11.8%, from net revenue of $29.9 million for the three months ended June 30, 2008. The increase was primarily the result of a $1.4 million increase in administrative fees; and a $3.3 million increase in other service fees, offset by a $1.2 million increase

in revenue share obligations, as described below:

	•		Gross administrative fees. Non-GAAP gross administrative fee revenue increased by $1.4 million, or 3.9%, as compared to the prior period, primarily due to higher purchasing volumes by existing customers and the addition of new customers under our group purchasing organization contracts with our manufacturer and distributor vendors. The net increase in non-GAAP gross administrative fee revenue was comprised of a $1.8 million, or 4.9% increase, in non-GAAP gross administrative fee revenue not associated with performance targets. This increase was partially offset by a $0.4 million decrease in contingent revenue which is recognized upon confirmation from certain customers that respective performance targets had been achieved. We may have fluctuations in our non-GAAP gross administrative fee revenue in future quarters as the timing of vendor reporting and customer acknowledgement of achieved performance targets varies and may not result in discernable trends. In addition, a decrease in customer patient volume, supply utilization, the impact of continued hospital budget challenges and the current economic environment may negatively impact non-GAAP gross administrative fee revenue in the future.

	•		Revenue share obligation. Non-GAAP revenue share obligation increased $1.2 million, or 9.7%, 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 ratio of non-GAAP revenue share obligation to non-GAAP gross administrative fees (or the “revenue share ratio”). The revenue share ratio for the three months ended June 30, 2009 was 35.5% as compared to 33.6% for the three months ended June 30, 2008. The increase in our revenue share ratio was primarily the result of changes in revenue mix to larger customers during the period. Larger customers who commit to higher levels of purchasing volume through our group purchasing organization contracts typically receive higher non-GAAP revenue share obligation percentages. We may also experience fluctuations in our revenue share ratio because of changes in the timing of vendor reporting and the timing of revenue recognition based on performance target achievement for certain customers.

	•		Other service fees. The $3.3 million or 69.1% increase in other service fees primarily related to revenue from our annual customer and vendor meeting of $3.0 million recognized during the quarter as compared to $2.9 million of revenue that was recognized in the three months ended March 31, 2008. The remaining increase was attributable to our supply chain consulting growth, which was due to an increase in the number of consulting engagements from new and existing customers partially offset by a $0.5 million decrease in contingent revenue that was recognized upon confirmation from certain customers that respective performance targets had been achieved.

Total Operating Expenses


	Three Months Ended June 30,
	2009					2008					Change
			% of					% of
	Amount		Revenue			Amount		Revenue			Amount			%
	(Unaudited, in thousands)
Operating expenses:
Cost of revenue	$	17,613		20.9	%	$	10,688		17.5	%	$	6,925			64.8	%
Product development expenses		5,250		6.2			3,611		5.9			1,639			45.4
Selling and marketing expenses		15,595		18.5			9,544		15.6			6,051			63.4
General and administrative expenses		27,481		32.6			22,215		36.3			5,266			23.7
Depreciation		2,985		3.5			2,349		3.8			636			27.1
Amortization of intangibles		7,000		8.3			5,016		8.2			1,984			39.6
Impairment of intangibles		—		0.0			2,079		3.4			(2,079	)		(100.0	)

Total operating expenses		75,924		90.2			55,502		90.6			20,422			36.8

Operating expenses by segment:
Revenue Cycle Management		46,615		55.4			32,750		53.5			13,865			42.3
Spend Management		21,742		25.8			17,173		28.0			4,569			26.6


Total segment operating expenses		68,357		81.2			49,923		81.5			18,434			36.9
Corporate expenses		7,567		9.0			5,579		9.1			1,988			35.6


Total operating expenses	$	75,924		90.2	%	$	55,502		90.6	%	$	20,422			36.8	%

Cost of revenue. Cost of revenue for the three months ended June 30, 2009 was $17.6 million, or 20.9% of total net revenue, an increase of $6.9 million, or 64.8%, from cost of revenue of $10.7 million, or 17.5% of total net revenue, for the three months ended June 30, 2008.

Of the increase, $5.3 million was attributable to cost of revenue associated with the Accuro Acquisition. The remaining increase was primarily attributable to the continuing change in our revenue mix in the Revenue Cycle Management segment which provided 60.3% of our consolidated revenue for the three months ended June 30, 2009 compared to 51.1% of our consolidated revenue for the three months ended June 30, 2008. This change in revenue mix was the primary contributing factor to the $1.1 million increase in cost of revenue for our Revenue Cycle Management segment, exclusive of Accuro, because the nature of this technology-based revenue results in a higher cost of revenue than our Spend Management revenue. The remaining increase in cost of revenue related to the direct costs associated with new and existing Spend Management customer consulting engagements.

Excluding the impact of the Accuro Acquisition, our cost of revenue as a percentage of related net revenue remained relatively consistent, decreasing from 18.7% to 18.4% period over period.

Product development expenses. Product development expenses for the three months ended June 30, 2009 were $5.3 million, or 6.2% of total net revenue, an increase of $1.6 million, or 45.4%, from product development expenses of $3.6 million, or 5.9% of total net revenue, for the three months ended June 30, 2008.

The increase during the three months ended June 30, 2009 included $1.4 million of product development expenses attributable to the Accuro Acquisition as we continue to make investments in product development. Excluding the product development expenses associated with Accuro, product development expenses remained consistent period over period. We may develop a number of new and enhanced Revenue Cycle Management products and services utilizing assets acquired in our previous Revenue Cycle Management acquisitions. Therefore, we expect to maintain or increase product development spending for the rest of 2009.

Excluding the impact of the Accuro Acquisition, our product development expenses as a percentage of related net revenue remained relatively consistent, decreasing from 4.9% to 4.5%.

