10-K 1 sxci10k123111.htm SXCI 10K 12.31.11


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
R
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2011
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to     
SXC HEALTH SOLUTIONS CORP.
(Exact name of registrant as specified in its charter)
 
Yukon Territory
(State or other jurisdiction of
incorporation or organization)
000-52073
(Commission File Number)
75-2578509
(I.R.S. Employer
Identification Number) 
2441 Warrenville Road, Suite 610, Lisle, Illinois 60532-3642
(Address of principal executive offices, zip code)
Registrant’s phone number, including area code: (800) 282-3232
Securities registered pursuant to 12(b) of the Act:
Title of each class
Name of Each Exchange on Which Registered
Common Stock, no par value
NASDAQ Stock Market
Toronto Stock Exchange

Securities registered pursuant to 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes R     No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No R
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 R     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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes R     No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer R
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No   R
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2011 was $3,668,451,409 based on the closing price of $58.92 as reported on the NASDAQ Stock Market. Solely for the purposes of this calculation, directors and officers of the registrant are deemed to be affiliates.
As of January 31, 2012, there were 62,384,161 shares outstanding of the Registrant’s no par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
 As permitted by General Instruction G of Form 10-K, the information required by Part III of this Form 10-K is incorporated by reference, and will be included either in a definitive proxy statement or an amendment to this Form 10-K, which must be filed with the SEC no later than 120 days after the end of the fiscal year covered by this Form 10-K.



TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 EX-12.1
 
 
 EX-21.1
 
 
 EX-23.1
 
 
 EX-31.1
 
 
 EX-31.2
 
 
 EX-32.1
 
 
 EX-32.2
 
 

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Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains certain forward-looking statements, including without limitation, statements concerning SXC Health Solutions Corp.’s operations, economic performance and financial condition. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are developed by combining currently available information with SXC Health Solutions Corp.’s beliefs and assumptions and are generally identified by the words “believe,” “expect,” “anticipate” and other similar expressions. Forward-looking statements do not guarantee future performance, which may be materially different from that expressed in, or implied by, any such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.
These forward-looking statements are based largely on SXC Health Solutions Corp.’s current expectations and are subject to a number of risks and uncertainties, including, without limitation, those identified under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Actual results could differ materially from results referred to in the forward-looking statements. In addition, important factors to consider in evaluating such forward-looking statements include changes in external market factors, changes in SXC Health Solutions Corp.’s business or growth strategy or an inability to execute its strategy due to changes in its industry or the economy in general. In light of these risks and uncertainties, there can be no assurances that the results referred to in the forward-looking statements contained in this Annual Report on Form 10-K will in fact occur. SXC Health Solutions Corp. undertakes no obligation to, and expressly disclaims any such obligation to, update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, changes to future results over time or otherwise.


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PART I
THE COMPANY

ITEM 1.
BUSINESS
 The following description of the business should be read in conjunction with the information included elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2011. This description contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the results discussed in the forward-looking statements due to the factors set forth in “Risk Factors” and elsewhere in this Annual Report on Form 10-K. References in this Annual Report on Form 10-K to “we,” “our,” “us,” "SXC" or the “Company” refer to SXC Health Solutions Corp. and its directly and indirectly owned subsidiaries as a combined entity.

OVERVIEW

The Company is a leading provider of pharmacy benefit management (“PBM”) services and healthcare information technology (“HCIT”) solutions to the healthcare benefit management industry. The Company’s product offerings and solutions combine a wide range of applications and PBM services designed to assist its customers in reducing the cost and managing the complexity of their prescription drug programs. The Company’s customers include many of the largest organizations in the pharmaceutical supply chain, such as pharmacy benefit managers, managed care organizations, self-insured employer groups, unions, third party health care plan administrators, and state and federal government entities.
The Company’s PBM services, which are marketed under the informedRx brand, include electronic point-of-sale pharmacy claims management, retail pharmacy network management, mail pharmacy claims management, specialty pharmacy claims management, Medicare Part D services, benefit design consultation, preferred drug management programs, drug review and analysis, consulting services, data access, and reporting and information analysis. The Company's PBM services include owning and operating a network of mail and specialty pharmacies. In addition, the Company is a national provider of drug benefits to its customers under the federal government’s Medicare Part D program.
The Company’s HCIT solutions include RxCLAIM®, an on-line transaction processing system that provides instant adjudication of prescription drug claims, RxMAX®, the Company’s rebate management system, RxTRACK®, the Company’s data warehouse and analysis system, Zynchros, the Company’s suite of on-demand formulary management tools, the Company’s pharmacy management system for retail, chain, institutional and mail-order pharmacies, as well as a number of other software products for customers in the pharmaceutical supply chain. The Company’s HCIT solutions are available on a license basis with on-going maintenance and support or on a transaction fee basis using an application service provider (“ASP”) model.
The Company conducts business in both the United States and Canada. For the years ended December 31, 2011, 2010 and 2009, the Company recognized revenue of $5.0 billion, $1.9 billion, and $1.4 billion, respectively, from the United States, and $7.5 million, $4.1 million and $2.8 million, respectively, from Canada.
The Company completed its acquisition of MedfusionRx, LLC (“MedfusionRx"), a leading independent specialty pharmacy provider, on December 28, 2010. The purchase price for MedfusionRx was $101.5 million in cash with an additional $5.5 million potential earn-out payment subject to the achievement of certain performance targets in the 2012 fiscal year. The acquisition has helped expand the Company's specialty pharmacy business and enhance its capabilities in this rapidly growing sector of the PBM industry.
On October 3, 2011, the Company completed the acquisition of PTRX, Inc. (“PTRX”), a full-service PBM, and its exclusive mail-order pharmacy provider, SaveDirectRx, Inc. (“SaveDirectRx”), both based in San Antonio, Texas. The aggregate purchase price was $77.2 million in cash, subject to certain customary post-closing adjustments, with an opportunity for the former owners of SaveDirectRx to earn an additional $4.5 million, subject to the achievement of certain performance targets through 2012. The acquisitions of PTRX and SaveDirectRx continue upon the Company's strategy to acquire assets that currently utilize the Company's technology platform in order to ease the integration into the Company's business.
In January 2012, the Company completed its acquisition of HealthTran LLC (“HealthTran”), a middle market PBM based in Denver, Colorado, in exchange for $250 million in cash, subject to certain customary post-closing adjustments. HealthTran was an existing HCIT customer of the Company and utilizes an SXC platform for its claims adjudication services.
The Company exists under the Yukon Business Corporations Act. The Company’s principal executive offices are located at 2441 Warrenville Road, Suite 610, Lisle, Illinois 60532, and the telephone number for the Company’s principal executive office is 800-282-3232. The Company maintains a website at www.sxc.com. The information contained in, or that can be accessed through, the Company’s website is not part of, and is not incorporated into, this Annual Report on Form 10-K or other filings the Company makes with the Securities and Exchange Commission (the “SEC”). The Company will make available free of charge on its website the annual report on Form 10-K, future quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.
Products, Solutions and Services
The Company’s solutions address the challenges faced by payors in the pharmaceutical supply chain. The Company provides comprehensive PBM systems and services, pharmacy dispensing operations and related prescription management services focused on reducing overhead pharmacy costs and providing members with excellent care. The Company believes it is unique in that it can deploy its solutions as:

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•
PBM solutions — pharmacy network management, clinical and member programs to manage drug costs using the Company’s own system software and services;
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Web-enabled technology — the Company provides on-line transaction processing and clinical solutions through web-enabled, real-time technology: and
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Software solutions — licensed software products can be sold in addition to systems implementation and consulting services and maintenance.
Payor Products and Services Offered by the Company
PBM Services
The Company’s informedRx offering is a broad suite of customizable PBM services that provide a flexible and cost-effective alternative to traditional PBM offerings typically employed by health plans, government agencies and employers. The Company provides a broad range of pharmacy spend management solutions and information technology capabilities to managed care organizations, self-insured employer groups, unions, third party health care plan administrators, and state and federal government entities. The Company’s customers have gained increased control of their pharmacy benefit dollars and maximized cost control and quality of care through a full range of pharmacy spend management services, including:
Formulary Administration — Provide support for customers’ existing formularies and preferred drug lists or collaborate to create best-in-class models supported by formulary predictive modeling and impact analysis. Pharmacist, physician and member-focused intervention protocols provide quality controls to drive generics, preferred drug products and appropriate use. Formularies are administered based on specific plan designs, or by enabling customers with the tools to maintain their own custom formularies online. 
Benefit Plan Design and Management — Accommodate any plan design option required and support an unlimited number of benefit design variations. The Company specializes in applying data-driven insights to help customers understand the medical risk drivers within their population and take a strategic approach to plan design. The Company provides benefit design configuration and support to customers, in accordance with mutually developed processes. Benefit designs can be modified online, in real time, by the Company or by the customer’s staff. 
Pharmacy Network Management — A wide range of retail network options, including supporting existing networks or assisting customers in developing proprietary networks that meet specific geographic access requirements, desired price discounts, or other service requirements. A proprietary national retail network, which consists of pharmacies in all 50 states and in Puerto Rico, Guam and the Virgin Islands, provides excellent access to the Company’s customers. A proprietary preferred retail network combined with targeted member communications offers deeper discounts for payors to achieve increased savings on retail prescriptions.
Drug Utilization Review (“DUR”) — Pre-dispensing DUR edit checks are performed on an online, real-time basis between mail and retail pharmacies to encourage appropriate drug utilization, enhance member outcomes, and reduce drug costs. All prescriptions are checked for member eligibility and plan design features and are then compared against previous histories of prescriptions filled by the same pharmacy, by other participating retail network pharmacies and by the mail service pharmacy. 
Clinical Services and Consulting — Consultative and technical expertise to augment, develop, deploy, and support any additional clinical programs. Customers also have the option of using the Company’s clinical programs, which incorporate complete prescription drug information to reduce the growth rate of prescription drug costs and increase the quality of care and member safety. The Company offers comprehensive clinical management strategies which help reduce undesirable events, increase medication compliance, decrease medication waste, and promote plan member well-being. 
Reporting and Information Analysis Solutions — Providing two main levels of reporting: A comprehensive reporting package (which includes a large menu of unique reports), and an online analytical decision support tool, RxTRACK®, designed to meet and exceed the Company’s customers’ expectations and provide flexibility for customized reporting. The Company uses customer plan data and industry benchmark data to drive proactive discussions regarding opportunities to increase savings. 
Mail and Specialty Pharmacy Services — The Company offers mail and specialty services to its PBM members, as well as other members of its pharmacy network. Mail service gives members flexibility, privacy, and easy access to their maintenance medications while offering significant plan savings to the customer. To provide a higher standard of service and to assert greater control over outcomes for clients, the Company offers full-service, state of the art mail service pharmacies that provide high quality service, member support and convenient, easy-to-use mail service delivery throughout the U.S. Projected savings for mail service are dependent on plan design features, including co-payments and incentives, and utilization patterns. 
Specialty service offers customers the ability to control spending on specialty medications and ensure patients receive the necessary, personalized support for complex medications, in one of the fastest growing sectors of pharmaceutical spending. The Company’s specialty therapy medication management program uses a highly-trained and specialized clinical staff organized in disease pods, a patient-centric approach and evidence based clinical treatment protocols. The patient care team communicates with the patient, patient’s physician, and other caregivers as needed to obtain a complete medical and pharmacy history and then craft an individualized treatment plan including patient education, counseling and expected therapy outcomes. Plan savings are achieved as the cost for specialty medication using this program is generally lower than retail pricing. 
Web Services - A suite of web-based services that enables customers to interact with the claims processing system using a standardized protocol in a secure environment. This method of access provides the Company's clients with the freedom to build products, tools, and reports that utilize data throughout their enterprises. Once the raw data is in house, it can be used by the customer as appropriate, thus providing far greater flexibility and return on investment. 
A member website, RxPORTALTM, invites members to learn more about their prescription benefit programs, medication

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histories, drug information and related industry news. This site also features a real-time trial adjudication program that gives members the information they need to make informed, cost-effective choices regarding their prescription therapy. This site can be customized with a customer's logo and name, links to the organization's Internet home site, and up-to-date news bulletins about the organization. 
RxPROVIDER PORTALTM is a web based interface that allows pharmacists and physicians to obtain information from RxCLAIM® on a member's plan to assist in providing more cost effective prescription medications. The portal gives providers the ability to view claim details, remittance advice and eligibility, and perform prior authorizations online.
Healthcare IT
The Company's HCIT offerings deliver applications on a license, ASP, or fee-for-service basis to customers who administer and manage pharmacy benefits. SXC has achieved a broad industry footprint by deploying technology to help healthcare companies manage the rising prescription drug costs and enhance the level of care they provide. 
HCIT products and services serve a diversified group of payor customers that include health plans, federal, state and provincial government programs, pharmacy benefit managers, workers' compensation programs, and long-term and/or chronic care facility operators. In addition, SXC's robust and flexible technology serves as the engine for the Company's full service PBM solutions.
Technology Products and Services
RxCLAIM® is an on-line transaction processing system designed to provide instant on-line adjudication of third-party prescription drug claims at the point of service, including trouble-free claims management and cost-effective review, as well as payment and billing support and real-time functionality for updating benefit, price, member, provider and drug details. RxCLAIM® is designed to provide the Company’s customers with automation efficiencies, flexibility and control by facilitating the real-time processing of pharmacy claims and payments against eligibility, plan benefits, formularies, price, drug utilization review, prior authorization, and rebates in addition to many other features.
Other products
•
Integrail PathfinderTM PRO is a comprehensive software application that enables a wide array of users to understand the impact of healthcare resource allocation and medical decision-making through the incorporation of risk prediction and episode profiling technologies. The application offers users an intuitive system for integrating disparate data sources to pinpoint variations in resource utilization and quality of care. The tool offers both a standardized library of reports and robust ad hoc query capabilities that are designed to provide flexible, easy access to complex information.
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IntegrailRx features the ability to measure and predict both pharmacy and total risk using pharmacy claims. This gives customers the insights they need to improve member outcomes, better manage trend and structure benefits based on a forward-looking view of their medical risk.
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RxBUILDERTM is a web-based interface for formulary creation and maintenance utilizing a Medi-Span® based product file. This rules-based approach minimizes the work of list building and maintenance operations and captures efficiencies in sharing formulary information between lines of business.
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RxPORTALTM allows customers to interact with the patient's formulary and drug history in a secure environment allowing patients and health plans to access industry leading tools and up to date information.
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RxAUTHTM is a prior authorization (“PA”) management solution which offers flexibility and efficiency in automating the PA process from end-to-end. Built upon the powerful PA capabilities housed in RxCLAIM®, RxAUTHTM supports the entire PA lifecycle, from receipt of the request, through rules adjudication, to execution of the resulting decision. RxAUTHTM is also available in a web based application. 
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RxMAX® is a rebate management system that is designed to assist health plans in managing their relationships with pharmaceutical manufacturers through contract management, record keeping, calculating market share, and creating billing details and summaries.
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Zynchros provides a suite of on-demand formulary management tools to help payors effectively manage their formulary programs, and to maintain Medicare Part D compliance in their programs.
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Enhanced Coordination of Benefits integrates external data sources with unique algorithms and eligibility data to identify beneficiaries with other coverage. This enables accurate identification of third party liability in real-time prior to the claim being paid.
Medicare Part D
Since the inception of the Medicare Part D program, the Company has offered a comprehensive array of services to the Medicare marketplace, all compliant with Centers for Medicare and Medicaid Services (“CMS”) regulations and configured to meet the challenges of a rapidly changing and growing pharmaceutical landscape. 
As a full-service PBM and a National Prescription Drug Plan, the Company supports a wide variety of Medicare Part D Plan Sponsors.  The Company provides prescription benefit management support for Medicare Advantage Prescription Drug plans ("MAPDs") and prescription drug plans ("PDPs"), including implementation of specific Medicare Part D plan designs, creation and maintenance of Medicare Part D formularies (including CMS submission), CMS reporting requirements and consultative, proactive account management.
The Industry
The Company believes the key market factors that influence spending on information technology solutions and services by participants in the pharmaceutical supply chain are the amount spent on prescription drugs and the associated volume of prescription drugs dispensed and insurance claims processed each year. According to IMS Health (“IMS”), approximately 4.0 billion pharmacy prescriptions were written and