Selling and marketing expenses. Selling and marketing expenses for the three months ended June 30, 2009 were $15.6 million, or 18.5% of total net revenue, an increase of $6.1 million, or 63.4%, from selling and marketing expenses of $9.5 million, or 15.6% of total net revenue, for the three months ended June 30, 2008. The increase was primarily attributable to $4.4 million of expenses in connection with our annual customer and vendor meeting held during the quarter ended June 30, 2009 that included an increased amount of education and training to the participants as compared the prior period. In 2008, the annual customer and vendor meeting was held and its related revenue and costs were recognized in the first quarter; and a $1.2 million increase in compensation expense to new employees. The remaining increase was attributable to higher general operating infrastructure expenses.

Excluding the impact of the Accuro Acquisition, selling and marketing expenses, as a percentage of related net revenue, increased from 16.0% to 22.9% period over period and was primarily attributable to the timing of our annual customer and vendor meeting.

General and administrative expenses. General and administrative expenses for the three months ended June 30, 2009 were $27.5 million, or 32.6% of total net revenue, an increase of $5.3 million, or 23.7%, from general and administrative expenses of $22.2 million, or 36.3% of total net revenue, for the three months ended June 30, 2008.

The increase during the three months ended June 30, 2009 includes a $1.4 million increase in share-based compensation; a $1.4 million increase in general technology and operating infrastructure expense; $0.8 million in higher bad debt expense to reserve for potential uncollectible accounts; a $0.6 million increase in rent expense; a $0.6 million increase in professional fees; and $0.5 million of higher legal expenses from certain legal actions and claims arising in the ordinary course of business.

Excluding the impact of the Accuro Acquisition, our general and administrative expenses as a percentage of related net revenue increased from 35.7% to 38.1% period over period. This increase is primarily attributable to the reasons described above.

Depreciation. Depreciation expense for the three months ended June 30, 2009 was $3.0 million, or 3.5% of total net revenue, an increase of $0.6 million, or 27.1%, from depreciation of $2.3 million, or 3.8% of total net revenue, for the three months ended June 30, 2008.

This increase was primarily attributable to depreciation resulting from the additions to property and equipment from the Accuro Acquisition.

Amortization of intangibles. Amortization of intangibles for the three months ended June 30, 2009 was $7.0 million, or 8.3% of total net revenue, an increase of $2.0 million, or 39.6%, from amortization of intangibles of $5.0 million, or 8.2% of total net revenue, for the three months ended June 30, 2008. The increase is primarily attributable to the amortization of certain identified intangible assets acquired in the Accuro Acquisition.

Impairment of intangibles. Impairment of intangibles for the three months ended June 30, 2009 was zero compared to $2.1 million for the three months ended June 30, 2008.

Impairment during the three months ended June 30, 2008 related to acquired developed technology from prior acquisitions, revenue cycle management tradename and internally developed software products that were deemed to be impaired, primarily because of the acquired Accuro products. The impairment charges were primarily incurred at the Revenue Cycle Management segment.

Segment Operating Expenses

Revenue Cycle Management expenses. Revenue Cycle Management operating expenses for the three months ended June 30, 2009 were $46.6 million, an increase of $13.9 million, or 42.3%, from $32.8 million for the three months ended June 30, 2008.

The primary reason for the $13.9 million increase in operating expenses is $10.3 million of expenses that are attributable to the Accuro Acquisition. Excluding the Accuro Acquisition related expenses, Revenue Cycle Management operating expenses increased as a result of a $2.3 million increase in compensation expense for new employees; $0.9 million increase in cost of revenue in connection with implementation costs associated with revenue growth; $0.9 million of higher share-based compensation; a $0.7 million increase in education and training expenses relating to our annual customer and vendor meeting; and $0.6 million of increased legal expenses from certain legal actions and claims. The increase was offset by a $1.8 million nonrecurring impairment charge of intangible assets that occurred during the three months ended June 30, 2008.

As a percentage of Revenue Cycle Management segment net revenue, segment expenses decreased to 91.8% from 104.6% for the three months ended June 30, 2009 and 2008, respectively, for the reasons described above.

Spend Management expenses. Spend Management operating expenses for the three months ended June 30, 2009 were $21.7 million, or 25.8% of total net revenue, an increase of $4.6 million, or 26.6%, from $17.2 million, or 28.0% of total net revenue for the three months ended June 30, 2008.

The increase in Spend Management expenses was primarily attributable to a $3.6 million increase in our annual customer and vendor meeting costs because the annual meeting occurred during the second quarter of 2009 as compared to the first quarter of 2008. Spend Management operating expenses also increased as a result of $0.5 million of compensation expense for new employees in addition to $0.5 million of higher general operating infrastructure expenses.

As a percentage of Spend Management segment net revenue, segment expenses increased to 65.0% from 57.4% for the three months ended June 30, 2009 and 2008, respectively, for the reasons described above.

Corporate expenses. Corporate expenses for the three months ended June 30, 2009 were $7.6 million, an increase of $2.0 million, or 35.6%, from $5.6 million for the three months ended June 30, 2008, or 9.0% and 9.1% of total net revenue, respectively. The increase in corporate expenses was attributable to $1.0 million of higher share-based compensation expense; $0.4 million of higher travel related costs; $0.2 million of charitable contributions; and $0.4 million of other additional operating infrastructure expense.

Non-operating Expenses

Interest expense. Interest expense for the three months ended June 30, 2009 was $4.8 million, a decrease of $0.2 million, or 4.7%, from interest expense of $5.0 million for the three months ended June 30, 2008. As of June 30, 2009, we had total indebtedness of $241.4 million compared to $274.1 million as of June 30, 2008, of which $100.0 million was incurred on June 2, 2008 in connection with the Accuro Acquisition. 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 for the remainder of 2009 as a result of fluctuations in interest rates.

Other income (expense). Other expense for the three months ended June 30, 2009 was $0.1 million, comprised principally of $0.1 million of rental income partially offset by $0.2 million of foreign exchange transaction losses. Other expense for the three months ended June 30, 2008 was $3.4 million. The $3.3 million decrease in other expense is primarily due to a $3.9 million expense to terminate our interest rate swap arrangements during the three months ended June 30, 2008. The decrease was offset by a $0.4 million reduction in interest income earned resulting from a lower cash balance period over period; and the foreign exchange transaction losses mentioned above.

Income tax expense (benefit). Income tax expense for the three months ended June 30, 2009 was $1.3 million, an increase of approximately $2.4 million from an income tax benefit of $1.1 million for the three months ended June 30, 2008. The increase was primarily attributable to being profitable in the three months ended June 30, 2009 as compared to a loss recorded in the prior period. The income tax expense (benefit) recorded during the three months ended June 30, 2009 and 2008 reflected an effective tax rate of 37.7% and 40.1%, respectively.

Comparison of the Six Months Ended June 30, 2009 and June 30, 2008


	Six Months Ended June 30,
	2009						2008						Change
				% of						% of
	Amount			Revenue			Amount			Revenue			Amount			%
	(Unaudited, in thousands)
Net revenue:
Revenue Cycle Management	$	97,790			59.9	%	$	56,426			47.0	%	$	41,364			73.3	%
Spend Management
Gross administrative fees(1)		80,276			49.2			77,766			64.8			2,510			3.2
Revenue share obligation(1)		(27,412	)		(16.8	)		(25,073	)		(20.9	)		(2,339	)		9.3
Other service fees		12,539			7.7			10,874			9.1			1,665			15.3

Total Spend Management		65,403			40.1			63,567			53.0			1,836			2.9

Total net revenue	$	163,193			100.0	%	$	119,993			100.0	%	$	43,200			36.0	%


(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 six months ended June 30, 2009 was $163.2 million, an increase of $43.2 million, or 36.0%, from total net revenue of $120.0 million for the six months ended June 30, 2008. The increase in total net revenue was comprised of a $41.4 million increase in Revenue Cycle Management revenue and a $1.8 million increase in Spend Management revenue.

Revenue Cycle Management net revenue. Revenue Cycle Management net revenue for the six months ended June 30, 2009 was $97.8 million, an increase of $41.4 million, or 73.3%, from net revenue of $56.4 million for the six months ended June 30, 2008. The increase was primarily the result of the following:

•		Acquisition related revenue. The operating results of Accuro were included in our six months ended June 30, 2009 and were only included in the comparable prior period for approximately one month from the date of the Accuro Acquisition on June 2, 2008. $32.0 million of the net revenue increase resulted from revenue attributable to Accuro.

		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 six months ended June 30, 2009 was $97.8 million, an increase of $12.8 million, or 15.1%, from Revenue Cycle Management non-GAAP acquisition-affected net revenue of $85.0 million for the six months ended June 30, 2008. The following table sets forth the reconciliation of Revenue Cycle Management non-GAAP acquisition-affected net revenue to GAAP net revenue:


	Six Months Ended June 30,
	2009		2008		Change
	Amount		Amount		Amount			%
	(Unaudited, in thousands)
Revenue Cycle Management net revenue	$	97,790	$	56,426	$	41,364			73.3	%
Acquisition related RCM adjustments(1)		—		28,540		(28,540	)		(100.0	)

Total RCM acquisition-affected net revenue(1)	$	97,790	$	84,966	$	12,824			15.1	%


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

•

Non-acquisition related revenue. The increase in net revenue from non-acquisition related products and services was $9.4 million, or 18.2%. The increase was primarily attributable to stronger demand for our products and services and consisted of a $3.9 million increase from our revenue cycle services, exclusive of Accuro; a $3.1 million increase from our claims and denial management tools; and a $2.3 million increase from our decision support software.

Spend Management net revenue. Spend Management net revenue for the six months ended June 30, 2009 was $65.4 million, an increase of $1.8 million, or 2.9%, from net revenue of $63.6 million for the six months ended June 30, 2008. The increase was the result of an increase in administrative fees of $2.5 million, or 3.2%, and an increase in other service fees of $1.6 million, or 15.3%, offset by an increase in revenue share obligations of $2.3 million, or 9.3%, as described below:

	•		Gross administrative fees. Non-GAAP gross administrative fee revenue increased by $2.5 million, or 3.2%, 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. The net increase in non-GAAP gross administrative fee revenue was comprised of a $5.0 million, or 6.6% increase, in non-GAAP gross administrative fee revenue not associated with performance targets. This increase was partially offset by a $2.5 million decrease in contingent revenue recognized upon confirmation from certain customers that respective performance targets had been achieved during the six months ended June 30, 2009 compared to the six months ended June 30, 2008. We may have fluctuations in our non-GAAP gross administrative fee revenue in future quarters 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, supply utilization, the effect of continued hospital budget challenges and the current economic environment may negatively impact non-GAAP gross administrative fees in the future.

	•		Revenue share obligation. Non-GAAP revenue share obligation increased $2.3 million, or 9.3%, 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 ratio of non-GAAP revenue share obligation to non-GAAP gross administrative fees (or the “revenue share ratio”). The revenue share ratio for the six months ended June 30, 2009 was 34.1% as compared to 32.2% for the six months ended June 30, 2008. The increase in our revenue share ratio was primarily the result of the timing of contingency-based revenue recognition period over period and of changes in revenue mix to larger customers during the period. Larger customers who commit to higher levels of purchasing volume through our group purchasing organization contracts typically receive higher non-GAAP revenue share obligation percentages. We may also 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 $1.6 million or 15.3% increase in other service fees primarily related to $1.0 million in higher revenues from our supply chain consulting and $0.3 million from our data analysis subscription services. The growth was mainly due to an increased number of consulting engagements and subscription-based services from new and existing customers.