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filled in the United States during 2010 — representing a retail value in excess of $307 billion. Based on the factors described below, the Company expects drug utilization rates to continue to rise in the future. The Company estimates that the current market opportunity for its information technology and services in its industry is significant, and is growing at a rate in excess of the drug utilization rate alone due to the following factors:
Aging population.  According to the U.S. Census Bureau, the U.S. population is expected to age rapidly through 2030, when 19.5% of the population will be over the age of 65, compared to 12.0% in 2000. Older Americans require more medications than their younger counterparts — often 20 to 40 prescriptions annually, according to CMS. According to the Kaiser Family Foundation ("Kaiser"), the number of prescriptions purchased in the U.S. increased 39% from 1999 to 2009, while the population only grew 9%. The increase in prescriptions due to an aging population is expected to drive demand for senior-focused clinical programs and benefit plans, as well as information technology decision support tools to facilitate on-line analytical assessment of specific population trends, which will address the PBM needs of an aging population.
Rising drug prices.  According to IMS, the U.S. pharmaceutical market is expected to grow at a 3% to 6% annual compound rate. Retail prescription prices have increased on average 3.6% annually between 2000 and 2009, according to Kaiser, a rate which is higher than the average inflation rate during that same period of 2.5%. Industry solutions to counter rising drug prices include tools to identify clinically appropriate cost-savings opportunities, supporting clinical programs that help promote generic and clinically equivalent, lower-cost preferred drug products, utilization management programs, such as PA and step-therapy, to help ensure that patients who can benefit from therapies are identified and that cost-effective treatment is encouraged, and tools to identify clinically appropriate, cost-saving opportunities.
Health information technology stimulus.  During 2009, the U.S. government enacted an approximately $20 billion stimulus package to spur the usage of electronic health records in the U.S. The package provides incentive payments to providers or hospitals to become meaningful users of electronic health records. The goal is to create a national infrastructure of health information technology to help improve health care quality, reduce health care costs, and add security to patient health records. The Company believes this program will fundamentally change the methods and manner in which health information records are shared, stored, and utilized.
Health care reform.  The health care reform statute enacted in 2010 could provide drug coverage for an estimated 32 million people in the form of expanded Medicaid coverage. The Company is active in this market and believes that expanded coverage will create growth opportunities. In addition, the reform bill provides a pathway for follow-on biologic development, giving more cost effective generic options to clients and opportunity for margin expansion for the Company.
Medicare Part D.  Medicare Part D is a program that subsidizes the costs of prescription drugs for Medicare beneficiaries. This program is heavily regulated with rules that can and do change on a regular basis. Ongoing regulatory changes by CMS will continue to fuel the future demands of this program. Medicare Part D has impacted the demand for pharmacy benefit management as well as information technology, as the Company's customers are required to update their systems, and the Company believes they will continue to require support to maintain these systems.
Growth in Specialty Drug Class.  During 2010, specialty drug spend continued to grow at a double digit pace, increasing 90% from 2005 according to Health Industries Research Companies, Inc. ("HIRC"). Specialty drug spend represented 25% of prescription drug spend in 2010. The Company projects that specialty spend will represent 43% of prescription drug spend by 2020. There is a move to shift coverage of these drugs from the medical benefit to the pharmacy benefit. The Company believes this movement presents opportunities for its specialty pharmacy program.
Generic Pipeline.  According to IMS, products representing approximately $28 billion in annual sales in the U.S. are expected to come off patent and face the prospect of generic competition in 2012. Also according to IMS, over the next five years, $64 billion in branded drugs will come off patent in the U.S., fueling growth in the availability of generic equivalents. The Company believes that this presents an opportunity for client cost savings and Company margin expansion.
Competition
The Company competes with numerous companies that provide the same or similar services. Its competitors range from large publicly traded companies to several small and privately owned companies which compete for a significant part of the market. The principal competitive factors are quality of service, scope of available services, and price. The ability to be competitive is influenced by the Company's ability to negotiate prices with pharmacies, drug manufacturers, and third party rebate administrators. Market share for PBM services in the United States is highly concentrated, with a few national firms, such as Medco Health Solutions, Inc., Express Scripts, Inc. and CVS Caremark Corporation, controlling a significant share of prescription volume. Moreover, the recent merger activity between Express Scripts, Inc. and Medco Health Solutions, Inc. signals further consolidation of these large firms. Some of the Company's competitors have been in existence for longer periods of time and are better established. Some of them also have broader public recognition and substantially greater financial and marketing resources. In addition, some of the Company's customers and potential customers may find it desirable to perform for themselves those services now being rendered by the Company.
The Company's ability to attract and retain customers is substantially dependent on its capability to provide competitive pricing, efficient and accurate claims management, utilization review services and related reporting, and consulting services.
The payor and pharmaceutical supply chain markets require solutions which address the unique needs of each constituent. The Company's customers require robust and scalable technology solutions, as well as the ability to ensure cost efficiency for themselves and their customers. The Company's product offerings include a wide range of PBM services and software products for managing prescription drug programs and for drug prescribing and dispensing. The Company's payor suite of products includes a wide range of pharmacy benefits management and claims adjudication systems.


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Competitive Strengths
The Company believes that the following competitive strengths are the keys to its success:
Flexible, customized and independent services:  The Company believes a key differentiator between itself and its competitors is not only the Company's ability to provide innovative PBM services, but also to deliver these services on an à la carte basis. The SXC suite offers the flexibility of broad product choice along the entire PBM continuum, enabling enhanced customer control, solutions tailored to the Company's customers’ specific requirements, and flexible pricing. The market for the Company's products is divided between large customers that have the sophisticated technology infrastructure and staff required to operate a 24-hour data center and other customers that are not able or willing to operate these sophisticated systems.
The Company’s business model allows its large customers to license the Company’s products and operate the Company’s systems themselves (with or without taking advantage of the Company’s significant customization, consulting and systems implementation services) and allows its other customers to utilize the Company’s systems’ capabilities on a fee-per-transaction or subscription basis through ASP processing from the Company’s data center.
Leading technology and platform:  The Company’s technology is robust, scalable, and web-enabled. The Company’s payor offerings efficiently supported over 558 million transactions in 2011. The platform is able to instantly cross-check multiple processes, such as reviewing claim eligibility, adverse drug reaction and properly calculating member, pharmacy and payor payments. The Company’s technology is built on flexible, database-driven rule sets and broad functionality applicable for most any type of business. The Company believes it has one of the most comprehensive claims processing platforms in the market.
The Company’s technology platform allows it to provide more comprehensive PBM services through its informedRx brand by offering customers a selection of services to choose from to meet their unique needs versus requiring them to accept a one-size-fits-all solution. The Company believes this à la carte offering is a key differentiator from its competitors.
Measurable cost savings for customers:  The Company provides its customers with increased control over prescription drug costs and drug benefit programs. The Company’s pricing model and flexible product offerings are designed to deliver measurable cost savings to the Company’s customers. The Company believes its pricing model is a key differentiator from its competitors for the Company’s customers who want to gain control of their prescription drug costs. For example, the Company’s pharmacy network contracts and manufacturer rebate agreements are made available by the Company to each customer. For customers who select the Company’s pharmacy network and manufacturer rebate services on a fixed fee per transaction basis, there is clarity to the rebates and other fees payable by the pharmaceutical manufacturer or third party rebate administrator to the customer. The Company believes that its pricing model together with the flexibility to select from a broad range of customizable services helps the customers realize measurable results and cost savings.
Business Strategy
The Company seeks to enhance its position as a leading provider of technology-enabled PBM services to the pharmaceutical supply chain in North America. The Company’s primary strategies are:
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Expand the breadth of the Company’s PBM services for health plans, self-insured employers and government agencies that sponsor pharmacy benefit plans:  Within the Company’s informedRx suite of products, several key initiatives are underway which the Company believes will help it to expand its revenue per claim and make the Company more competitive in the broader market. The Company combines its claims processing capabilities with a full suite of PBM services to offer competitively priced pharmacy networks, specialty drug and mail order programs, manufacturer rebate contracts and clinical programs to enable the Company’s customers to have more control over their drug spending. With the Company’s diversified product portfolio and the market demand for greater transparency in pricing of prescription drugs, the Company believes it is in an attractive market environment for informedRx to prosper.
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Provide additional PBM services to the Company’s existing payor customer base:  Based on the success the Company has had to date with informedRx, the Company intends to sell additional services to the Company’s existing customers through its informedRx suite of products which include the Company’s mail and specialty pharmacy services, as well as the Company’s competitive pharmacy network and clinical offerings. The Company may also make capital investments in technology to further improve the quality of its products. By providing a broader range of services, the Company believes that it can increase its customer base and the breadth of products utilized by each customer, thereby increasing the Company’s revenue base.
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Target HCIT clients for pull-through sales opportunities: The Company has been successful in working with current HCIT clients to provide PBM services, such as the retail pharmacy network and formulary administration. The Company will continue to pursue pull-throughs as part of its growth strategy.
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Target large public sector fee-for-service opportunities:  Based on the success the Company has had to date with public sector opportunities, it intends to sell additional services to state, federal, and provincial Medicaid plans. The Company sells PBM technology solutions to support pharmacy claims processing, Medicaid rebate management, and sophisticated pharmacy claims prior authorization workflow and processing, among other services.
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Aggressively pursue large health plan technology upgrades:  The Company’s goal is to be the industry’s leading provider of tools, technology and services to help its customers better manage pharmacy programs, and in turn, to reduce the cost of drug delivery and enhance the healthcare experience for their plan members.
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Pursue strategic acquisition opportunities:  The Company actively evaluates opportunities to expand its product offerings and customer base through strategic acquisitions, such as the recent acquisitions of MedfusionRx, PTRX, SaveDirectRx and HealthTran. The Company’s acquisition strategy focuses on identifying acquisitions that expand its core footprint in the PBM market, add new products and services in potential high growth areas and provide additional scale in areas such as specialty

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pharmacy management, oncology or public sector pharmacy (including state Medicaid). The Company believes that its management team’s proven ability to successfully identify acquisition opportunities that are complementary and synergistic to its business and to integrate them into its existing operations with minimal disruption has played, and will continue to play, an important role in the expansion of its business.
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Broaden the Company’s services, technology and markets through next generation growth opportunities:  The Company continues to pursue next generation growth opportunities through proprietary development of new technology applications and new PBM services. The Company currently has a number of tools that are available to its HCIT customers to facilitate e-prescribing and other electronic health record keeping. The Company believes that this market will continue to grow and offers an excellent opportunity to complement the Company’s PBM services and further enhance its product offerings. In addition, the Company believes that the recently enacted healthcare reform statute, which contemplates an expansion of coverage and emphasis on technology improvements in healthcare services (such as e-prescribing), offers a number of potential growth opportunities.

GOVERNMENT REGULATION
Various aspects of the Company's business are governed by federal and state laws and regulations. Because sanctions may be imposed for violations of these laws, compliance is a significant operational requirement. The Company believes it is in substantial compliance with all existing legal requirements material to the operation of its business. There are, however, significant uncertainties involving the application of many of these legal requirements to its business. In addition, at any given time, there are numerous proposed health care laws and regulations at the federal and state levels, many of which could adversely affect the Company's business, results of operations, and financial condition. The Company is unable to predict what additional federal or state legislation or regulatory initiatives may be enacted in the future relating to its business or the health care industry in general, or what effect any such legislation or regulations might have on the Company. The Company also cannot provide any assurance that federal or state governments will not impose additional restrictions or adopt interpretations of existing laws or regulations that could have a material adverse effect on its business or financial performance.
Some of the state laws described below may be preempted in whole or in part by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), which provides for comprehensive federal regulation of employee benefit plans. However, the scope of ERISA preemption is uncertain given the extensive and sometimes conflicting court rulings addressing the topic. The Company also provides services to certain clients, such as governmental entities, that are not subject to ERISA.
Federal Laws and Regulations Affecting the PBM Industry
The following descriptions identify various federal laws and regulations that affect or may affect aspects of the Company's PBM business:
Legislation and Litigation Affecting Drug Prices.
Average wholesale price (“AWP”) is a standard pricing metric published by third party data sources and currently used throughout the pharmacy benefits industry as the basis for determining drug pricing under contracts with clients, pharmacies, and pharmaceutical manufacturers. The calculation and reporting of AWP have been the subject of investigations by federal and state governments and litigation brought against pharmaceutical manufacturers, as well as data services that report AWP. The Company is not responsible for calculations, reports or payments of AWP; however, such investigations or lawsuits could impact the Company's business because many of its customer contracts, pharmaceutical purchase agreements, retail network contracts and other agreements use AWP as a pricing benchmark. In March 2009, a federal district court gave final approval to settlement of class action lawsuits brought against First DataBank (“FDB”) and Medi-Span, two primary sources of AWP reporting. Under the terms of the settlement, FDB and Medi-Span agreed, among other things, to reduce the reported AWP of certain prescription drugs by four percent effective September 26, 2009. FDB and Medi-Span also announced that they would discontinue publishing AWP within two years of the settlement. On September 3, 2009, a federal appeals court rejected challenges to the settlements, clearing the way for the AWP reductions to take effect.
In response to this action, the Company, as authorized in most of the Company's standard customer contracts, adopted a revised pricing benchmark to assure cost neutrality for the Company, its customers, and pharmacies as to what they paid or received, as applicable, for prescription drug products using the AWP pricing benchmark before September 26, 2009 and what they would pay or receive on or after September 26, 2009. While that transition has been accomplished to date with no material adverse effect on the Company, there can be no assurances that customers and pharmacies in reviewing the results of the transition may not challenge the way in which the transition occurred and/or whether it preserved cost neutrality as intended, or that the results of such challenges will not have a material adverse effect on the Company's financial performance, results of operations and financial condition in future periods. These changes, as well as any changes proposed by the federal government and the states regarding the reimbursement for drugs by Medicaid and Medicare, could impact the Company's pricing to customers and other payors and could impact its ability to negotiate discounts with manufacturers, wholesalers, or retail pharmacies.
Legislation and Regulation of Medicare Advantage and Medicare Part D.
The Medicare voluntary outpatient prescription drug benefit (“Part D”) established under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) became effective on January 1, 2006. The MMA also created new guidelines for Medicare HMOs, termed Medicare Advantage Plans (“MA-PDs”), which offer both an outpatient prescription drug benefit and health care coverage.
Medicare beneficiaries who elect Medicare Part D coverage pay a monthly premium for the covered outpatient drug benefit. Assistance with premiums and cost sharing for outpatient drugs are provided to eligible low-income beneficiaries. The voluntary outpatient prescription drug benefit requires coverage of essentially the same pharmaceuticals that are approved for the Medicaid program, although selection may be restricted through a formulary. Beneficiaries can enroll in the outpatient prescription drug benefit through standalone Prescription Drug Plans