Total Operating Expenses


	Six Months Ended June 30,
	2009					2008					Change
			% of					% of
	Amount		Revenue			Amount		Revenue			Amount			%
	(Unaudited, in thousands)
Operating expenses:
Cost of revenue	$	34,358		21.1	%	$	19,151		16.0	%	$	15,207			79.4	%
Product development expenses		11,268		6.9			6,308		5.3			4,960			78.6
Selling and marketing expenses		26,491		16.2			22,455		18.7			4,036			18.0
General and administrative expenses		54,932		33.7			43,275		36.1			11,657			26.9
Depreciation		5,895		3.6			4,470		3.7			1,425			31.9
Amortization of intangibles		14,011		8.6			8,793		7.3			5,218			59.3
Impairment of intangibles		—		0.0			2,079		1.7			(2,079	)		(100.0	)

Total operating expenses		146,955		90.0			106,531		88.8			40,424			37.9

Operating expenses by segment:
Revenue Cycle Management		92,138		56.5			59,001		49.2			33,137			56.2
Spend Management		39,943		24.5			37,072		30.9			2,871			7.7

Total segment operating expenses		132,081		80.9			96,073		80.1			36,008			37.5
Corporate expenses		14,874		9.1			10,458		8.7			4,416			42.2

Total operating expenses	$	146,955		90.0	%	$	106,531		88.8	%	$	40,424			37.9	%

Cost of revenue. Cost of revenue for the six months ended June 30, 2009 was $34.4 million, or 21.1% of total net revenue, an increase of $15.2 million, or 79.4%, from cost of revenue of $19.2 million, or 16.0% of total net revenue, for the six months ended June 30, 2008.

Of the increase, $10.6 million was attributable to cost of revenue associated with the Accuro Acquisition. The remaining increase was primarily attributable to the change in our revenue mix with the Revenue Cycle Management segment which provided a higher percentage of consolidated net revenue compared to the prior year increasing from 47.0% to 59.9%. Revenue Cycle Management software as a service revenue results in a higher cost of revenue than the net administrative fee revenue in our Spend Management revenue. The remaining increase in cost of revenue is related to the direct costs associated with new and existing Spend Management customer consulting engagements.

Excluding the impact of the Accuro Acquisition, our cost of revenue as a percentage of related net revenue increased from 16.5% to 18.7% period over period. This increase is primarily attributable to the reasons described above.

Product development expenses. Product development expenses for the six months ended June 30, 2009 were $11.3 million, or 6.9% of total net revenue, an increase of $5.0 million, or 78.6%, from product development expenses of $6.3 million, or 5.3% of total net revenue, for the six months ended June 30, 2008.

The increase during the six months ended June 30, 2009 included $4.4 million of product development expenses attributable to the Accuro Acquisition as we continue to make investments in such product development. Excluding the product development expenses associated with the Accuro, product development expenses increased by $0.6 million, period over period. We continue to develop a number of new Revenue Cycle Management products and services and enhance our existing products. Therefore, we expect to maintain or increase our product development spending for the rest of 2009.

Excluding the impact of the Accuro Acquisition, our product development expenses as a percentage of related net revenue remained unchanged at 4.7%.

Selling and marketing expenses. Selling and marketing expenses for the six months ended June 30, 2009 were $26.5 million, or 16.2% of total net revenue, an increase of $4.0 million, or 18.0%, from selling and marketing expenses of $22.5 million, or 18.7% of total net revenue, for the six months ended June 30, 2008. The increase was primarily attributable to (i) a $1.7 million increase in compensation expense to new employees; (ii) a $0.9 million increase in commission expense (iii) a $0.6 million increase in expenses relating to our annual customer and vendor meeting; and (iv) a $0.8 million increase 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, increased from 19.1% to 20.4% period over period.

- 38 -

General and administrative expenses. General and administrative expenses for the six months ended June 30, 2009 were $54.9 million, or 33.7% of total net revenue, an increase of $11.7 million, or 26.9%, from general and administrative expenses of $43.3 million, or 36.1% of total net revenue, for the six months ended June 30, 2008.

The increase during the six months ended June 30, 2009 includes $1.0 million of general and administrative expenses attributable to the Accuro Acquisition. Also contributing to the increase was a $3.4 million increase in share-based compensation; $2.6 million in compensation expense to new employees; $1.6 million of higher legal expenses from certain legal actions and claims arising in the ordinary course of business; a $1.1 million increase in technology-related expense; $0.6 million in higher bad debt expense to reserve for potential uncollectible accounts along with certain bankruptcies that have occurred during the period with respect to customers of our Revenue Cycle Management segment; a $0.5 million increase in rent expense; a $0.5 million increase in transportation expenses; and a $0.4 million increase in professional fees.

Excluding the impact of the Accuro Acquisition, our general and administrative expenses as a percentage of related net revenue increased from 35.8% to 41.0% period over period. This increase is primarily attributable to the reasons described above.

Depreciation. Depreciation expense for the six months ended June 30, 2009 was $5.9 million, or 3.6% of total net revenue, an increase of $1.4 million, or 31.9%, from depreciation of $4.5 million, or 3.7% of total net revenue, for the six months ended June 30, 2008.

This increase was primarily attributable to depreciation resulting from the additions to property and equipment from the Accuro Acquisition.

Amortization of intangibles. Amortization of intangibles for the six months ended June 30, 2009 was $14.0 million, or 8.6% of total net revenue, an increase of $5.2 million, or 59.3%, from amortization of intangibles of $8.8 million, or 7.3% of total net revenue, for the six months ended June 30, 2008. The increase is primarily attributable to the amortization of certain identified intangible assets acquired in the Accuro Acquisition.

Impairment of intangibles. Impairment of intangibles for the six months ended June 30, 2009 and 2008 was zero and $2.1 million, respectively.

Impairment during the six months ended June 30, 2008 relates to acquired developed technology from prior acquisitions, revenue cycle management tradename and internally developed software products that were deemed to be impaired, primarily because of the acquired Accuro products.

Segment Operating Expenses

Revenue Cycle Management expenses. Revenue Cycle Management operating expenses for the six months ended June 30, 2009 were $92.1 million, an increase of $33.1 million, or 56.2%, from $59.0 million for the six months ended June 30, 2008.

The primary reason for the $33.1 million increase in operating expenses is $24.3 million of expenses that are attributable to the Accuro Acquisition. Revenue Cycle Management operating expenses also increased as a result of a $3.4 million increase in compensation expense to new employees; a $3.3 million increase in cost of revenue in connection with implementation costs associated with revenue growth; $1.8 million of higher share-based compensation expense; $1.6 million of increased legal expenses primarily for discovery and document production in connection with a lawsuit in which the Company has been retained as an expert witness by the plaintiffs; and $0.7 million of increased bad debt expense to reserve for potentially uncollectible accounts. The increase was largely offset by a $1.8 million nonrecurring impairment charge of intangible assets that occurred during the six months ended June 30, 2008.

As a percentage of Revenue Cycle Management segment net revenue, segment expenses decreased to 94.2% from 104.6% for the six months ended June 30, 2009 and 2008, respectively, for the reasons described above.

Spend Management expenses. Spend Management operating expenses for the six months ended June 30, 2009 were $39.9 million, or 24.5% of total net revenue, an increase of $2.9 million, or 7.7%, from $37.1 million, or 30.9% of total net revenue for the six months ended June 30, 2008.

The increase in Spend Management expenses was primarily attributable to $1.7 million of higher compensation expense to new employees; $0.8 million of higher share-based compensation expense; a $0.8 million increase in cost of revenues associated with new customers and customer renewals; and a $0.5 million increase in education and training expenses relating to our annual customer and vendor meeting. The increase was offset by a $0.6 million decrease in the amortization of intangibles as certain of these assets are amortized under an accelerated

method and are nearing the end of their useful life; and a $0.3 million decrease in general operating expense.

As a percentage of Spend Management segment net revenue, segment expenses increased to 61.1% from 58.3% for the six months ended June 30, 2009 and 2008, respectively, for the reasons described above.

Corporate expenses. Corporate expenses for the six months ended June 30, 2009 were $14.9 million, an increase of $4.4 million, or 42.2%, from $10.5 million for the six months ended June 30, 2008, or 9.1% and 8.7% of total net revenue, respectively. The increase in corporate expenses was primarily attributable to $2.3 million of higher share-based compensation expense; $0.7 million of additional operating infrastructure expense; $0.6 million of increased travel costs; $0.5 million of compensation expense associated with new employees; and $0.3 million of charitable contributions.

Non-operating Expenses

Interest expense. Interest expense for the six months ended June 30, 2009 was $9.8 million, an increase of $0.4 million, or 4.7%, from interest expense of $9.3 million for the six months ended June 30, 2008. As of June 30, 2009, we had total indebtedness of $241.4 million compared to $274.1 million as of June 30, 2008, of which $100.0 million was incurred on June 2, 2008 in connection with the Accuro Acquisition. The financing for the Accuro Acquisition is primarily responsible for the increase in our interest expense. Our interest expense may vary for the remainder of 2009 as a result of fluctuations in interest rates.

Other income (expense). Other income for the six months ended June 30, 2009 was $0.2 million, comprised principally of $0.2 million of rental income slightly offset by foreign exchange transaction losses. Other expense for the six months ended June 30, 2008 was $2.3 million. The $2.4 million decrease is primarily due to the $3.9 million expense to terminate our interest rate swap arrangements during the six months ended June 30, 2008 offset by lower interest income earned resulting from a decrease in our cash balance period over period.

Income tax expense. Income tax expense for the six months ended June 30, 2009 was $2.6 million, an increase of approximately $1.9 million from an income tax expense of $0.7 million for the six months ended June 30, 2008, which was primarily attributable to increased income before tax of $4.8 million. The income tax expense recorded during the six months ended June 30, 2009 and 2008 reflected an effective tax rate of 38.8% and 38.2%, respectively.

Critical Accounting Policies

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. Because of the uncertainty inherent in these matters, actual results could differ from the estimates.

Management considers an accounting policy to be critical if the accounting policy requires management to make particularly difficult, subjective or complex judgments about matters that are inherently uncertain. A summary of our critical accounting policies is included in Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. There have been no material changes to the critical accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Allowance for Doubtful Accounts

In evaluating the collectability 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 three months ended June 30, 2009 and 2008 was 1.5% and 0.3%, respectively, and decreased from 1.6% for the three months ended March 31, 2009. The increase over prior year was primarily attributable to approximately $0.8 million relating to potential uncollectible accounts in our Revenue Cycle Management segment.

Our bad debt expense to total net revenue ratio for the six months ended June 30, 2009 and 2008 was 1.5% and 0.8%, respectively. The increase was attributable to approximately $1.9 million for potential uncollectible accounts which includes certain bankruptcies that occurred during the period with respect to customers in our Revenue Cycle Management segment. These bankruptcies have involved certain of our customers located primarily in the northeast region of the country.

Given the continuing impact of current adverse economic conditions and customer financial constrains, we may experience additional collectability 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 have a nominal impact on our bad debt expense for the three months ended June 30, 2009 and would result in an increase of $0.3 million for the six months ended June 30, 2009.

Liquidity and Capital Resources

Our primary cash requirements involve payment of ordinary expenses, working capital fluctuations, debt service obligations and capital expenditures. Our capital expenditures typically consist of software 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; (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 a change in our cash management practice, we currently use the swing-line 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. We had $84.2 million available (net of a $1.0 million letter of credit) on our revolving credit facility as of June 30, 2009, which matures on October 23, 2011. Based on our analysis as of June 30, 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 payments, revenue share obligations, 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.

Discussion of Cash Flow

As of June 30, 2009 and December 31, 2008, we had cash and cash equivalents totaling zero and $5.4 million, respectively.

Our cash provided by operations is generally driven by cash receipts generated by our customers offset by cash paid for the operating expenses of providing services and products to our customers. If we grow our revenues while maintaining a more modest growth rate in operating expenses, we expect cash provided by operations to grow from period to period.

Cash provided by operating activities for each of the six months ended June 30, 2009 and 2008 was $22.9 million and $24.4 million, respectively, which included the following changes in assets and liabilities: (i) an increase in the accrued revenue share obligation and rebates liability as compared to the prior period that is due to the variability in the amount and timing of payments resulting in a $3.3 million positive cash flow impact; and (ii) a decrease in accounts receivable of $1.8 million associated with improved accounts receivable collections and certain write-offs. Offsetting the above increases in cash provided by operating activities was (i) an increase of $5.5 million in accrued payroll and benefits related to payroll timing and incentive payment accruals. (ii) a decrease of $3.0 million in accounts payable relating to the timing of payments to our vendors; (iii) a decrease of $6.0 million in other accrued expenses which was primarily attributable to the timing of payments; (iv) a decrease of $2.9 million in deferred revenue due to the revenue recognition of previously deferred amounts; and (v) an increase of $1.2 million in other long-term assets which was primarily attributable to the timing of certain sales and marketing payments.