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(“PDPs”), available in 34 regions across the United States, or through MA-PDs that offer integrated drug coverage with other health care coverage in 26 regions across the United States.
As a PDP sponsor and in its capacity as a subcontractor with certain Part D Plan clients, the Company is subject to certain federal rules, regulations, and sub-regulatory guidance pertaining to the operation of Medicare Part D. If CMS determines that the Company has not performed satisfactorily as a subcontractor, CMS may request the Company's PDP or Medicare Advantage Plan client to revoke its Medicare Part D activities or responsibilities. While the Company believes that it provides an appropriate level of service under its respective contract and subcontracts, it can give no assurances that CMS or a Medicare Part D Plan will not terminate its business relationships insofar as they pertain to Medicare Part D.
PDPs and MA-PDs are subject to provisions of the MMA intended to deter “fraud, waste and abuse” and are strictly monitored by CMS and its Medicare Drug Integrity Contractors (“MEDICs”) to ensure that Part D program funds are not spent inappropriately. In April 2006, CMS issued a chapter 9 to the Medicare Prescription Drug Benefit Manual interpreting the fraud, waste and abuse provisions of Part D, referred to as the “FWA Guidance.” Among other things, the FWA Guidance cites the following examples of potential PBM fraud, waste and abuse risks in connection with Part D: prescription drug switching, unlawful remuneration, inappropriate formulary decisions, prescription drug splitting or shorting, and failure to offer negotiated prices. CMS has offered additional sub-regulatory guidance regarding some of these risk areas, particularly with respect to the Part D formulary decision making process which is highly regulated by CMS. No assurance can be given that the Company will not be subject to scrutiny or challenge under one or more of the underlying laws by the government enforcers or private litigants.
Also in 2006, CMS issued guidance to PDPs and MA-PDs requiring that such plans report 100% of all price concessions received for PBM services. This CMS guidance suggests that best practices would require PDPs and MA-PDs to contractually require the right to audit their PBMs, as well as require 100% transparency as to manufacturer rebates paid for drugs provided under the sponsor's plan, including the portion of such rebates retained by the PBM as part of the price concession for the PBM's services. In 2009, CMS codified this guidance in regulations, effective January 1, 2010, that require Part D drug plan sponsors to use the amount paid to a pharmacy as the basis for determining cost sharing for beneficiaries and for reporting a plan's drug costs to CMS. To date, such disclosures have not had a material adverse effect on the Company's business, results of operations, financial condition, or cash flows; nor does the Company anticipate such disclosures to have such an effect in the future.
The Patient Protection and Affordable Care Act (Public Law 111-148) (“PPACA”), as amended by the Health Care and Education Reconciliation Act of 2010 (Public Law 111-152) (collectively, the “Health Care Reform Laws”) made changes to MA-PDs that are likely to result in significant reductions in government payments to the plans and reduced enrollment numbers. Those individuals leaving an MA-PD are expected to transition into the traditional Medicare program, making the net financial effect on the Company's activities uncertain. The Health Care Reform Laws also made changes to the Medicare Part D program that could have an impact on the Company's business. These new provisions include changes in the way drugs are paid for under the so called “coverage gap,” creation of protected classes of drugs that have an impact on formularies and allow the government more control over formularies, reductions in the subsidies provided to higher income individuals, and changes in dispensing requirements in long-term care facilities. Some of these changes may have a positive impact and others may have a negative impact on the Company's revenues and business model.
Federal Anti-Kickback/Fraud and Abuse Laws.
The federal Anti-Kickback Statute (“AKS”) is a criminal law that prohibits, among other things, an individual or entity from knowingly or willfully paying or receiving, subject to certain statutory exceptions and regulatory safe harbors, any remuneration, directly or indirectly, intended to induce: (1) a referral for the furnishing of any item or service for which payment may be made in whole or in part under a federal health care program, including Medicare, Medicaid and the Tricare Program, or (2) the purchase, lease, order or the arranging for or recommending of the purchase, lease, or order of items or services for which payment may be made in whole or in part under federal health care programs. Penalties for violating the AKS may include imprisonment, criminal and civil fines, and exclusion from participation in the federally-funded health care programs.
The AKS has been interpreted broadly by courts, the U.S. Department of Health & Human Services (“HHS”), Office of Inspector General (“OIG”), the agency charged with the enforcement of the AKS, and other administrative bodies. Because of the statute's broad scope and the limited statutory exceptions, the OIG has established certain regulatory safe harbors which, if fully met, should immune the parties from liability under the AKS. For example, safe harbors exist for certain properly disclosed and reported discounts received from vendors, certain investment interests, certain properly disclosed payments made by vendors to group purchasing organizations, certain personal services arrangements, and certain discount and payment arrangements between PBMs and HMO risk contractors serving Medicaid and Medicare members. A practice that does not fall within an exception or a safe harbor is not necessarily unlawful, but may be subject to scrutiny and challenge. Some, though not all, court opinions interpreting the AKS have focused primarily on the law's intent requirement and have held that an arrangement will violate the AKS if any one purpose of the arrangement is to induce referrals or purchases, even if the payments at issue are also intended for a legitimate purpose. Thus, a violation of the statute may occur even if only one purpose of a payment arrangement is to induce patient referrals or purchases of products or services that are reimbursed by federal health care programs. Among the practices that have been identified by the OIG as potentially improper under the statute are certain product conversion programs in which benefits are given by drug manufacturers to pharmacists or physicians for changing a prescription, or recommending or requesting such a change, from one drug to another. The AKS has been cited as a partial basis, along with state consumer protection laws discussed below, for investigations and multi-state settlements relating to financial incentives provided by drug manufacturers to retail pharmacies as well as to PBMs in connection with such programs.
In April 2003, the OIG published “Final OIG Compliance Program Guidance for Pharmaceutical Manufacturers” (the “Compliance Guidance”). The Compliance Guidance, which is directed toward pharmaceutical manufacturers, provides the OIG's views on the fundamental elements of pharmaceutical manufacturer compliance programs. The Compliance Guidance also highlights several potentially risky arrangements for pharmaceutical manufacturers, including the provision of grants, “prebates” and “upfront payments” to PBMs to support disease management

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programs and therapeutic interchanges. In addition, the Compliance Guidance indicates that the provision of rebates or other payments to PBMs by pharmaceutical manufacturers may potentially trigger liability under the AKS if not properly structured and disclosed.
The Health Care Reform Laws made two important clarifications that significantly strengthen the government's ability to enforce the AKS. First, the Health Care Reform Laws clarified that a person need not have actual knowledge of or specific intent to violate the AKS. Second, the Health Care Reform Laws made clear that a claim resulting from an AKS violation constitutes a false claim under the federal False Claims Act (“FCA”). The provision codifies what some federal district courts had already held and significantly heightens the civil penalties the Company could face for any alleged AKS violation.
Additionally, it is a crime under the Public Contract Anti-Kickback Act, for any person to knowingly and willfully offer or provide any remuneration to a prime contractor to the United States, including a contractor servicing federally funded health programs, in order to obtain favorable treatment in a subcontract. Violators of this law also may be subject to civil monetary penalties.
The Company believes that it is in substantial compliance with the legal requirements imposed by such anti-kickback laws and regulations. However, there can be no assurance that the Company will not be subject to scrutiny or challenge under such laws or regulations. Any such challenge could have a material adverse effect on its business, results of operations, financial condition or cash flows.
Federal Statutes Prohibiting False Claims.
The FCA imposes liability for knowingly making or causing to be made false claims to the government, including federal health care programs such as Medicare and Medicaid. For example, potential false claims include claims for services not rendered, or claims that misrepresent actual services rendered in order to obtain higher reimbursement. Private individuals may bring qui tam or whistleblower lawsuits against providers under the FCA, which authorizes the payment of a portion of any recovery to the individual bringing suit. Such actions are initially required to be filed under seal pending their review by the Department of Justice. Federal district courts have interpreted the FCA as applying to claims for reimbursement that violate the AKS or federal physician self-referral law (commonly referred to as the “Stark Law”) under certain circumstances. The Health Care Reform Laws expanded false claims liability by clarifying that an AKS violation can be a predicate for a false claim under the FCA and by adding a provision that imposes FCA liability on an individual or entity that fails to make a timely return of any overpayments received from Medicare or Medicaid. The FCA generally provides for the imposition of civil penalties and for treble damages, resulting in the possibility of substantial financial penalties for small billing errors that are replicated in a large number of claims, as each individual claim could be deemed to be a separate violation of the FCA. Criminal provisions that are similar to the FCA provide that a corporation may be fined if it is convicted of presenting to any federal agency a claim or making a statement that it knows to be false, fictitious or fraudulent to any federal agency.
In 2010, the Company directly contracted with the federal government to provide services to beneficiaries of federally funded health care programs. Therefore, the Company directly submitted claims to the federal government. In addition, the Company does contract with and provide services to entities or organizations that are federal government contractors, such as Medicare Part D PDPs. There can be no assurance that the government would not potentially view one or more of the Company's actions in providing services to federal government contractors as causing or assisting in the presentment of a false claim particularly in light of the April 2009 amendments to the FCA under the Fraud Enforcement Recovery Act of 2009 (“FERA”). At that time, FERA expanded the scope of FCA liability to include reverse false claims, which apply to anyone who knowingly conceals, or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the government. The Company does not believe it is in violation of the FCA and has a corporate compliance and ethics program, policies and procedures and internal controls in place to help maintain an organizational culture of honesty and integrity.
ERISA Regulation.
ERISA regulates certain aspects of employee pension and health benefit plans, including self-funded corporate health plans. The Company has agreements with self-funded corporate health plans to provide PBM services, and therefore, it is a service provider to ERISA plans. ERISA imposes duties on any person or entity that is a fiduciary with respect to the ERISA plan. The Company administers pharmacy benefits for ERISA plans in accordance with plan design choices made by the ERISA plan sponsors. The Company does not believe that the general conduct of its business subjects it to the fiduciary obligations set forth by ERISA, except to the extent it has specifically contracted with an ERISA plan sponsor to accept fiduciary responsibility for the limited purpose of addressing benefit claims and appeals. However, there can be no assurance that the U.S. Department of Labor (“DOL”), which is the agency that enforces ERISA, or a private litigant would not assert that the fiduciary obligations imposed by ERISA apply to certain aspects of the Company's operations.
Numerous lawsuits have been filed against various PBMs by private litigants, including Plan participants on behalf of an ERISA plan and by ERISA Plan sponsors, alleging that the PBMs are ERISA fiduciaries and that, in such capacity, they allegedly violated ERISA fiduciary duties in connection with certain business practices related to their respective contracts with retail pharmacy networks and/or pharmaceutical manufacturers.
ERISA also imposes civil and criminal liability on service providers to health plans and certain other persons if certain forms of illegal remuneration are made or received. These provisions of ERISA are similar, but not identical, to the federal healthcare Anti-Kickback Statute discussed above. In particular, ERISA does not provide the statutory and regulatory safe harbor exceptions incorporated into the federal healthcare Anti-Kickback Statute. Like the health care anti-kickback laws, the corresponding provisions of ERISA are written broadly and their application to particular cases is often uncertain. The Company has implemented policies regarding, among other things, disclosure to health plan sponsors with respect to any commissions paid by or to it that might fall within the scope of such provisions and accordingly believe it is in substantial compliance with any applicable provisions of ERISA. However, the Company can provide no assurance that its policies in this regard would be found by the DOL and potential private litigants to meet the requirements of ERISA.
In addition, the DOL has recently issued several regulations that impose new fee disclosure rules on certain ERISA plans and their service providers. Those regulations do not currently apply to self-funded corporate health plans and their service providers, but the DOL has

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held hearings to discuss extending them in the future. As a result, the Company is not yet able to assess the effect the regulations may have on our business.
FDA Regulation.
The U.S. Food and Drug Administration (“FDA”) generally has authority to regulate drug promotional materials that are disseminated by or on behalf of a drug manufacturer. The FDA also may inspect facilities in connection with procedures implemented to effect recalls of prescription drugs.
In addition, the FDA has authority to require the submission and implementation of a risk evaluation and mitigation strategy (“REMS”) if the FDA determines that that a REMS is necessary for the safe and effective marketing of a drug. To the extent we dispense products subject to REMS requirements or provide REMS services to a pharmaceutical manufacturer, we are subject to audit by the pharmaceutical manufacturer.
Antitrust Regulation.
Various federal and state antitrust laws regulate trade and commerce with the objective of protecting the competitive process. Thus, Section One of the Sherman Act prohibits agreements that unreasonably restrain competition; Section Two of the Sherman Act prohibits monopolization and attempts to monopolize; Section Seven of the Clayton Act prohibits mergers and acquisitions which may substantially lessen competition; and the Robinson-Patman Act prohibits discriminating in price among different customers in certain circumstances. The interpretation of these broadly-worded statutes is left for the courts, and there is often uncertainty concerning the application of the antitrust laws to specific business practices. Successful plaintiffs in federal antitrust actions are always entitled to recover treble damages, as well as their attorneys' fees. (In addition, virtually all states have antitrust statutes analogous to the Sherman Act, often including automatic treble damages and attorneys' fees.)
Numerous retail pharmacies in the U.S. have filed lawsuits against pharmaceutical manufacturers, drug wholesalers, and PBMs challenging certain branded drug pricing practices under federal and state antitrust laws. The complaints alleged, in part, that the manufacturers gave, and the PBMs accepted, rebates and discounts on purchases of brand name prescription drugs, in violation of the Robinson-Patman Act, and that the manufacturers, drug wholesalers, and PBMs conspired in violation of the Sherman Act not to provide similar rebates and discounts to the plaintiff retail pharmacies. Although the Sherman Act allegations have been resolved, often with substantial settlements, certain Robinson-Patman Act claims continue to be litigated. The plaintiffs seek unspecified monetary damages, including trebled damages, injunctive relief against the alleged price discrimination, and attorneys' fees.
The Company believes that it is in compliance with the legal requirements imposed by the antitrust laws. However, there can be no assurance that the Company will not be subject to scrutiny or challenge under such laws. Any such challenge could have a material adverse effect on the Company's business, results of operations, financial condition, or cash flows.
State Laws and Regulations Affecting the PBM Industry
The following descriptions identify various state laws and regulations that affect or may affect aspects of the Company's PBM business:
State Anti-Kickback/False Claims Laws.
Many states have laws and/or regulations similar to the AKS and the FCA described above, while several others are currently considering passing or strengthening false claims laws. Such state laws are not necessarily limited to services or items for which government-funded health care program payments may be made. Such state laws may be broad enough to include improper payments made in connection with services or items that are paid by commercial payors. Penalties for violating these state anti-kickback and false claims laws may include, but are not limited to, injunction, imprisonment, criminal and civil fines and exclusion from participation in the state Medicaid programs. Additionally, under the Deficit Reduction Act of 2005, discussed in greater detail below, states are incentivized to pass broad false claims legislation similar to the FCA, and there has been activity in several states during the past several years to do so.
The Company believes that it is in substantial compliance with the legal requirements imposed by such laws and regulations. However, there can be no assurance that the Company will not be subject to scrutiny or challenge under such laws or regulations. Any such challenge could have a material adverse effect on the Company's business, results of operations, financial condition or cash flows.
State Consumer Protection Laws.
Most states have enacted consumer protection and deceptive trade practices laws that generally prohibit payments and other broad categories of conduct deemed harmful to consumers. These statutes may be enforced by states and/or private litigants. Such laws have been and continue to be the basis for investigations, prosecutions, and settlements of PBMs, initiated by state prosecutors as well as by private litigants.
 The Company believes that it is in substantial compliance with the legal requirements imposed by such laws and regulations. However, there can be no assurance that the Company will not be subject to scrutiny or challenge under one or more of these laws, or under similar consumer protection theories.
State Comprehensive PBM Regulation.
Legislation directly regulating PBM activities in a comprehensive manner has been introduced in a number of states. In addition, legislation has been proposed in some states seeking to impose fiduciary obligations or disclosure requirements on PBMs. The District of Columbia has enacted a statute imposing fiduciary and disclosure obligations on PBMs. Similarly, both North Dakota and South Dakota have relatively comprehensive PBM laws that, among other things, increase financial transparency and regulate therapeutic interchange programs. Each state that enacts such legislation requires the Company to adapt its operations in that state, which could materially adversely impact the Company.
Many states have licensure or registration laws governing certain types of ancillary health care organizations, including preferred

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provider organizations, third-party administrators (“TPAs”), companies that provide utilization review services, and companies that engage in the practices of a pharmacy. The scope of these laws differs significantly from state to state, and the application of such laws to the activities of PBMs often is unclear.
In addition, certain quasi-regulatory organizations, including the National Association of Boards of Pharmacy and the National Association of Insurance Commissioners (“NAIC”) have issued model regulations or may propose future regulations concerning PBMs and/or PBM activities, and the National Committee for Quality Assurance (“NCQA”), the Utilization Review Accreditation Commission (“URAC”), or other credentialing organizations may provide voluntary standards regarding PBM activities. In 2007, for example, URAC finalized PBM accreditation standards for PBMs serving the commercially insured market. While the actions of these quasi-regulatory organizations do not have the force of law, they may influence states to adopt their requirements or recommendations as well as influence customer requirements for PBM services. Moreover, any standards established by these organizations could also impact the Company's health plan customers and/or the services it provides to them.
The Company believes that it is in substantial compliance with all such laws and requirements where required, and will continue to monitor legislative and regulatory developments. Since 2009, the Company has been awarded full PBM accreditation from URAC. There can be no assurance, however, regarding the future interpretation of these laws and their applicability to the activities of the Company's PBM business. Future legislation or regulation, or interpretations by regulatory and quasi-regulatory authorities of existing laws and regulations, could materially affect the cost and nature of the Company's business as currently conducted.
Network Access Legislation.
A majority of states now have some form of legislation affecting the Company's ability to limit access to a pharmacy provider network (“any willing provider” legislation), or removal of a network provider, (“due process” legislation). Such legislation may require the Company or its clients to admit any retail pharmacy willing to meet the plan's price and other terms for network participation, or may provide that a provider may not be removed from a network except in compliance with certain procedures. Similarly, there are any willing pharmacy provisions applicable to Medicare Part D plans. These statutes have not materially affected the Company's business.
State Legislation Affecting Plan or Benefit Design.
Some states have enacted legislation that prohibits certain types of managed care plan sponsors from implementing certain restrictive design features, and many states have legislation regulating various aspects of managed care plans, including provisions relating to the pharmacy benefits. For example, some states, under so-called freedom of choice legislation, provide that members of the plan may not be required to use network providers, but must instead be provided with benefits even if they choose to use non-network providers. Other states have enacted legislation purporting to prohibit health plans from offering members financial incentives for use of mail service pharmacies. Legislation has been introduced in some states to prohibit or restrict therapeutic intervention, to require coverage of all FDA-approved drugs or to require coverage for off-label uses of drugs where those uses are recognized in peer-reviewed medical journals or reference compendia. Other states mandate coverage of certain benefits or conditions and require health plan coverage of specific drugs, if deemed medically necessary by the prescribing physician. Such legislation does not generally apply to the Company directly, but may apply to certain of its clients, such as HMOs and health insurers. If legislation were to become widely adopted, it could have the effect of limiting the economic benefits achievable through PBMs. This development could have a material adverse effect on the Company's business, results of operations, financial condition or cash flows.
State Regulation of Financial Risk Plans.
Fee-for-service prescription drug plans are generally not subject to financial regulation by the states. However, if a PBM offers to provide prescription drug coverage on a capitated basis or otherwise accepts material financial risk in providing the benefit, laws in various states may regulate the plan. Such laws may require that the party at risk establish reserves or otherwise demonstrate financial responsibility. Laws that may apply in such cases include insurance laws, HMO laws or limited prepaid health service plan laws. Currently, the Company does not believe that its PBM business incurs financial risk of the type subject to such regulation. However, if it chooses to become a regional PDP for the Medicare outpatient prescription drug benefit at some time in the future, the Company would need to comply with state laws governing risk-bearing entities in the states where it operates a PDP.
State Discount Drug Card Regulation.
Numerous states have laws and/or regulations regulating the selling, marketing, promoting, advertising or distributing of commercial discount drug cards for cash purchases. Such laws and regulations provide, generally, that any person may bring an action for damages or seek an injunction for violations. The Company administers a limited commercial discount drug card program that it does not consider material to its business. The Company believes its administration of the commercial discount drug card program is in compliance with various state laws. However, there can be no assurance that the existence of such laws will not materially impact the Company's ability to offer certain new commercial products and/or services in the future.
Combined Federal and State Laws, Regulations and Other Standards Affecting the PBM Industry
Certain aspects of the Company's PBM business are or may be affected by bodies of law that exist at both the federal and state levels and by other standard setting entities. Among these are the following:
Pharmacy Licensure and Regulation.
The Company is subject to state and federal statutes and regulations governing the operation of mail service and specialty pharmacies and the dispensing of controlled substances. The Company's pharmacies deliver prescription drugs and supplies to individuals in all 50 states. The practice of pharmacy is generally regulated at the state level by state boards of pharmacy. Each of the Company's pharmacies must be

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licensed in the state in which it is located. Also, many of the states where the Company delivers pharmaceuticals, including controlled substances, have laws and regulations that require out-of-state mail service pharmacies, such as the Company, to register with that state's board of pharmacy or similar regulatory body. Federal statutes and regulations govern the labeling, packaging, advertising and adulteration of prescription drugs and the dispensing of controlled substances. Federal controlled substance laws require the Company to register its pharmacies with the United States Drug Enforcement Administration and to comply with security, record keeping, inventory control and labeling standards in order to dispense controlled substances. The Company is also subject to certain federal and state laws affecting Internet-based pharmacies because it dispenses prescription drugs pursuant to refill orders received through its Internet websites, among other methods. Several states have proposed new laws to regulate Internet-based pharmacies, and federal regulation of Internet-based pharmacies by the FDA or another federal agency has also been proposed. Other statutes and regulations may affect our mail service operations. For example, the Federal Trade Commission (“FTC”) requires mail service sellers of goods generally to engage in truthful advertising, to stock a reasonable supply of the products to be sold, to fill mail service orders within thirty days and to provide clients with refunds when appropriate. In addition, the United States Postal Service has statutory authority to restrict the transmission of drugs and medicines through the mail. The Company's pharmacists are subject to state regulation of the profession of pharmacy and employees engaged in a professional practice must satisfy applicable state licensing requirements.
Deficit Reduction Act of 2005.
The Deficit Reduction Act of 2005 (“DRA”) came into law on February 8, 2006 enacting significant changes to the Medicaid system, a state and federally funded program, with respect to prescription drugs. Among other things, the DRA revises the methodology used to determine federal upper payment limits, to pharmacies, and the maximum amount a state can reimburse for generic drugs under Medicaid. In addition, the DRA permits stronger cost-sharing requirements applicable to Medicaid prescription drugs, and contains provisions intended to reduce fraud, waste and abuse in the Medicaid program. The DRA's fraud, waste and abuse provisions, among other things, incentivize states to enact their own false claims acts, mirrored on the FCA, described above, and provides for appropriate federal funding to increase oversight of the Medicaid program. The DRA's fraud, waste and abuse provisions also include a provision intended to strengthen Medicaid's status as payor of last resort relative to private health insurance by specifying that PBMs and self-insured plans may be liable third parties. The provisions in the DRA have the potential to impact the PBM industry by means of increased prosecutorial and private litigant scrutiny of the pharmaceutical industry in general, which may include PBMs. Additionally, the DRA mandates the public availability of pharmaceutical manufacturer average manufacturer prices (“AMPs”) and creates incentives to states to use AMPs for Medicaid reimbursement, potentially paving the way for a more general market shift in reimbursement mechanisms from AWP-based methodologies to AMP-based methodologies, discussed in more detail above, under “Legislation and Litigation Affecting Drug Prices.” Additionally, the third party recovery provisions in the DRA may lead to greater financial recoveries from third party PBMs in cases where Medicaid was not properly a primary payor on a drug claim, even where a PBM is not financially at risk.
Privacy and Confidentiality Legislation.
The Company's activities involve the receipt, use and disclosure of confidential health information, including disclosure of the confidential information to a customer's health benefit plan, as permitted in accordance with applicable federal and state privacy laws. In addition, the Company uses and discloses de-identified data for analytical and other purposes. Many state laws restrict the use and disclosure of confidential medical information, and similar new legislative and regulatory initiatives are underway at the state and federal level. To date, no such laws presently have an adverse impact the Company's ability to provide its services, but there can be no assurance that federal or state governments will not enact such legislation, impose restrictions or adopt interpretations of existing laws that could have a material adverse effect on its business, results of operations, financial condition or cash flows.
The Health Insurance Portability and Accountability Act of 1996 and the regulations issued thereunder (collectively “HIPAA”) impose extensive requirements on the way in which health plans, healthcare providers that engage in certain electronic financial and administrative transactions covered by HIPAA, and healthcare clearinghouses (known as “covered entities”) and the persons or entities that use or disclose protected health information (“PHI”) to provide services to covered entities or to perform functions on their behalf (known as “business associates”), use, disclose and safeguard PHI, including requirements to protect the integrity, availability and confidentiality of electronic PHI. Many of these obligations were expanded under the Health Information Technology for Economic and Clinic Health Act (the “HITECH Act”), passed as part of the American Recovery and Reinvestment Act of 2009.
The final privacy regulations (“Privacy Rule”) issued by the Office for Civil Rights (“OCR”) of HHS pursuant to HIPAA, give individuals the right to know how their PHI is used and disclosed, as well as the right to access, amend and obtain information concerning certain disclosures of PHI. Covered entities, such as pharmacies and health plans, are required to provide a written Notice of Privacy Practices to individuals that describes how the entity uses and discloses PHI, and how individuals may exercise their rights with respect to their PHI. For most uses and disclosures of PHI other than for treatment, payment, healthcare operations and certain public policy purposes, HIPAA generally requires that covered entities obtain a valid written individual authorization. In most cases, use or disclosure of PHI must be limited to the minimum necessary to achieve the purpose of the use or disclosure.
The Company is itself a covered entity under HIPAA in connection with its operation of a mail service pharmacy and a specialty service pharmacy.
In connection with its other activities that require access to PHI the Company is not considered a covered entity. However, the Company's health plan clients and pharmacy customers are covered entities, and are required to enter into business associate agreements with vendors, such as PBMs, that perform a function or activity for the covered entity that involves the use or disclosure of individually identifiable health information. The business associate agreements mandated by the Privacy Rule create a contractual obligation for the business associate to perform its duties for the covered entity in compliance with the Privacy Rule. Effective February 17, 2010, the HITECH Act created a statutory obligation for the Company, when it acts as a business associate, to satisfy certain aspects of the Privacy Rule and the final HIPAA security regulations.
If we fail to comply with HIPAA or our policies and procedures are not sufficient to prevent the unauthorized disclosure of PHI, we

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could be subject to liability, fines and lawsuits under federal and state privacy laws, consumer protection statutes and other laws. Criminal penalties and civil sanctions may be imposed for failing to comply with HIPAA standards either as a covered entity or business associate, and these penalties and sanctions have significantly increased under the HITECH Act. In February 2011, OCR, the agency responsible for enforcing HIPAA and HITECH, issued the first civil monetary penalty ever imposed for a covered entity's violation of the HIPAA Privacy Rule. Additionally, the HITECH Act requires OCR to conduct periodic compliance audits. Continued enforcement actions are likely to occur in the future. Furthermore, HITECH provides authority to state attorney generals to bring actions in federal court for violations of HIPAA on behalf of state residents harmed by such violations.
The final transactions and code sets regulation (the “Transaction Rule”) promulgated under HIPAA requires that all covered entities that engage in certain electronic transactions use standardized formats and code sets. The Company, in its role as a business associate of a covered entity, must conduct such transactions in accordance with the Transaction Rule. The Company, in its role as a specialty pharmacy, must also conduct such transactions in accordance with the Transaction Rule or engage a clearinghouse to process their covered transactions. HHS promulgated a National Provider Identifiers (“NPI”) Final Rule which requires health plans to utilize NPIs in all Standard Transactions. NPIs replaced National Association of Boards of Pharmacy numbers for pharmacies, Drug Enforcement Agency numbers for physicians and similar identifiers for other health care providers for purposes of identifying providers in connection with HIPAA standard transactions. The Company has undertaken the necessary arrangements to ensure that its standard transactions remain compliant with the Transaction Rule subsequent to the implementation of the NPI Final Rule.
The final security regulations (the “Security Rule”) issued pursuant to HIPAA mandate the use of administrative, physical, and technical safeguards to protect the confidentiality of electronic PHI. As with the other two rules issued pursuant to HIPAA, the Security Rule applies to covered entities, and certain aspects of the Security Rule also apply to business associates. The Company has made the necessary arrangements to ensure compliance with the Security Rule for all aspects of its business.
The Company must also comply with the “breach notification” regulations, which implement provisions of the HITECH Act. Under these regulations, covered entities must promptly notify affected individuals and the HHS Secretary in the case of a breach of “unsecured PHI,” as well as the media in cases where a breach affects more than 500 individuals. Breaches affecting fewer than 500 individuals must be reported to the HHS Secretary on an annual basis. The regulations also require business associates of covered entities to notify the covered entity of breaches at or by the business associate. The Company has taken and continues to take reasonable steps to reduce the amount of unsecured PHI it handles.
In addition, final regulations governing a covered entity's obligation to provide, upon individual request, “access reports” are expected to be issued by OCR in 2012. A recently released proposed rule, if finalized, would require covered entities to develop systems to monitor which of their employees' and business associates' access an individual's electronic PHI, at what time and date access occurs, and the action taken during the access session (e.g., modification, deletion, viewing). The proposed rule would also require information on access to electronic designated record sets held by business associates. The proposed regulations could impose significant burdens on covered entities and business associates that result from having to take reports generated for internal purposes and modify them for disclosure to patients or health plan enrollees.
The Health Care Reform Laws require the Secretary of HHS to develop new health information technology standards that could require changes to the Company's existing software products. For example, the statute requires the establishment of interoperable standards and protocols to facilitate electronic enrollment of individuals in federal and state health and human services programs and provides the government with authority to require incorporation of these standards and protocols in health information technology investments as a condition of receiving federal funds for such investments. The Company is monitoring regulatory implementation of these provisions so that it may respond accordingly to any new recommendations or requirements that may necessitate or warrant changes to existing products.
While new and future legal interpretations could alter the Company's assessment of its efforts to comply with provisions of HIPAA, the HITECH Act, and the Health Care Reform Laws that govern the privacy, security and standardization of health care information and transactions, the Company currently believes that compliance with these legal authorities should not have a material adverse effect on its business operations.
Pursuant to HIPAA, state laws that are more protective of PHI are not pre-empted. Therefore, to the extent states continue to enact more protective legislation, the Company could be required to make significant changes to its business operations.
Independent of any regulatory restrictions, individual health plan clients could increase limitations on the Company's use of medical information, which could prevent it from offering certain services.
The Health Care Reform Laws.
On March 23, 2010, the President of the United States signed into law the most comprehensive change to America's healthcare system in decades. The Health Care Reform Laws contains a variety of provisions that could have a significant impact on the Company and its customers. The Health Care Reform Laws provide the opportunity for significant expansion of the Company's PBM and health information technology activities. These potential benefits are the result of an expected increase in the number of individuals with health insurance and the potential increase in demand for pharmaceutical products and health information technology services.
However, the Health Care Reform Laws also present great uncertainty for the Company and potential risks to its operations and financial success. The Health Care Reform Laws contain many provisions intended to reduce the government's healthcare costs through reimbursement reductions, alternative payment methods, and ongoing studies of healthcare reimbursement systems. For example, the Health Care Reform Laws establish the Independent Payment Advisory Board (“IPAB”), which is designed to make proposals as early as 2014 to reduce the per capita rate of growth in Medicare spending in years when that growth exceeds established targets. Another potential source of reimbursement uncertainty is the newly established Center for Medicare and Medicaid Innovation (“CMMI”), which is designed to test the cost-cutting efficacy of innovative payment service delivery systems through demonstration projects. These types of provisions could have a significant impact on the profitability

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of the Company and its customers, particularly because of the unpredictability of the proposals that could be generated by the IPAB and the CMMI.
The Health Care Reform Laws also require PBMs to disclose certain information, including discounts and rebates obtained from pharmaceutical manufacturers, to PDP or MA-PD plan sponsors or qualified health benefits plans offered through an exchange. In addition, the Health Care Reform Laws change the calculation of Medicaid rebates in a way that could increase or decrease pharmaceutical manufacturers' incentive to provide discounts and rebates to PBMs. These changes could have a negative impact on the Company's revenues or business model. Additionally, the Health Care Reform Laws expand existing fraud and abuse provisions and significantly increase the resources available to the federal government to pursue fraud and abuse issues, which could expose the Company to greater scrutiny and possibly significant financial liability. For example, the Health Care Reform Laws extend the treble damages available for violations of the FCA to violations relating to the state-based health insurance exchanges created by the Health Care Reform Laws. Moreover, the Health Care Reform Laws establish new civil monetary penalties: $15,000 daily for failure to grant timely access to the OIG for the purposes of audits or investigations and $50,000 for each false record or statement knowingly submitted or caused to be submitted for payment of items furnished under a federal health care program. As a result, the Company may be forced to expend greater resources on monitoring and compliance programs and legal fees. Similarly, the Company's customers may be subject to greater scrutiny and financial liability, which could indirectly put pressure on the Company's financial relationships with those customers.
Aside from particular provisions of the Health Care Reform Laws, there is significant uncertainty about the implementation of the Health Care Reform Laws, likely through hundreds of new regulations, guidance documents, and other policy statements that could result in significant changes to the Company's business model and the healthcare economy as a whole.
Political developments also continue to contribute to the uncertainty surrounding implementation of the Health Care Reform Laws. The Health Care Reform Laws will likely play an important role in the November 2012 elections, results of which may affect the timing, manner, and predictability of the Health Care Reform Laws' regulatory implementation. The resulting unpredictability creates significant uncertainty for the Company and its customers about the structure and regulatory environment of the healthcare market and future revenue sources. Additionally, these uncertainties have been enhanced by a series of lawsuits challenging the constitutionality of the Health Care Reform Laws and calling into question key aspects of the statute such as the individual mandate to carry health insurance. The Supreme Court has agreed to hear arguments about the constitutionality of the Health Care Reform Laws in March 2012. The outcome will present potentially significant consequences for the Company and its customers, particularly in terms of future financial projections and the healthcare regulatory environment.
Future Regulation.
The Company is unable to predict accurately what, if any, additional federal or state legislation or regulatory initiatives may be enacted in the future relating to its businesses or the health care industry in general, or what effect any such legislation or regulations might have on it. For example, the federal government and several state governments have considered the Patients' Bill of Rights and other similar legislation aimed primarily at improving quality of care provided to individuals in managed care plans. Some of the initiatives would provide greater access to drugs not included on health plan formularies, giving participants the right to sue their health plan for malpractice, and mandating an appeals or grievance process. There can be no assurance that federal or state governments will not impose additional restrictions, via a Patients' Bill of Rights or otherwise, or adopt interpretations of existing laws that could have a material adverse effect on the Company's business, results of operations, financial condition or cash flows.
EMPLOYEES
As of December 31, 2011, the Company had 1,433 employees, primarily located in Lisle, Illinois, and Scottsdale, Arizona, whose services are devoted full time to SXC and its subsidiaries. The Company has never had a work stoppage. The Company’s personnel are not represented by any collective bargaining unit and are not unionized. The Company considers its relations with its personnel to be good. The Company’s future success will depend, in part, on its ability to continue to attract, retain, and motivate highly qualified technical and managerial personnel, for whom competition is intense.
FINANCIAL INFORMATION ABOUT SEGMENTS
The Company operates in two reportable operating segments, PBM and HCIT. Financial information about the Company’s segments is described in Note 15-Segment Information to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
CUSTOMERS
The Company generates a significant portion of its revenue from a small number of customers and for the year ended December 31, 2011, HealthSpring , Inc. ("HealthSpring") accounted for 40% of total revenue. The loss of, or substantial changes in the services provided to, these significant customers, or the loss of other customers that could be significant in the aggregate, could have a material adverse effect on the Company’s results of operations. See "Item 1A. - Risk Factors - Business Risks - We are dependent on key customers" below for additional information regarding our relationship with HealthSpring and other significant customers.