We believe that cash used in or provided by 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 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. Cash used in investing activities decreased from $217.2 million during the six months ended June 30, 2008 to $31.5 million during the six months ended June 30, 2009. The decrease was primarily due to the Accuro Acquisition that took place in June 2008 offset by the deferred purchase consideration payment of $19.8 million (inclusive of $1.5 million of imputed interest) made in June 2009 as part of the Accuro Acquisition and increased capital expenditures period over period that are primarily related to the growth in our Revenue Cycle Management segment.

Cash used in financing activities for the six months ended June 30, 2009 and 2008 was $3.2 million and $69.9 million, respectively. The amount for the six months ended June 30, 2009 primarily represents the draw down from our credit facility of $60.9 million; the excess tax benefit from the exercise of stock options of $3.3 million and the issuance of common stock of $4.5 million. Offsetting the net proceeds received during the period were repayments on our long term debt of $65.2 million. Our credit agreement requires an annual payment of excess cash flow which we expect to pay in the first quarter of 2010.

Acquisition Contingent Consideration

The Asset Purchase Agreement for the Med-Data acquisition contains provisions requiring additional consideration to be paid to the former owners of the acquired assets if certain performance criteria are met. The Med-Data contingency period ended June 30, 2007, and on September 25, 2007, we provided notice to the former owner of the Med-Data business indicating that we do not believe any additional payment is due. The former owner has disputed our calculation of the performance measures, alleged that we failed to fulfill our contractual obligations with respect to the earn-out, and filed a complaint in federal court with respect to these matters on November 30, 2007. 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 true status of their relationship with their largest customer. Discovery has been substantially completed, but we cannot estimate a probable outcome of the litigation at this time. The maximum potential earn-out payment 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.

Off-Balance Sheet Arrangements and Commitments

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

We lease office space and equipment under operating leases. Some of these operating leases include rent escalations, rent holidays, and rent concessions and incentives. However, we recognize lease expense on a straight-line basis over the minimum lease term utilizing total future minimum lease payments. Our consolidated future minimum rental payments under our operating leases with initial or remaining non-cancelable lease terms of at least one year are as follows as of June 30, 2009 for each respective year (in thousands):


	Amount
	(Unaudited)
2009	$	3,748
2010		7,673
2011		6,735
2012		7,856
2013		5,451
Thereafter		28,243

Total future minimum rental payments	$	59,706

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 will commence on September 1, 2009 and will consist 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.

As of June 30, 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 of directors in its financial and operational decision-making, we supplement our consolidated financial statements presented on a GAAP basis in this Quarterly Report on Form 10-Q with the following non-GAAP financial measures: gross fees, gross administrative fees, revenue share obligation, EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Revenue Cycle Management acquisition-affected net revenue and cash diluted earnings per share.

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

Gross Fees, Gross Administrative Fees and Revenue Share Obligation. Gross fees include all gross administrative fees we receive pursuant to our vendor contracts and all other fees we receive from customers. Our revenue share obligation represents the portion of the gross administrative fees we are contractually obligated to share with certain of our GPO customers. Total net revenue (a GAAP measure) reflects our gross fees net of our revenue share obligation. These non-GAAP measures assist management and the board of directors 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 1,200 vendors contracted by our GPO, and that our revenue share obligation constitutes a significant outlay to certain of our GPO customers. A reconciliation of these non-GAAP measures to their most directly comparable GAAP measure can be found in the “Overview” and “Results of Operations” section of Item 2.

EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin. We define: (i) EBITDA, as net income (loss) before net interest expense, income tax expense (benefit), depreciation and amortization; (ii) Adjusted EBITDA, as net income (loss) before net interest expense, income tax expense (benefit), depreciation and amortization and other non-recurring, non-cash or non-operating items; and (iii) Adjusted EBITDA Margin, as Adjusted EBITDA as a percentage of net revenue. We use EBITDA, Adjusted EBITDA and adjusted EBITDA Margin to facilitate a comparison of our operating performance on a consistent basis from period to period and provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone. These measures assist management and the board of directors 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 of directors 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 of directors. 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 of directors and management and disclosed in our Annual Report on Form 10-K. Our credit agreement also contains provisions that utilize other measures, such as excess cash flow, to measure liquidity.

EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flow from continuing operating activities. Despite the advantages regarding the use and analysis of these measures as mentioned above, EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin, as disclosed in this Quarterly Report on Form 10-Q, have limitations as analytical tools, and you should not consider these measures in isolation, or as a substitute for analysis of our results as reported under GAAP; nor are these measures intended to be measures of liquidity or free cash flow for our discretionary use. Some of the limitations of EBITDA are:

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

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

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

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

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

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

The following table sets forth a reconciliation of EBITDA and Adjusted EBITDA to net income, a comparable GAAP-based measure. All of the items included in the reconciliation from net income to EBITDA to Adjusted EBITDA are either (i) non-cash items (e.g., depreciation and amortization, impairment of intangibles and share-based compensation expense) or (ii) items that management does not consider in assessing our on-going operating performance (e.g., income taxes, 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.


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
				(Unaudited, in thousands)

Net income (loss)	$	2,175		$	(1,576	)	$	4,080		$	1,123

Depreciation		2,985			2,349			5,895			4,470
Amortization of intangibles		7,000			5,016			14,011			8,793
Amortization of intangibles (included in cost of revenue)		802			371			1,590			762
Interest expense, net of interest income(1)		4,758			4,545			9,739			7,954
Income tax expense (benefit)		1,314			(1,053	)		2,583			693


EBITDA		19,034			9,652			37,898			23,795

Impairment of intangibles(2)		—			2,079			—			2,079
Share-based compensation(3)		4,574			2,399			8,960			4,139
Rental income from capitalizing building lease(4)		(109	)		(109	)		(219	)		(219	)
Purchase accounting adjustment(5)		15			1,102			204			1,359
Interest rate swap cancellation(6)		—			3,914			—			3,914


Adjusted EBITDA	$	23,514		$	19,037		$	46,843		$	35,067


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

(2)		Impairment of intangibles during the three and six months ended June 30, 2008 primarily relates to acquired developed technology from prior acquisitions, revenue cycle management tradename and internally developed software products, mainly because of the acquired Accuro products.