ITEM 1A. RISK FACTORS
INDUSTRY RISKS
Our future growth is dependent on further market acceptance and increased market penetration of our products.
Our business model depends on our ability to sell our products and services. Achieving increased market acceptance of our products and services will require substantial sales and marketing efforts and the expenditure of significant financial and other resources to create awareness and demand by participants in the pharmaceutical supply chain. Additionally, payors, which may have invested substantial resources in other

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methods of conducting business and exchanging information, may be reluctant to purchase our products and services.
We cannot be assured that payors will purchase our products and services. If we fail to achieve broad acceptance of our products and services by payors, and other healthcare industry participants, or if we fail to position our services as a preferred method for information management and pharmaceutical healthcare delivery, our business, financial condition, and results of operations will be materially adversely affected.
The electronic healthcare information market is rapidly evolving. A number of market entrants have introduced or developed products and services that are competitive with one or more components of our offerings. We expect that additional companies will continue to enter this market. In new and rapidly evolving industries, there is significant uncertainty and risk as to the demand for, and market acceptance of, products and services. Because the markets for our products and services are evolving, we are not able to predict the size and growth rate of the markets with any certainty. We cannot be assured that the markets for our products and services will continue to grow or, if they do, that they will be strong and continue to grow at a sufficient pace. If markets fail to grow, grow more slowly than expected or become saturated with competitors, our business, financial condition, and results of operations could be materially adversely affected.
Competition in our industry is intense and could reduce or eliminate our profitability.
The PBM industry is very competitive. If we do not compete effectively, our business, results of operations, financial condition or cash flows could suffer. The industry is highly consolidated and dominated by a few large companies with significant resources, purchasing power, and other competitive advantages, which we do not have. A limited number of firms, including national PBM companies, such as Medco Health Solutions, Inc., Express Scripts, Inc. (“ESI”), and CVS Caremark Corporation, have significant market share of the prescription volume, and recent PBM merger activity may further increase the market share of our competitors. For example, in July 2011, ESI agreed to acquire Medco Health Solutions, Inc., which, if finalized, will result in ESI holding a large portion of the PBM market share. Our competitors also include drug retailers, physician practice management companies, and insurance companies/health maintenance organizations. We may also experience competition from other sources in the future. PBM companies compete primarily on the basis of price, service, reporting capabilities and clinical services. In most cases, our competitors are large, profitable, and well-established companies with substantially greater financial and marketing resources than our resources.
Consolidation in the healthcare industry could materially adversely affect our business, financial condition and results of operations.
Many healthcare industry participants are consolidating to create integrated healthcare delivery systems with greater market power. As provider networks and managed care organizations consolidate, thereby decreasing the number of market participants, competition to provide products, and services like ours will become more intense, and the importance of establishing relationships with key industry participants will become greater. In the past we have lost customers as a result of industry consolidation. In addition, industry participants may try to use their market power to negotiate price reductions for our products and services. Further, consolidation of management and billing services through integrated delivery systems may decrease demand for our products. If we are forced to reduce prices as a result of either an imbalance of market power or decreased demand for our products, revenue would be reduced and we could become significantly less profitable.
Future changes in laws or regulations in the healthcare industry could adversely affect our business.
The healthcare industry is highly regulated and is subject to changing political, economic, and regulatory influences. For example, the Balanced Budget Act of 1997 (Public Law 105-32) contained significant changes to Medicare and Medicaid and had an impact for several years on healthcare providers' ability to invest in capital intensive systems. In addition, HIPAA, as amended by the HITECH Act, and Canadian privacy statutes directly impact the healthcare industry by requiring various security and privacy measures in order to ensure the protection of patient health information. More recently, increased government involvement in healthcare, such as the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Public Law 108-173) (“Medicare Modernization Act” or “MMA”), which introduced the Medicare Part D benefit, effective January 1, 2006, the Deficit Reduction Act of 2005 (Public Law 109-171) (“DRA”), the Medicare Improvements for Patients and Providers Act of 2008 (Public Law 110-275) (“MIPPA”), the American Recovery and Reinvestment Act of 2009, the Patient Protection and Affordable Care Act (Public Law 111-148) (“PPACA”) and the Health Care and Education Reconciliation Act of 2010 (Public Law 111-152), which amends the PPACA (collectively, the “Health Care Reform Laws”), and other U.S. initiatives at both the federal and state level could lower reimbursement rates and otherwise change the business environment of our customers and the other entities with which we have a business relationship. Further, existing laws and regulations are subject to changing interpretation by courts, regulatory agencies, and agency officials. PBMs have also increasingly become the target of federal and state litigation over practices relating to drug switching, handling of rebates, and fiduciary duties.
These factors affect PBMs directly, as well as impacting the purchasing practices and operation of healthcare organizations. For example, the Health Care Reform Laws impose new transparency requirements on PBMs, and the CMS issued a proposed rule implementing these requirements in October 2011. Among other requirements, the new transparency regulations propose to require PBMs to report certain data to the Secretary of the DHHS, including, for example, aggregate rebates and discounts received by the PBM, the percentage of prescriptions that were provided through retail pharmacies compared to mail order pharmacies, and the aggregate amount of the rebates that are received by the PBM and passed through to a Medicare Part D plan, a Medicare Advantage Prescription Drug Plan, or a state exchange. The Health Care Reform Laws also contain programs to reform or amend the U.S. healthcare system and to change healthcare financing and reimbursement systems. These reforms are expected to increase the number of individuals who have health insurance coverage and expand the market for pharmaceutical products. However, healthcare industry participants may also respond by reducing their investments or postponing investment decisions, including investments in our product offerings. Moreover, the manner and timing of implementation and portions of the law's constitutionality remain uncertain; the U.S. Supreme Court has agreed to decide the constitutionality of the Health Care Reform Laws, likely hearing arguments in March 2012. The healthcare industry is expected to continue to undergo significant changes for the foreseeable future, and we cannot predict the effect of possible future legislation and regulation on our business, financial condition and results of operations.

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The worker's compensation industry is also highly regulated and subject to various political, economic and regulatory influences.  State Departments of Insurance in many key states have set forth maximum state fee schedules for worker's compensation provider reimbursement.  These maximum fee schedules may be reduced by regulators at any time to the detriment of PBMs and providers.  Any willing provider statutes are also significant in worker's compensation because non-network pharmacies may seek reimbursement at rates higher than Company contracted pharmacies, thereby driving up reimbursement costs.  Moreover, while the Company believes that all in-network pharmacies should be reimbursed at contracted rates, many providers and third-party billers believe that such reimbursement should be at the higher of the state maximum fee schedule or the contracted rates.  If such providers and positions are held valid, the Company may be subject to significant economic risk.
BUSINESS RISKS
We are dependent on key customers.
We generate a significant portion of our revenue from a small number of customers. Our largest customer, HealthSpring, accounted for 41% of our PBM segment revenue and 40% of our total revenue for the year ended December 31, 2011. On January 31, 2012, Cigna Corporation (“Cigna”) announced the completion of its acquisition of HealthSpring in an all-cash transaction. The Company's contract with HealthSpring (the “HealthSpring contract”) was effective on January 1, 2011 and has an initial three-year term (with two additional one-year extensions). Neither party to the HealthSpring contract has the right to terminate the agreement prior to the end of the initial term, except in the event of a material breach. While the Company does not currently anticipate any adverse impact to its financial results through the initial term of the HealthSpring contract as a result of the acquisition, we can give no assurances that we will be able to continue to generate a substantial portion of our revenues from HealthSpring for the foreseeable future, or that we will be able to extend or renew the HealthSpring contract past the initial period.
Although we continually seek to diversify our customer base, we may be unable to offset the effects of an adverse change in one of our key customer relationships. For example, if our existing customers elect not to renew their contracts with us at the expiry of the current terms of those contracts, or reduce the level of service offerings the Company provides, our recurring revenue base will be reduced, which could have a material adverse effect on our results of operations. Furthermore, we sell most of our computer software and services to PBM organizations, Blue Cross/Blue Shield organizations, managed care organizations and retail/mail-order pharmacy chains. If the healthcare benefits industry or our customers in the healthcare benefits industry experience problems, they may curtail spending on our products and services and our business and financial results could be materially adversely affected. For example, we may suffer a loss of customers if there is any significant consolidation among firms in the healthcare benefits industry or other participants in the pharmaceutical supply chain, if demand for pharmaceutical claims processing services should decline or if the financial condition of any of our customers otherwise deteriorates.
Many of our clients put their contracts out for competitive bidding prior to expiration. Competitive bidding requires costly and time-consuming efforts on our behalf and, even after we have won such bidding processes, we can incur significant expenses in proceedings or litigation contesting the adequacy or fairness of these bidding processes. We could lose clients if they cancel their agreements with us, if we fail to win a competitive bid at the time of contract renewal, if the financial condition of any of our clients deteriorates or if our clients are acquired by, or acquire, companies with which we do not have contracts. Over the past several years, self-funded employers, third party administrators and other managed care companies have experienced significant consolidation. Consolidations by their very nature reduce the number of clients who may need our services. A client involved in a merger or acquisition by a company that is not a client of ours may not renew, and in some instances may terminate, its contract with us. Our clients (such as HealthSpring) have been and may continue to be, subject to consolidation pressure.
Demands by our customers for enhanced service levels or possible loss or unfavorable modification of contracts with our customers could negatively affect our profitability.
As our customers face the continued rapid growth in prescription drug costs, they may demand additional services and enhanced service levels and/or lower prices to help mitigate the increase in spending. Additionally, increasing downward pressure of federal and state reimbursements for pharmaceuticals and other medical services may cause our customers to demand lower fees, and changes in existing, or the adoption of new, laws or regulations relating to purchase discount and rebate arrangements with pharmaceutical manufacturers, or to formulary management or other PBM services, could also reduce the discounts or rebates we receive. Further, we operate in a very competitive environment, and as a result, may not be able to increase our fees to compensate for these increased services. Accordingly, margin pressure resulting from these trends could negatively affect our profitability.
Due to the term of our contracts with customers, if we are unable to renew those contracts at the same service levels previously provided, or at all, or replace any lost customers, our future business and results of operations would be adversely affected.
Our contracts with customers generally do not have terms longer than three years and, in some cases, are terminable by the customer on relatively short notice. Our larger customers generally seek bids from other PBM providers in advance of the expiration of their contracts. In addition, we believe the managed care industry is undergoing substantial consolidation, and another party that is not our customer could acquire some of our managed care customers. In such a case, the likelihood such customer would renew its PBM contract with us could be reduced, and the likelihood of a reduction in services would increase.
Our business strategy of expansion through acquisitions may result in unexpected integration costs and challenges, loss of acquired business and/or dilution to existing shareholders.
We look to the acquisition of other businesses, such as the acquisitions of National Medical Health Card Systems, Inc. (“NMHC”), MedfusionRx, PTRX, SaveDirectRx and HealthTran, as a way to achieve our strategy of expanding our product offerings and customer base. The successful implementation of this acquisition strategy depends on our ability to identify suitable acquisition candidates, acquire companies on acceptable terms, integrate the acquired company’s operations and technology successfully with our own, and maintain the goodwill of the acquired business. We are unable to predict whether or when we will be able to identify any suitable additional acquisition candidates or, the

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likelihood that any potential acquisition will be completed. It is also possible that a potential acquisition will be dilutive to existing shareholders. In addition, while we believe we have the experience and know-how to integrate acquisitions, such efforts entail significant risks including, but not limited to:
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a diversion of management’s attention from other business concerns;
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failure to successfully integrate the operations, services, products and personnel of an acquired company;
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failure to realize expected synergies from an acquired company;
•
possible inconsistencies in standards, controls, procedures and policies among the companies being combined or assimilated, which would make it more difficult to implement and harmonize company-wide financial, accounting, billing, information technology and other systems;
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possible difficulties maintaining the quality of products and services that acquired companies have historically provided;
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required amortization of the identifiable intangible assets of an acquired business, which will reduce our net income in the years following its acquisition, and also require a reduction of our net income in future years if we were to experience an impairment of goodwill or other intangible assets attributable to an acquisition;
•
the potential loss of key employees or customers from either our current business or the business of the acquired company;
•
possible difficulties coordinating businesses located in different geographic regions; and
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the assumption of significant and/or unknown liabilities of the acquired company.
Our future success depends upon the ability to grow, and if we are unable to manage our growth effectively, we may incur unexpected expenses and be unable to meet our customers’ requirements.
An important part of our business strategy is to expand the scope of our operations, both organically and through acquisitions. We cannot be certain that our systems, procedures, controls, and space will be adequate to support expansion of our operations, and we may be unable to expand and upgrade our systems and infrastructure to accommodate any future growth. Growth in operations will place significant demands on our management, financial and other resources. Our future operating results will depend on the ability of our management and key employees to successfully manage changing business conditions and to implement and improve our technical, administrative, financial control and reporting systems. Our inability to finance future growth, manage future expansion or hire and retain the personnel needed to manage our business successfully could have a material adverse effect on our business, financial condition and results of operations.
Changes in the industry pricing benchmarks could adversely affect our financial performance.
Contracts in the prescription drug industry, including our contracts with our retail network pharmacies and with our PBM customers, have traditionally used certain published benchmarks to establish pricing for prescription drugs. These benchmarks include Average Wholesale Price (“AWP”), Average Sales Price (“ASP”), Average Manufacturer Price ("AMP"), Wholesale Acquisition Cost, and Direct Price. Most of our contracts with pharmacies and customers historically utilized the AWP standard. In March 2009, class action litigation settlements with the two primary entities that publish AWP, First DataBank (“FDB”) and Medi-Span, have raised uncertainties as to whether payors, pharmacy providers, PBMs and others in the prescription drug industry will continue to utilize AWP as it has previously been calculated or whether other pricing benchmarks will be adopted for establishing prices within the industry.
In March 2009, a federal district court gave final approval to settlements of class action lawsuits brought against FDB and Medi-Span, two primary sources of AWP price reporting. Under the terms of the settlements, FDB and Medi-Span have agreed, among other things to reduce the reported AWP of certain drugs by four percent, and FDB and Medi-Span also announced that they would discontinue publishing AWP within two years of the settlements. On September 3, 2009, a federal appeals court rejected challenges to the settlements, clearing the way for the AWP reductions to take effect on September 26, 2009. In response to this action, the Company, as authorized in most of the Company’s standard customer contracts, adopted a revised pricing benchmark to ensure cost neutrality for the Company, its customers and pharmacies as to what they paid or received, as applicable, for prescription drug products using the AWP pricing benchmark before September 26, 2009 and what they would pay or receive on or after September 26, 2009. While that transition has been accomplished to date with no material adverse effect on the Company, there can be no assurances that customers and pharmacies, in reviewing the results of the transition may not challenge the way in which the transition occurred and/or whether it preserved cost neutrality as intended, or that the results of such challenges will not have a material adverse effect on our financial performance, results of operations and financial condition in future periods.
Further, changes in the reporting of any applicable pricing benchmarks, including the expected introduction of a new pricing benchmark in place of AWP by FDB and Medi-Span, or in the basis for calculating reimbursements proposed by the federal government and certain states, and other legislative or regulatory adjustments that may be made regarding the reimbursement of payments for drugs by Medicaid and Medicare, including CMS's proposed retail survey-based alternative to AWP, could impact our pricing to customers and other payors and could impact our ability to negotiate discounts with manufacturers, wholesalers, or retail pharmacies. In some circumstances, such changes could also impact the reimbursement that we receive in our mail order and specialty pharmacies or that we receive from Medicare or Medicaid programs for drugs covered by such programs and from managed care organizations that contract with government health care programs to provide prescription drug benefits. In addition, it is possible that payors and pharmacy providers will disagree with the use or application of the changes we have put in place or begin to evaluate other pricing benchmarks as the basis for contracting for prescription drugs and PBM services in the future, and the effect of this development on our business cannot be predicted at this time. Due to these and other uncertainties, we can give no assurance that the short or long-term impact of changes to industry pricing benchmarks will not have a material adverse effect on our financial performance, results of operations and financial condition in future periods.

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If we lose relationships with one or more key pharmaceutical manufacturers or if rebate payments we receive from pharmaceutical manufacturers and rebate processing service providers decline, our business, results of operations, financial condition or cash flows could be negatively impacted.
We receive fees from our clients for administering a rebate program with pharmaceutical manufacturers based on the use of selected drugs by members of health plans sponsored by our clients, as well as fees for other programs and services. We believe our business, results of operations, financial condition or cash flows could suffer if:
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we lose relationships with one or more key pharmaceutical manufacturers;
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we are unable to finalize rebate contracts with one or more key pharmaceutical manufacturers in the future, or are unable to negotiate interim arrangements;
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rebates decline due to the failure of our health plan sponsors to meet market share or other thresholds;
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legal restrictions are imposed on the ability of pharmaceutical manufacturers to offer rebates or purchase our programs or services;
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pharmaceutical manufactures choose not to offer rebates or purchase our programs or services; or
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rebates decline due to contract branded products losing their patents.
Over the next few years, as patents expire covering many brand name drugs that currently have substantial market share, generic products will be introduced that may substantially reduce the market share of these brand name drugs. Historically, manufacturers of generic drugs have not offered formulary rebates on their drugs. Our profitability could be adversely affected if the use of newly approved, brand name drugs added to formularies, does not offset any decline in use of brand name drugs whose patents expire.
Government efforts to reduce health care costs and alter health care financing practices could lead to a decreased demand for our services or to reduced rebates from manufacturers.
The Health Care Reform Laws and other proposals considered by Congress related to health care, could impact PBMs directly (e.g. requiring disclosure of information about pricing and product switches), or indirectly (e.g. modifying reimbursement rates for pharmaceutical manufacturers participating in government programs). The Health Care Reform Laws and other health care related proposals may increase government involvement in healthcare and regulation of PBM, pharmacy services and managed care plans, or otherwise change the way we do business. Some of these initiatives would, among other things, require that health plan members have greater access to drugs not included on a plan's formulary and give health plan members the right to sue their health plans for malpractice when they have been denied care. Health plan sponsors may react to the Health Care Reform Laws or other health care related proposals and the uncertainty surrounding them by cutting back or delaying the purchase of our PBM services, and manufacturers may react by reducing rebates or reducing supplies of certain products. These proposals could lead to a decreased demand for our services or to reduced rebates from manufacturers. We cannot predict what effect, if any, these proposals may have on our businesses. PBMs have recently been subject to enhanced political scrutiny as certain U.S. Senators have criticized PBMs for entering into agreements with manufacturers to allegedly limit access to generic products and for allegedly contributing to over-utilization and off-label use of some antipsychotic drugs. This enhanced scrutiny may result in increased audits or examination of the PBM industry. Further, in its FY 2012 Workplan, the DHHS Office of Inspector General (“OIG”) has also indicated an intent to focus on PBMs, with plans to review the rebates collected by Medicare Part D sponsors and PBMs and analyze whether there are any discrepancies between the rebate amounts negotiated between PBMs and manufacturers and the actual rebates paid. Other legislative or market-driven changes in the healthcare system that we cannot anticipate could also materially adversely affect our business, financial condition and results of operations.
Prescription volumes may decline, and our net revenues and profitability may be negatively impacted, if the safety risk profiles of drugs increase or if drugs are withdrawn from the market, including as a result of manufacturing issues, or if prescription drugs transition to over-the-counter products.
We dispense significant volumes of brand-name and generic drugs from our mail-order pharmacies and through networks of retail pharmacies. When increased safety risk profiles or manufacturing issues of specific drugs or classes of drugs result in utilization decreases, physicians may cease writing or otherwise reduce the numbers of prescriptions for these drugs. Additionally, negative press regarding drugs with higher safety risk profiles may result in reduced global consumer demand for such drugs. On occasion, products are withdrawn by their manufacturers or transition to over-the-counter products. In cases where there are no acceptable prescription drug equivalents or alternatives for these prescription drugs, our volumes, net revenues, profitability and cash flows may decline.
If we are unable to compete successfully, our business, financial condition and results of operations will be adversely affected.
The market for our products and services is fragmented, intensely competitive and is characterized by rapidly changing technology, evolving industry standards and user needs and the frequent introduction of new products and services. We compete on the basis of several factors, including: breadth and depth of services; reputation; reliability, accuracy and security of our software programs; ability to enhance existing products and services; ability to introduce and gain market acceptance of new products and services quickly and in a cost-effective manner; customer service; price and cost-saving measures; and industry expertise and experience.
Some of our competitors are more established, benefit from greater name recognition and have substantially greater financial, technical and marketing resources than us. Furthermore, we expect that competition will continue to increase as a result of consolidation in both the information technology and healthcare industries. If our competitors or potential competitors were to merge or partner with one another, the change in the competitive landscape could adversely affect our ability to compete effectively.
In addition, the HCIT market is characterized by rapid technological change and increasingly sophisticated and varied customer needs.

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To successfully compete in this market, we must continue to enhance our existing products and services, anticipate and develop new technology that addresses the needs of our existing and prospective customers and keep pace with changing industry standards on a timely and cost-effective basis. The development of our proprietary technology entails significant technical and business risks, and we may not be successful in using new technologies effectively or in adapting our proprietary technology to evolving customer requirements or industry practice. Moreover, competitors may develop products that are more efficient, less costly, or otherwise better received by the market than us. We cannot be assured that we will be able to introduce new products in a timely manner, or at all, or that such products will achieve market acceptance.
There can be no assurance that we will be able to compete successfully against current and future competitors or that the competitive pressures that we face will not materially adversely affect our business, financial condition, and results of operations.
Our software products are susceptible to undetected errors or similar problems, which may cause our systems to fail to perform properly.
Complex software such as ours often contains defects or errors that are difficult to detect, even through testing, and despite testing by us, our existing and future software products may contain errors. We strive to regularly introduce new solutions and enhancements to our products and services. If we detect any errors before introducing a product, we may have to delay commercial release for an extended period of time while the problem is addressed and in some cases may lose sales as a result of the delay. If we do not discover software errors that affect our products until after they are sold and become operational, we would need to provide enhancements to correct such errors, which would result in unexpected additional expense and diversion of resources to remedy such errors.
Any errors in our software or enhancements, regardless of whether or when they are detected or remedied, may result in harm to our reputation, product liability claims, license terminations or renegotiations, or delays in, or loss of, market acceptance of our product offerings.
Furthermore, our customers might use our software together with products from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our software does not directly cause these problems, the existence of these errors might cause us to incur significant costs, divert the attention of our technical personnel from development efforts, impact our reputation or cause significant customer relations problems.
We may be liable for the consequences of the use of incorrect or incomplete data that we provide.
We provide data, including patient clinical information, to pharmaceutical providers for their use in dispensing prescription drugs to patients. Third-party contractors provide us with most of this data. If this data is incorrect or incomplete, adverse consequences, including severe injury or death, may occur and give rise to product liability and other claims against us. In addition, a court or government agency may take the position that our delivery of health information directly, including through pharmaceutical providers, or delivery of information by a third-party site that a consumer accesses through our websites, exposes us to personal injury liability, or other liability for wrongful delivery or handling of healthcare services or erroneous health information. While we maintain product liability insurance coverage in an amount that we believe is sufficient for our business, we cannot be assured that this coverage will prove to be adequate or will continue to be available on acceptable terms, if at all. A claim brought against us that is uninsured or under-insured could materially harm our business, financial condition and results of operations. Even unsuccessful claims could result in substantial costs and diversion of management resources.
It is difficult to predict the length of the sales cycle for our healthcare software solutions.
The length of the sales cycle for our healthcare software solutions is difficult to predict, as it depends on a number of factors, including the nature and size of the potential customer and the extent of the commitment being made by the potential customer. Our sales and marketing efforts with respect to pharmaceutical providers and payors generally involve a lengthy sales cycle due to these organizations’ complex decision-making processes. Additionally, in light of increased government involvement in healthcare and related changes in the operating environment for healthcare organizations, our current and potential customers may react by curtailing or deferring investments, including those for our services. In many cases, our acquisition of new business is dependent on us successfully bidding pursuant to a competitive bidding process. If potential customers take longer than we expect to decide whether to purchase our solutions, our selling expenses could increase and our revenues could decrease or be delayed, which could materially harm our business, financial condition and results of operations.
Due to complex calculations within our customer contracts, we may be required to issue significant credit memos to our customers that could adversely affect our business, profitability and growth prospects.
Contracts with our customers have complex calculations. We are consistently in the process of implementing procedures to improve our monitoring of material contractual obligations. We continue to issue credit memos to customers related to meeting, among other things, pricing performance guarantees. The continued issuance of credit memos could adversely affect our business, profitability and growth prospects.
Failure of our health plan customers to pay for prescription claims or a delay in payment of those claims could have a material adverse effect on our profitability.
Our contracts with retail pharmacies that participate in our network generally obligate us to make payments for prescription claims even if we are not reimbursed by our customers. If our customers delay their reimbursement payments or fail to make payments for prescription claims, it could have a material adverse effect on our profitability.
If we become subject to liability claims that are not covered by our insurance policies, we may be liable for damages and other expenses that could have a material adverse effect on our business, results of operations, financial condition or cash flows.
Various aspects of our business may subject us to litigation and liability for damages, such as the performance of PBM services and the operation of our call centers and website. A successful product or professional liability claim in excess of our insurance coverage where we are required to pay damages, incur legal costs or face negative publicity could have a material adverse effect on our business, results of operations, financial condition or cash flows, our business reputation and our ability to attract and retain clients, network pharmacies, and employees. While we intend to maintain professional and general liability insurance coverage at all times, we cannot provide assurance that we will be able to

21


maintain insurance in the future, that insurance will be available on acceptable terms or that insurance will be adequate to cover any or all potential product or professional liability claims.
Our operations are vulnerable to interruption by damage from a variety of sources, many of which are not within our control.
The success of our business depends in part on our ability to operate our systems without interruption. Our products and services are susceptible to all the threats inherent in computer software and other technology-based systems. Our systems are vulnerable to, among other things, power loss and telecommunications failures, software and hardware errors, failures or crashes, computer viruses and similar disruptive problems, and fire, flood, and other natural disasters. Although we take precautions to guard against and minimize damage from these and other potential risks, including implementing disaster recovery systems and procedures, they are often unpredictable and beyond our control. Any significant interruptions in our services could damage our reputation in the marketplace and have a material adverse effect on our business, financial condition and results of operations.
Our business depends on our intellectual property rights, and if we are unable to protect them, our competitive position may suffer.
We do not have any patents on our technology. Nonetheless, our business plan is predicated on our proprietary systems and technology. Accordingly, protecting our intellectual property rights is critical to our continued success and our ability to maintain our competitive position. We protect our proprietary rights through a combination of trademark, trade secret and copyright law, confidentiality and non-disclosure agreements with our employees, consultants, customers and suppliers, and limiting access to our trade secrets and technology. We cannot be assured that the steps we have taken will prevent misappropriation of our technology, which could have a material adverse effect on our competitive position. Also, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our intellectual property by reverse-engineering the functionality of our systems or otherwise obtain and use information that we regard as proprietary. Policing unauthorized use of our intellectual property is difficult and expensive, and we are unable to determine the extent, if any, to which piracy of our intellectual property exists.
In addition, we may have to engage in litigation in the future to enforce or protect our intellectual property rights, and we may incur substantial costs and the diversion of management’s time and attention as a result.
We may become subject to claims that we infringe the intellectual property rights of others, which, even if not successful, could have a material adverse impact on our business.
We could be subject to intellectual property infringement claims from third parties as the number of our competitors grows and our applications’ functionality overlaps with their products. There has been a substantial amount of intellectual property litigation in the information technology industries. While we do not believe that we have infringed or are infringing on any proprietary rights of third parties, we cannot assure that infringement claims will not be asserted against us or that those claims will be unsuccessful. Even if a claim brought against us is ultimately unsuccessful, we could incur substantial costs and diversion of management resources in defending any infringement claims. Furthermore, a party making a claim against us could secure a judgment awarding substantial damages as well as injunctive or other equitable relief that could effectively block our ability to develop and market our products and services. We may be required to license intellectual property from third parties in order to continue using our products, and we cannot assure that we will be able to obtain such licenses on commercially reasonable terms, or at all.
We may be unable to obtain, retain the right to use or successfully integrate third-party licenses for the use in our solutions, which could prevent us from offering the products and services which use those technologies.
We use third-party licenses for some of the technology used in our solutions, and intend to continue licensing technologies from third parties. These licenses are the type that ordinarily accompany the business that we conduct. However, these licenses might not continue to be available to us on commercially reasonable terms or at all in the future. Most of these licenses can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. Although we are not dependent upon any individual license and believe that substitutes are generally available, our inability to obtain or renew any of these licenses could delay development of our new product offerings or prevent us from selling our existing solutions until equivalent technology can be identified, licensed and integrated, or developed by us, and there is no assurance as to when we would be able to do so, if at all. Lack of access to required licenses from third parties could harm our business, financial condition, and results of operations.
Most of our third-party licenses are non-exclusive. Our competitors may obtain the right to use any of the technology covered by these licenses and use the technology to attempt to compete more effectively with us. Our use of third-party technologies exposes us to risks associated with the integration of components from various sources into our solutions, such as unknown software errors or defects or unanticipated incompatibility with our systems and technologies. In addition, if our vendors choose to discontinue support of the licensed technology in the future or are unsuccessful in their continued research and development efforts, are unable to continue their business, decide to discontinue dealings with us or are acquired by a competitor or other party that does not wish to deal with us, we may not be able to modify or adapt our own solutions to use other available technologies in a timely manner, if at all.
We are subject to a number of existing laws, regulations, and industry initiatives, non-compliance with which could adversely affect our business, financial condition and results of operations.
We could suffer civil and/or criminal penalties, lose customers, and be required to pay substantial damages or make significant changes to our operations if we fail to comply with complex and rapidly evolving laws and regulations.
During the past several years, the U.S. health care industry has been subject to an increase in government regulation at both the federal and state levels. Numerous state and federal laws and regulations affect our business and operations. The categories include, but are not limited to:
•
health care fraud and abuse laws and regulations, including, but not limited to, the federal Anti-kickback Statute, the federal