(3)		Represents 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.

(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 our consolidated financial statements filed in our annual report on Form 10-K for the year ended December 31, 2008 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.

(6)		During the three and six months ended June 30, 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 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 of directors to better understand the extent of period-over-period growth of the Revenue Cycle Management segment. Given the significant impact that this acquisition had on the Company during the fiscal year ended December 31, 2008 and the three and six months ended June 30, 2009, 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 2.

Cash Diluted Earnings Per Share

The Company defines cash diluted EPS as diluted earnings per share excluding non-cash acquisition-related intangible amortization and non-recurring expense items on a tax-adjusted basis and non-cash tax-adjusted shared-based compensation expense. Cash diluted EPS is not a measure of liquidity under GAAP, or otherwise, and is not an alternative to cash flow from continuing operating activities. Cash diluted 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 of directors 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 cash diluted EPS growth over time, investors may find such information useful; however, as a non-GAAP financial measure, cash diluted EPS is not the sole measure of the Company’s financial performance and may not be the best measure for investors to gauge such performance.


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2009		2008			2009		2008

Per share data	(Unaudited)					(Unaudited)
Diluted EPS attributable to common stockholders	$	0.04	$	(0.03	)	$	0.07	$	0.02

Non-cash, tax-adjusted acquisition-related intangible amortization		0.08		0.07			0.16		0.12

Non-cash, tax-adjusted share-based compensation (1)		0.05		0.03			0.10		0.05

Tax-adjusted interest rate swap cancellation (2)		—		0.05			—		0.05

Non-cash, tax-adjusted impairment of intangibles (3)		—		0.03			—		0.03


Non-GAAP cash diluted EPS	$	0.17	$	0.15		$	0.32	$	0.27


Weighted average shares — diluted		56,968		47,288			56,699		48,485


(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 three and six months ended June 30, 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.

(3)		Represents the per share impact, on a tax-adjusted basis of impairment of intangibles during the three and six months ended June 30, 2008. The impairment primarily relates to acquired developed technology from prior acquisitions, revenue cycle management tradename and internally developed software products deemed impaired as a result of the Accuro Acquisition.

New Pronouncements

Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — An Amendment of SFAS No. 133 (or “SFAS No. 161”). SFAS No. 161 seeks to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures regarding the impact on financial position, financial performance, and cash flows. To achieve this increased transparency, SFAS 161 requires (1) the disclosure of the fair value of derivative instruments and gains and losses in a tabular format; (2) the disclosure of derivative features that are credit risk-related; and (3) cross-referencing within the footnotes. We adopted SFAS 161 on January 1, 2009. The adoption of SFAS No. 161 did not have a material impact on our condensed consolidated financial statements.

Business Combinations

Fair Value Measurements

In April 2009, the FASB issued FSP FAS No. 107-1 and APB 28-1 to amend FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, and APB Opinion No. 28, Interim Financial Reporting, which is effective for the Company June 30, 2009. The FSP requires a publicly traded company to include disclosures about fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, the guidance requires an entity to disclose either in the body or the accompanying notes of its summarized financial information the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. The adoption of this guidance did not have a significant impact on our condensed consolidated financial statements.

Subsequent Events

Accounting for Transfers of Financial Assets

Consolidation of Variable Interest Entities

company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying Interpretation 46(R)’s provisions. SFAS No. 167 is applicable for annual periods after November 15, 2009 and interim periods thereafter. We are currently assessing the impact, if any, that the adoption of SFAS No. 167 would have on our condensed consolidated financial statements.

GAAP Hierarchy

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign currency exchange risk. Certain of our contracts are denominated in Canadian dollars. As our Canadian sales have not historically been significant to our operations, we do not believe that changes in the Canadian dollar relative to the U.S. dollar will have a significant impact on our financial condition, results of operations or cash flows. As we continue to grow our operations, we may increase the amount of our sales to foreign customers. Although we do not expect foreign currency exchange risk to have a significant impact on our future operations, we will assess the risk on a case-specific basis to determine whether a forward currency hedge instrument would be warranted. On August 2, 2007, we entered into a series of forward contracts to fix the Canadian dollar-to-U.S. dollar exchange rates on a Canadian customer contract, as discussed in Note 11 to our Condensed Consolidated Financial Statements herein. We have one other Canadian dollar contract that we have not elected to hedge, we currently do not transact business in any currency other than the U.S. dollar.

We continue to evaluate the credit worthiness of the counterparty of the hedge instruments. Considering the current state of the credit markets and specific challenges related to financial institutions, the Company continues to believe that the underlying size, international presence and US government cash infusion, and operating history of the counterparty will allow them to perform under the obligations of the contract and are not a risk of default that would change the highly effective status of the hedged instruments.

Interest rate risk. We had outstanding borrowings on our term loan and revolving credit facility of $241.4 million as of June 30, 2009. The term loan and revolving credit facility bear interest at LIBOR plus an applicable margin.

On May 21, 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). The interest rate swap terminates on March 31, 2012 and qualifies as a highly effective cash flow hedge under SFAS No. 133. As such, the fair value of the derivative will be recorded on our condensed consolidated balance sheet. The interest rate swap matures on March 31, 2012. As of June 30, 2009, the interest rate swap had a market value of $0.4 million ($0.2 million net of tax). The asset is included on other long-term assets in the accompanying condensed consolidated balance sheet as of June 30, 2009. The unrealized gain (loss) is recorded in other comprehensive income, net of tax, in the condensed consolidated statement of stockholders’ equity.