22


Civil False Claims Act, and comparable state law counterparts, which prohibit certain types of payments and referrals as well as false claims made in connection with health benefit programs;
•
privacy and confidentiality laws and regulations, including those under HIPAA and HITECH;
•
ERISA and related regulations, which regulate many health care plans;
•
potential regulation of the PBM industry by the FDA;
•
Medicare prescription drug coverage laws and related regulations promulgated by CMS;
•
consumer protection and unfair trade practice laws and regulations;
•
various licensure laws, such as state insurance, managed care and third party administrator licensure laws;
•
pharmacy laws and regulations;
•
antitrust lawsuits challenging PBM pricing practices;
•
state legislation regulating PBMs or imposing fiduciary status on PBMs;
•
drug pricing legislation, including, but not limited to, “most favored nation” pricing and “unitary pricing” legislation;
•
other Medicare and Medicaid reimbursement regulations promulgated by CMS;
•
pending legislation regarding importation of drug products into the U.S.;
•
legislation imposing benefit plan design restrictions, which limit how our customers can design their drug benefit plans;
•
network pharmacy access laws, including, but not limited to, “any willing provider” and “due process” legislation, that affect aspects of our pharmacy network contracts; and
•
formulary development and disclosure laws.
If we fail to comply with existing or future applicable laws and regulations, we could suffer civil or criminal penalties. We devote significant operational and managerial resources to comply with these laws and regulations. Although we have not been notified, and are not otherwise aware, of any material claim of non-compliance, there can be no assurance that we are in compliance with all existing legal requirements material to our business. Different interpretations and enforcement policies of these laws and regulations could subject our current practices to allegations of impropriety or illegality, or could require us to make significant changes to our operations. In addition, we cannot predict the impact of future legislation and regulatory changes on our business or assure you that we will be able to obtain or maintain the regulatory approvals required to operate our business.
We cannot predict whether or when future healthcare reform initiatives by U.S. federal or state, Canadian or other foreign regulatory authorities will be proposed, enacted or implemented or what impact those initiatives may have on our business, financial condition or results of operations. Additionally, government regulation could alter the clinical workflow of physicians, hospitals, and other healthcare participants, thereby limiting the utility of our products and services to existing and potential customers and resulting in a negative impact on market acceptance of our products and services.
Due to the complex laws and regulations governing the Medicare program in which we participate, our recorded estimates may materially change in the future, and our failure to fully comply with such laws and regulations may adversely impact our business and financial results.
The Medicare Part D program in which we participate is based upon extremely complex laws and regulations that are subject to interpretation. As a result, there is at least a reasonable possibility that our recorded estimates of receivables from CMS may change by a material amount in the near term. Additionally, any non-compliance with such laws and regulations could result in fines, penalties and exclusion from the Medicare program.
Although we are not aware of any allegations of non-compliance that could have a material adverse effect on our consolidated financial statements, we cannot assure you that any instances of non-compliance will not have a material adverse effect on our consolidated financial statements or results of operations.
Uncertainty regarding the impact of Medicare Part D may adversely impact our business and financial results.
MMA created a new, voluntary prescription drug benefit for Medicare beneficiaries entitled to Medicare benefits under Medicare Part A or enrolled in Medicare Part B effective January 1, 2006. We currently participate in the administration of the Medicare drug benefit: (i) through the provision of PBM services to our health plan customers and other customers that have qualified as a prescription drug plan (“PDP”) or a “Medicare Advantage” prescription drug plan, (ii) by assisting employers, unions and other health plan customers that qualify for the retiree drug subsidy available under Medicare Part D by collecting and submitting eligibility and/or drug cost data to CMS for them in order to obtain the subsidy, and (iii) by operating as a CMS approved Employer/Union Group Waiver PDP contract with CMS (S8841). Our existing PBM business could be adversely affected if our customers decide to discontinue providing prescription drug benefits altogether to their Medicare-eligible members. We are not yet able to assess the impact that Medicare Part D will have on our customers’ decisions to continue to offer a prescription drug benefit to their Medicare-eligible members.
In addition, as an approved PDP sponsor, we are a direct contractor to the federal government and are subject to the rules, regulations, and enforcement authority of the federal government over its contractors. Under regulations established by CMS governing participation in the Medicare Part D program, our subsidiary, NMHC Group Solutions Insurance, Inc. (“GSI”), a former risk-bearing entity regulated under state insurance laws, must obtain licensure as a domestic insurance company. GSI has been approved to operate as a risk-bearing entity in its domicile state, Delaware, as required by CMS, and has obtained approval from all but two state insurance departments that it is not required to maintain

23


a risk bearing license in such states. We did not continue to provide our PDP to individual Medicare Part D enrollees in 2009 and CMS has acknowledged our intent to provide the PDP Medicare benefits solely to employer groups. In addition, as of January 1, 2008, we only provide non-risk bearing Medicare benefits to employer groups that will reimburse us directly for any prescription drug costs. We do not intend at this time to offer our PDP to employer groups in instances where we could be subject to risk.
We face additional regulatory risks associated with our specialty pharmacy business which could subject us to additional regulatory scrutiny and liability and which could adversely affect the profitability of the specialty pharmacy business.
With our acquisition of MedfusionRx and its pharmacies in December 2010, additional state regulations became applicable to us. Various aspects of the specialty pharmacy business are governed by state laws and regulations not previously applicable to us or which may now be applicable in different ways. Significant sanctions may be imposed for violations of these laws and compliance programs are a significant operational requirement of our business. There are significant uncertainties involving the application of many of these legal requirements to us. Accordingly, we may be required to incur additional administrative and compliance expenses in determining the applicable requirements and in adapting our compliance practices, or modifying our business practices, in order to satisfy changing interpretations and regulatory policies.
Our mail and specialty pharmacies are dependent on our relationships with a limited number of suppliers and the loss of any of these relationships could significantly impact our ability to sustain and/or improve our financial performance.
We acquire a substantial percentage of our mail and specialty pharmacies prescription drug supply from a limited number of suppliers. Our agreements with these suppliers may be short-term and cancelable by either party without cause with a relatively short time-frame of prior notice. These agreements may limit our ability to provide services for competing drugs during the term of the agreement and allow the supplier to distribute through channels other than us. Further, certain of these agreements allow pricing and other terms of these relationships to be periodically adjusted for changing market conditions or required service levels. A termination or modification to any of these relationships could have a material adverse effect on our business, financial condition and results of operations. An additional risk related to supply is that many products distributed by our specialty pharmacy business are manufactured with ingredients that are susceptible to supply shortages. If any products we distribute are in short supply for long periods of time, this could result in a material adverse effect on our business, financial condition and results of operations.
Our ability to grow our specialty pharmacy business could be limited if we do not expand our existing base of drugs or if we lose patients.
Our specialty pharmacy business focuses on complex and high cost medications that serve a relatively small patient population. Due to the limited patient populations utilizing the medications that our specialty pharmacy business handles, our future growth relies in part on expanding our base of drugs or penetration in certain treatment categories. Further, a loss of patient base or reduction in demand for any reason for the medications we currently dispense could have a material adverse effect on our business, financial condition and results of operations.
The operations of our specialty pharmacy business may be adversely affected by industry trends in managed care contracting and consolidation.
     A growing number of health plans are contracting with a single provider for specialty pharmacy services. Likewise, manufacturers may not be eager to contract with regional providers of specialty pharmacy services. If we are unable to obtain managed care contracts in the areas in which we provide specialty pharmacy services or are unable to obtain specialty pharmacy products at reasonable costs or at all, our business could be adversely affected.
If our security is breached, outsiders could gain access to information we are required to keep confidential, and we could be subject to liability and customers could be deterred from using our services.
Our business relies on using the Internet to transmit confidential information. However, the difficulty of securely transmitting confidential information over the Internet has been a significant barrier to engaging in sensitive communications over the Internet, and is an important concern of our existing and prospective customers. Publicized compromise of Internet security, including third-party misappropriation of patient information or other data, or a perception of any such security breach, may deter people from using the Internet for these purposes, which would result in an unwillingness to use our systems to conduct transactions that involve transmitting confidential healthcare information. Further, if we are unable to protect the physical and electronic security and privacy of our databases and transactions, we could be subject to potential liability and regulatory action, our reputation and customer relationships would be harmed, and our business, operations, and financial results may be materially adversely affected.
We are highly dependent on senior management and key employees. Competition for our employees is intense, and we may not be able to attract and retain the highly skilled employees that we need to support our business.
Our success largely depends on the skills, experience, and continued efforts of our management and other key personnel, and on our ability to continue to attract, motivate, and retain highly qualified individuals. Competition for senior management and other key personnel is intense, and the pool of suitable candidates is limited. If we lose the services of one or more of our key employees, we may not be able to find a suitable replacement and our business, financial condition and results of operations could be materially adversely affected.
Our ability to provide high-quality services to our customers also depends in large part upon the experience and expertise of our employees generally. We must attract and retain highly qualified personnel with a deep understanding of the healthcare, PBM and HCIT industries. We compete with a number of companies for experienced personnel and many of these companies, including customers and competitors, have greater resources than we have and may be able to offer more attractive terms of employment. In addition, we invest significant time and expense in training our employees, which increases their value to customers and competitors who may seek to recruit them and increases the cost of replacing them. If we are unable to attract or retain qualified employees, the quality of our services could diminish and we may be unable to meet our business and financial goals.

24


Actual financial results may vary from our publicly disclosed forecasts.
Our actual financial results may vary from our publicly disclosed forecasts and these variations could be material and adverse. We periodically provide guidance on future financial results. These forecasts reflect numerous assumptions concerning our expected performance, as well as other factors, which are beyond our control and which may not turn out to be correct. Although we believe that the assumptions underlying our guidance and other forward-looking statements are reasonable when we make such statements, actual results could be materially different. Our financial results are subject to numerous risks and uncertainties, including those identified throughout these risk factors. If our actual results vary from our announced guidance, the price of our common shares may decline, and such a decline could be substantial. We do not undertake to update any guidance or other forward-looking information we may provide.
The covenants and restrictions in our credit facilities could adversely affect our business, financial condition and results of operations.
In December 2011, we entered into a five-year $350 million unsecured revolving credit facility, of which $100 million in borrowings were drawn in January 2012 to finance in part the acquisition of HealthTran LLC. We may incur substantial additional indebtedness under our credit facilities, particularly to fund future acquisitions, and our level of indebtedness could adversely affect our financial condition. In such an event, we would be required to devote a portion of our cash flows from operating activities to service our indebtedness, and such cash flows would therefore not be available for other corporate purposes. If we are unable to generate sufficient cash flow from operations in the future to service our debt obligations, we may be required to refinance all or a portion of our existing debt facilities, or to obtain additional financing and facilities. However, we may not be able to obtain such refinancing or additional facilities on favorable terms or at all.
The operating and financial restrictions and covenants contained in the agreements governing our outstanding and future indebtedness may limit our ability to finance future operations or capital needs, borrow additional funds for development and make certain investments. For example, our revolving credit facility restricts our ability to, among other things: incur certain additional debt or issue guarantees; incur or permit certain liens to exist; make certain investments, acquisitions or other restricted payments; dispose of assets; engage in certain types of transactions with affiliates; and merge, consolidate or transfer all or substantially all of our assets.
We may experience fluctuations in our financial results because of timing issues associated with our revenue recognition policy.
A portion of our revenue is derived from system sales, where we recognize revenue upon execution of a license agreement and shipment of the software, as long as all vendor obligations have been satisfied and collection of license fees is probable. As the costs associated with system sales are minimal, revenue and income may vary significantly based on the timing of recognition of revenue. Given that revenue from certain projects is recognized using the percentage-of-completion method, our revenue from these projects can vary substantially on a monthly and quarterly basis. In addition, certain contracts may contain undelivered elements or multiple deliverables, which may cause the applicable revenue to be deferred over multiple periods. Accordingly, the timing and delivery requirements of customers’ orders may have a material effect on our operations and financial results during any reporting period. In addition, to the extent that the costs required to complete a fixed price contract exceed the price quoted by us, our results may be materially adversely affected.
If we are required to write off goodwill or other intangible assets, our financial position and results of operations would be adversely affected.
We have goodwill and other intangible assets of approximately $360.8 million as of December 31, 2011. We are required to periodically evaluate goodwill and other intangible assets for impairment. In the future we may take charges against earnings resulting from impairment. Any determination requiring the write off of a significant portion of our goodwill or other intangible assets could adversely affect our results of operations and our financial condition.
Our tax filings are subject to possible review, audit and/or reassessment and we may be liable for additional taxes, interest or penalties if the final tax outcome is different from those provided for in our filings.
Although our primary operations are in the United States, we also have operations in Canada. Our income tax liability is therefore a consolidation of the tax liabilities we expect to have in various locations. Our tax rate is affected by the profitability of our operations in all locations, tax rates and systems of the countries in which we operate, our tax policies and the impact of certain tax planning strategies which we have implemented or may implement. To determine our worldwide tax liability, we make estimates of possible tax liabilities. Our tax filings, positions and strategies are subject to review under local or international tax audit and the outcomes of such reviews are uncertain. In addition, these audits generally take place years after the period in which the tax provision in question was provided and it may take a substantial amount of time before the final outcome of any audit is known. Future final tax outcomes could also differ materially from the amounts recorded in our financial statements. These differences could have a material effect on our financial position and our net income in the period such determination is made.
Changes in our accounting estimates and assumptions could negatively affect our financial position and results of operations.
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). These accounting principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of our consolidated financial statements. We are also required to make certain judgments that affect the reported amounts of revenues and expenses during each reporting period. We periodically evaluate our estimates and assumptions including those relating to revenue recognition, rebates, asset impairments, valuation of allowance for doubtful accounts, contingencies, and income taxes. We base our estimates on historical experience and various assumptions that we believe to be reasonable based on specific circumstances. Actual results could differ from these estimates, and changes in accounting standards could have an adverse impact on our future financial position and results of operations.
 


25


ITEM 1B.
UNRESOLVED STAFF COMMENTS
None

ITEM 2.
PROPERTIES
The Company’s principal business operations are conducted from a 116,712 square foot leased office facility located at 2441 Warrenville Road, Suite 610 in Lisle, Illinois (outside of Chicago). This lease expires in January 2018. The Company’s mail and specialty pharmacies, which support the delivery of medications to individuals, are principally located in Alabama, Maine, and Florida, with additional facilities mostly located in the southeastern states of the U.S. Additionally, the Company maintains operations in several other leased locations in the U.S. and Canada, including operations in Ontario (Milton), Arizona, Hawaii, Georgia, Arkansas, Massachusetts, Colorado, Pennsylvania and Texas. The Company believes these properties are adequate for its current operations.

ITEM 3.
LEGAL PROCEEDINGS
For information on legal proceedings, see Note 14-Commitments and Contingencies to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, which is hereby incorporated by reference into this Item 3.

ITEM 4.
MINE SAFETY DISCLOSURES
Not Applicable.

26


PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company’s common stock is traded on the Toronto Stock Exchange (“TSX”) and NASDAQ Stock Market (“NASDAQ”) under the symbol “SXC” and “SXCI,” respectively. Amounts related to trading on the TSX are provided in Canadian dollars. The following table sets forth for each period indicated the high and low sales prices for the Company’s common stock on the TSX:
 
High
 
Low
2011
 
 

 
 
 

First quarter
C
$
53.52

 
C
$
42.42

Second quarter
C
$
59.50

 
C
$
50.56

Third quarter
C
$
62.64

 
C
$
44.93

Fourth quarter
C
$
60.97

 
C
$
41.45

2010
 
 
 
 
 
First quarter
C
$
35.14

 
C
$
23.22

Second quarter
C
$
39.53

 
C
$
31.50

Third quarter
C
$
42.73

 
C
$
31.88

Fourth quarter
C
$
46.06

 
C
$
36.76

The Company’s common stock began trading on the NASDAQ on June 13, 2006. The following table sets forth for each period indicated the high and low sales prices for the Company’s common stock on the NASDAQ:
 
High
 
Low
2011
 

 
 

First quarter
$
55.00

 
$
42.60

Second quarter
$
62.00

 
$
52.53

Third quarter
$
66.40

 
$
45.31

Fourth quarter
$
60.00

 
$
40.36

2010
 
 
 
First quarter
$
34.47

 
$
22.61

Second quarter
$
38.49

 
$
29.17

Third quarter
$
41.58

 
$
30.70

Fourth quarter
$
45.78

 
$
35.81

On February 1, 2012, the closing sale price of the common stock, as reported by the TSX and NASDAQ was Cdn.$64.25 and $64.45 per share, respectively. As of February 1, 2012, there were approximately 23,025 holders of the Company’s common stock either of record or in street name.
Dividend Policy
The Company has never paid a cash dividend on its common stock and has no present intention to commence the payment of cash dividends. It is possible that the Board of Directors could determine in the future, based on the Company’s financial and other relevant circumstances at that time, to pay cash dividends.

27


Stock Performance
TSX
The following graph shows a five-year comparison of the yearly percentage change in the cumulative returns for the Company’s stock, as compared to the TSX Composite Index and the S&P/TSX Capped Health Care index, as of December 31 of each year indicated. The graph assumes an initial investment of Cdn.$100 was made on January 2, 2007 and assumes the reinvestment of any dividends.
The following table presents the five-year comparison of cumulative returns for the Company’s stock, as compared to the TSX Composite Index and the S&P/TSX Capped Health Care Index, as of December 31 of each year indicated. The values assume an initial investment of Cdn.$100 was made on January 2, 2007 and assume the reinvestment of any dividends. Amounts presented in the table below are in Canadian dollars.
 
Cumulative Total Return
 
1/2/2007
2007
2008
2009
2010
2011
SXC
$
100.00

$
133.82

$
209.01

$
526.65

$
783.09

$
1,052.76

TSX Composite
$
100.00

$
149.60

$
97.20

$
127.03

$
145.38

$
129.29

S&P/TSX Capped Health Care Index
$
100.00

$
72.48

$
51.20

$
65.61

$
91.74

$
104.03

Nasdaq
The following graph shows a five-year comparison of the yearly percentage change in the Company’s stock, as compared to the Nasdaq Composite Index and the S&P Healthcare Index, as of December 31 of each year indicated. The graph assumes an initial investment of $100 was made on January 2, 2007 and assumes the reinvestment of any dividends.


28


The following table presents a five-year comparison of cumulative returns for the Company’s stock, as compared to the Nasdaq Composite Index and the S&P Healthcare index, as of December 31 of each year indicated. The values assume an initial investment of $100 was made on January 2, 2007 and assumes the reinvestment of any dividends.
 