We entered into an interest rate collar in June 2008 which effectively sets a maximum LIBOR interest rate of 6.00% and a minimum LIBOR interest rate of 2.85% on the interest rate we pay on $155.0 million of our term loan debt outstanding, effectively limiting our base interest rate exposure on this portion of our term loan debt to within that range (2.85% to 6.00%). The collar does not hedge the applicable margin that the counterparty charges (1.50% and 2.75% on our revolving credit facility (base rate loan) and term loan, respectively, as of June 30, 2009). Settlement payments are made between the hedge counterparty and us on a quarterly basis, coinciding with our term loan installment payment dates, for any rate overage on the maximum rate and any rate deficiency on the minimum rate on the notional amount outstanding. The collar terminates on September 30, 2010 and no consideration was exchanged with the counterparty to enter into the hedging arrangement. As of June 30, 2009, we pay an effective interest rate of 2.85% on $155.0 million of notional term loan debt outstanding before applying the applicable margin.

We continue to evaluate the credit worthiness of the counterparty of the hedge instruments when assessing effectiveness. The Company believes that given the size of the hedged instruments and the likelihood that the counterparty would have to perform under the contracts mitigates any potential credit risk and risk of non-performance under the contract. In addition, the Company understands the interest rate

hedge counterparty has been acquired by a much larger financial institution. We believe that the creditworthiness of the acquirer mitigates risk and will allow the interest rate hedge counterparty to be able to perform under the terms of the contract.

A hypothetical 100 basis point increase or decrease in LIBOR would have resulted in an approximate $0.2 million and $0.4 change to our interest expense for the three and six months ended June 30, 2009, which represents potential interest rate change exposure on our outstanding unhedged portion of our term loan and revolving credit facility.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

As required by Rule 13a-15(b) under the Exchange Act, our management, with the participation of our chief executive officer and chief financial officer, evaluated the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based on such evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective and were operating at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting for the three months ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we 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.

On November 30, 2007, Jacqueline Hodges, the former owner of the Med-Data business, filed a complaint in the United States District Court for the Northern District of Georgia, alleging that we failed to act in good faith with respect to the operation of the Med-Data business after its acquisition on July 18, 2005, by our wholly owned subsidiary Project Metro Acquisition, LLC (subsequently merged into MedAssets Net Revenue Systems, LLC), by taking certain actions and failing to take others which had the effect of causing the business to fail to achieve additional acquisition consideration contingent on certain “earn-out” thresholds in the purchase agreement. 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 true status of their relationship with their largest customer. Discovery has been substantially completed, but we cannot estimate a probable outcome at this time.

Refer to Note 6 of the notes to our condensed consolidated financial statements for additional information.

Item 1A. Risk Factors

There have been no material changes in the risk factors as disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2008.

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

During the six months ended June 30, 2009, we issued approximately 131,000 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 $0.2 million in consideration in connection with these stock option exercises.

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

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

The Company’s 2009 Annual Meeting of Stockholders was held on May 28, 2009. The following matters were voted upon at the meeting and the stockholder votes on each such matter are briefly described below.

The board of directors’ nominees for election as Class II directors to serve a term of three years received the following votes:


	Votes For		Votes Withheld
Rand A. Ballard		48,094,400		459,424
C.A. Lance Piccolo		47,866,572		687,252
Bruce F. Wesson		48,074,206		479,618

There were no votes abstained or broker non-votes with respect to the matter described above. Each of the Class II directors named above was re-elected to serve a three-year term.

The following Class III directors’ term of office will continue until the Company’s 2010 Annual Meeting of Stockholders: John A. Bardis, Harris Hyman IV and Terrence J. Mulligan. The following Class I directors’ term of office will continue until the Company’s 2011 Annual Meeting of Stockholders: Samantha Trotman Burman, John C. Rutherford and Vernon R. Loucks, Jr.

The proposal to ratify the appointment by the board of directors of BDO Seidman, LLP as our independent registered public accounting firm for the fiscal year ended December 31, 2009 received the following votes:


Votes For	Votes Against	Votes Abstained
48,504,258	8,324	41,242

There were no broker non-votes with respect to the matter described above.

Item 5. Other Information

Not applicable.

Item 6. Exhibits


Exhibit
No.		Description of Exhibit

31.1*		Sarbanes-Oxley Act of 2002, Section 302 Certification for President and Chief Executive Officer

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

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


*		Filed herewith


PART I. FINANCIAL INFORMATION			3

Item 1. Condensed Consolidated Financial Statements			3

Condensed Consolidated Balance Sheets at June 30, 2009 and December 31, 2008			3

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008			4

Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2009			5

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008			6

Notes to Condensed Consolidated Financial Statements			7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27

Item 3. Quantitative and Qualitative Disclosures About Market Risk			47

Item 4. Controls and Procedures			48

PART II. OTHER INFORMATION			48

Item 1. Legal Proceedings			48

Item 1A. Risk Factors			48

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			48

Item 3. Defaults Upon Senior Securities			49

Item 4. Submission of Matters to a Vote of Security Holders			49

Item 5. Other Information			49

Item 6. Exhibits			49

Signatures			49

EX-31.1
EX-31.2
EX-32.1


								Accumulated
					Additional			Other						Total
	Common Stock				Paid-In			Comprehensive			Accumulated			Stockholders’
	Shares		Par Value		Capital			Income (Loss)			Deficit			Equity
	(In thousands)
Balances at December 31, 2008		53,917	$	539	$	605,340		$	(2,088	)	$	(220,852	)	$	382,939

Issuance of common stock from stock option exercises		931		9		4,467			—			—			4,476

Issuance of common restricted stock		1,040		11		(11	)		—			—			—

Stock compensation expense		—		—		8,960			—			—			8,960

Excess tax benefit from stock option exercises		—		—		3,313			—			—			3,313

Other comprehensive income:
Unrealized gain from hedging activities (net of a tax expense of $292)		—		—		—			483			—			483
Net income		—		—		—			—			4,080			4,080

Comprehensive income		—		—		—			483			4,080			4,563

Balances at June 30, 2009		55,888	$	559	$	622,069		$	(1,605	)	$	(216,772	)	$	404,251


Signature	Title	Date

/s/ JOHN A. BARDIS Name: John A. Bardis	Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)	August 10, 2009

/s/ L. NEIL HUNN Name: L. Neil Hunn	Chief Financial Officer (Principal Financial Officer)	August 10, 2009