Cumulative Total Return
 
1/2/2007
2007
2008
2009
2010
2011
SXC
$
100.00

$
103.13

$
132.86

$
383.78

$
609.67

$
803.41

Nasdaq Composite
$
100.00

$
127.98

$
76.09

$
109.49

$
128.01

$
125.70

S&P Healthcare index
$
100.00

$
117.94

$
89.07

$
104.27

$
105.01

$
115.69

The information in this “Stock Performance” section shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934.
Recent Sales of Unregistered Securities
Not applicable.

ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data has been derived from the consolidated financial statements of the Company contained elsewhere in this Annual Report on Form 10-K and the Company’s Annual Report on Form 10-K for the fiscal years ended December 31, 2010, 2009 and 2008. The selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, including the notes thereto.
 
For The Years Ended December 31,
 
2011 (6)
 
2010(4)(5)
 
2009(3)
 
2008(2)
 
2007(1)
 
(Dollars in thousands except share and per share data)
Statement of Operations Data:
 

 
 

 
 

 
 

 
 

Revenue
$
4,975,496

 
$
1,948,389

 
$
1,438,634

 
$
862,939

 
$
93,171

Net income
$
91,786

 
$
64,735

 
$
46,061

 
$
15,113

 
$
13,146

Earnings per share, basic
$
1.48

 
$
1.07

 
$
0.89

 
$
0.33

 
$
0.32

Earnings per share, diluted
$
1.46

 
$
1.03

 
$
0.86

 
$
0.32

 
$
0.30

Weighed average common shares outstanding:
 

 
 

 
 

 
 

 
 

Basic
62,126,656

 
60,736,831

 
52,008,408

 
45,956,932

 
41,510,744

Diluted
62,951,758

 
63,136,600

 
53,594,746

 
46,826,022

 
43,125,508

Ratio of earnings to fixed charges(7)
35.20

 
30.94

 
9.98

 
4.43

 
21.31

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 

 
 

 
 

 
 

 
 

Total assets
$
1,050,307

 
$
816,790

 
$
662,080

 
$
428,343

 
$
159,479

Long-term debt
$
—

 
$
—

 
$
—

 
$
47,640

 
$
—

Total stockholders’ equity
$
671,038

 
$
553,256

 
$
458,494

 
$
194,163

 
$
132,457

 Notes:
1)
Effective January 1, 2007, the Company adopted the FASB’s guidance for uncertainty in income taxes and, as a result, the Company recognized an adjustment in the liability for unrecognized income tax benefits of $0.2 million and a corresponding reduction in the beginning balance of retained earnings.
2)
Effective April 30, 2008, the Company, through a wholly-owned subsidiary, acquired all of the outstanding shares of NMHC, based in Port Washington, New York, which provides PBM services. The results of operations of the acquired business are included from the date of acquisition. The Company issued 5,571,920 shares of its common stock in connection with the acquisition.
3)
On September 23, 2009, the Company completed a public offering in Canada and the U.S. of 10,350,000 of its common shares at a price of $20.75 per share. The net proceeds to the Company from the offering were $203.1 million.
4)
On September 17, 2010, the Company executed a two-for-one stock split effected by a stock dividend on the issued and outstanding common shares of the Company. All share and per share data presented in this Annual Report have been adjusted to reflect this stock split.
5)
The Company completed its acquisition of MedfusionRx on December 28, 2010. The purchase price for MedfusionRx was $101.5 million in cash with an additional $5.5 million potential earn-out payment subject to the achievement of certain performance targets in the 2012 fiscal year.
6)
The Company completed its acquisitions of PTRX and SaveDirectRx on October 3, 2011. The aggregate purchase price for the acquisitions

29


was $77.2 million in cash, subject to customary working capital adjustments, with an additional $4.5 million potential earn-out payment subject to the achievement of certain performance targets in the 2012 fiscal year.
7)
See Exhibit 12.1 to this Annual Report for the computation of the ratios of earnings to fixed charges.

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis (“MD&A”) of SXC Health Solutions Corp. (the “Company”) should be read in conjunction with the consolidated financial statements of the Company and the related notes thereto included in Item 8 of this Annual Report on Form 10-K. This MD&A also contains forward-looking statements and should be read in conjunction with the risk factors described in Item 1A “Risk Factors.”
Certain statements included in this MD&A, including those that express management's objectives and the strategies to achieve those objectives, as well as information with respect to the Company's beliefs, plans, expectations, anticipations, estimates and intentions, constitute “forward-looking statements” within the meaning of applicable securities laws. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management at this time, are inherently subject to significant business, economic and competitive uncertainties and contingencies. We caution that such forward-looking statements involve known and unknown risks, uncertainties and other risks that may cause our actual financial results, performance, or achievements to be materially different from our estimated future results, performance or achievements expressed or implied by those forward-looking statements. Numerous factors could cause actual results to differ materially from those in the forward-looking statements, including without limitation, our dependence on, and ability to retain, key customers; our ability to achieve increased market acceptance for our product offerings and penetrate new markets; consolidation in the healthcare industry; the existence of undetected errors or similar problems in our software products; our ability to identify and complete acquisitions, manage our growth, integrate acquisitions and achieve expected synergies from acquisitions; our ability to compete successfully; potential liability for the use of incorrect or incomplete data; the length of the sales cycle for our healthcare software solutions; interruption of our operations due to outside sources; maintaining our intellectual property rights and litigation involving intellectual property rights; our ability to obtain, use or successfully integrate third-party licensed technology; compliance with existing laws, regulations and industry initiatives and future change in laws or regulations in the healthcare industry; breach of our security by third parties; our dependence on the expertise of our key personnel; our access to sufficient capital to fund our future requirements; potential write-offs of goodwill or other intangible assets; and the outcome of any legal proceeding that has been or may be instituted against us. This list is not exhaustive of the factors that may affect any of our forward-looking statements and is subject to change. For additional information with respect to certain of these and other factors, refer to the risk factors described in Item 1A of this Annual Report on Form 10-K.
When relying on forward-looking information to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. In making the forward-looking statements contained in this MD&A, the Company does not assume any future significant acquisitions, dispositions or one-time items. It does assume, however, the renewal of certain customer contracts. Every year, the Company has major customer contracts that come up for renewal. In addition, the Company also assumes new customer contracts. In this regard, the Company is pursuing large opportunities that present a very long and complex sales cycle which substantially affects its forecasting abilities. The Company has assumed certain timing for the realization of these opportunities which it thinks is reasonable but which may not be achieved. Furthermore, the pursuit of these larger opportunities does not ensure a linear progression of revenue and earnings since they may involve significant up-front costs followed by renewals and cancellations of existing contracts. The Company has assumed certain revenues which may not be realized. The Company has also assumed that the material factors referred to in the previous paragraph will not cause such forward-looking information to differ materially from actual results or events. There can be no assurance that such assumptions will reflect the actual outcome of such items or factors. Accordingly, investors are cautioned not to put undue reliance on forward-looking statements
THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS MD&A REPRESENTS THE COMPANY'S CURRENT EXPECTATIONS AND, ACCORDINGLY, IS SUBJECT TO CHANGE. HOWEVER, THE COMPANY EXPRESSLY DISCLAIMS ANY INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING INFORMATION, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE, EXCEPT AS REQUIRED BY APPLICABLE LAW.
All figures are in U.S. dollars unless otherwise stated.
Overview
PBM Business
The Company provides comprehensive PBM services to customers, which include managed care organizations, local governments, unions, corporations, HMOs, employers, workers' compensation plans, third party health care plan administrators, and federal and state government programs through its network of licensed pharmacies throughout the United States. The PBM services include electronic point-of-sale pharmacy claims management, retail pharmacy network management, access to the Company's mail and specialty pharmacies, Medicare Part D services, benefit design consultation, preferred drug management programs, drug review and analysis, consulting services, data access and reporting and information analysis. The Company also owns and operates a network of mail and specialty pharmacies.
The mail pharmacies provide members flexibility, privacy, and easy access to their maintenance medications while offering significant plan savings to the customer. These pharmacies provide high quality service, member support and convenient, easy-to-use mail service delivery throughout the U.S. Plan savings for mail service are dependent on plan design features, including co-payments and incentives, and utilization patterns.
The Company's specialty pharmacy offering provides customers the ability to control spending on specialty medications and ensure patients receive the necessary, personalized support for complex medications in one of the fastest growing sectors of pharmaceutical spending through its specialty pharmacy locations. The Company’s specialty therapy medication management program uses a highly-trained and specialized

30


clinical staff organized in disease pods, a patient-centric approach, and evidence based clinical treatment protocols. The patient care team communicates with the patient, patient’s physician, and other caregivers as needed to obtain a complete medical and pharmacy history and then craft an individualized treatment plan, including patient education, counseling and expected therapy outcomes. Plan savings are achieved as the cost for specialty medication using this program is generally lower than retail pricing. In addition, the Company is a national provider of drug benefits to its customers under the federal government’s Medicare Part D program. 
Revenue primarily consists of sales of prescription drugs, together with any associated administrative fees, to customers and participants, through the Company’s nationwide network of participating pharmacies or the Company's own mail and specialty pharmacies. Revenue related to the sales of prescription drugs is recognized when the claims are adjudicated and the prescription drugs are shipped. Claims are adjudicated at the point-of-sale using an on-line processing system.
Under the Company’s customer contracts, the pharmacy is solely obligated to collect the co-payments from the participants. As such, the Company does not include participant co-payments paid to non-Company owned pharmacies in revenue or cost of revenue. If we had included co-payments collected at non-Company owned pharmacies in our reported revenue and direct expenses, our operating and net income, consolidated balance sheets and statements of cash flows would not have been affected.
The Company evaluates customer contracts to determine whether it acts as a principal or as an agent in the fulfillment of prescriptions through its participating pharmacy network. The Company acts as a principal in most of its transactions with customers and revenue is recognized at the prescription price (ingredient cost plus dispensing fee) negotiated with customers, plus an administrative fee, if applicable (“gross reporting”). Gross reporting is appropriate when the Company (i) has separate contractual relationships with customers and with pharmacies, (ii) is responsible to validate and manage a claim through the claims adjudication process, (iii) commits to set prescription prices for the pharmacy, including instructing the pharmacy as to how that price is to be settled (co-payment requirements), (iv) manages the overall prescription drug relationship with the patients, who are participants of customers’ plans, and (v) has credit risk for the price due from the customer. In instances where the Company merely administers a customer’s network pharmacy contract to which the Company is not a party and under which the Company does not assume pricing risk and credit risk, among other factors, the Company only records an administrative fee as revenue. For these customers, the Company earns an administrative fee for collecting payments from the customer and remitting the corresponding amount to the pharmacies in the customer’s network. In these transactions, the Company acts as an agent for the customer. As the Company is not the principal in these transactions, the drug ingredient cost is not included in revenue or in cost of revenue (“net reporting”). As such, there is no impact to gross profit based upon whether gross or net reporting is used.
HCIT Business
The Company is also a leading provider of HCIT solutions and services to payors, and other participants in the pharmaceutical supply chain in North America. The Company’s product offerings include a wide range of software products for managing prescription drug programs and for drug prescribing and dispensing. The Company’s solutions are available on a license basis with on-going maintenance and support or on a transaction fee basis using an Application Service Provider (“ASP”) model. The Company’s payor customers include managed care organizations, Blue Cross Blue Shield organizations, government agencies, employers and intermediaries such as pharmacy benefit managers. The solutions offered by the Company’s services assist payors in managing the complexity and reducing the cost of their prescription drug programs and dispensing activities. 
Profitability of the HCIT business depends primarily on revenue derived from transaction processing services, software license sales, hardware sales, maintenance, and professional services. Recurring revenue remains a cornerstone of the Company’s business model and consists of transaction processing services and maintenance. Growth in revenue from recurring sources has been driven primarily by growth in the Company’s transaction processing business in the form of claims processing for its payor customers. Through the Company’s transaction processing business, where the Company is generally paid based on the volume of transactions processed, the Company continues to benefit from the growth in pharmaceutical drug use in the United States. The Company believes that aging demographics and increased use of prescription drugs will continue to benefit the transaction processing business. In addition to benefiting from this industry growth, the Company continues to focus on increasing recurring revenue in the transaction processing area by adding new transaction processing customers to its existing customer base. The recognition of revenue depends on various factors including the type of service provided, contract parameters, and any undelivered elements.
Operating Expenses
The Company’s operating expenses primarily consist of cost of revenue, product development costs, selling, general and administrative (“SG&A”) costs, depreciation, and amortization. Cost of revenue includes the costs of drugs dispensed as well as costs related to the products and services provided to customers and costs associated with the operation and maintenance of the transaction processing centers. These costs include salaries and related expenses for professional services personnel, transaction processing centers’ personnel, customer support personnel, any hardware or equipment sold to customers and depreciation expense related to data center operations. Product development costs consist of staffing expenses to produce enhancements and new initiatives. SG&A costs relate to selling expenses, commissions, marketing, network administration and administrative costs, including legal, accounting, investor relations and corporate development costs. Depreciation expense relates to the depreciation of property and equipment used by the Company. Amortization expense relates to definite-lived intangible assets from business acquisitions.
Industry Overview
The PBM and pharmacy industries are intensely competitive, generally resulting in continuous pressure on gross profit as a percentage of total revenue. In recent years, industry consolidation and dramatic growth in managed healthcare have led to increasingly aggressive pricing of PBM services. Given the pressure on all parties to reduce healthcare costs, the Company expects this competitive environment to continue for the foreseeable future. In order to remain competitive, the Company looks to continue to drive purchasing efficiencies of pharmaceuticals

31


to improve operating margins, and target the acquisition of other businesses to achieve its strategy of expanding its product offerings and customer base. The Company also looks to retain and expand its customer base by improving the quality of service provided by enhancing its solutions and lowering the total drug spend for customers.
The HCIT industry is increasingly competitive as technologies continue to advance and new products continue to emerge. This rapidly developing industry requires the Company to perpetually improve its offerings to meet customer’s rising product standards. Recent governmental stimulus initiatives to improve the country’s electronic health records should assist the growth of the industry, but it may also increase competition as more players enter the expanding market.
The complicated environment in which the Company operates presents it with opportunities, challenges, and risks. The Company’s clients are paramount to its success; the retention of existing and winning of new clients and members poses the greatest opportunity, and the loss thereof represents an ongoing risk. The preservation of the Company’s relationships with pharmaceutical manufacturers and the Company's network of participating pharmacies is very important to the execution of its business strategies. The Company’s future success will hinge on its ability to drive volume at its mail and specialty pharmacies and increase generic dispensing rates in light of the significant brand-name drug patent expirations expected to occur over the next several years. The Company’s ability to continue to provide innovative and competitive clinical and other services to clients and patients, including the Company’s active participation in the Medicare Part D benefit and the rapidly growing specialty pharmacy industry, also plays an important part in the Company’s future success.
The frequency with which the Company’s customer contracts come up for renewal, and the potential for one of the Company’s larger customers to terminate, or elect not to renew, its existing contract with the Company, create the risk that the Company’s results of operations may be volatile. The Company’s customer contracts generally do not have terms longer than three years and, in some cases, are terminable by the customer on relatively short notice. The Company’s larger customers generally seek bids from other PBM providers in advance of the expiration of their contracts. If existing customers elect not to renew their contracts with the Company at the expiration of the current terms of those contracts, and in particular if one of the Company’s largest customers elects not to renew, the Company’s recurring revenue base will be reduced and results of operations will be adversely affected.
The Company operates in a competitive environment where clients and other payors seek to control the growth in the cost of providing prescription drug benefits. The Company’s business model is designed to reduce the level of drug cost. The Company helps manage drug cost primarily by its programs designed to maximize the substitution of expensive brand drugs with equivalent but much lower cost generic drugs, obtaining competitive discounts from suppliers, securing rebates from pharmaceutical manufacturers and third party rebate administrators, securing discounts from retail pharmacies, applying the Company’s sophisticated clinical programs, and efficiently administering prescriptions dispensed through the Company’s mail and specialty pharmacies.
Various aspects of the Company’s business are governed by federal and state laws and regulations. Because sanctions may be imposed for violations of these laws, compliance is a significant operational requirement. The Company believes it is in substantial compliance with all existing legal requirements material to the operation of its business. There are, however, significant uncertainties involving the application of many of these legal requirements to its business. In addition, there are numerous proposed health care laws and regulations at the federal and state levels, many of which could adversely affect the Company’s business, results of operations and financial condition. The Company is unable to predict what additional federal or state legislation or regulatory initiatives may be enacted in the future relating to its business or the health care industry in general, or what effect any such legislation or regulations might have on it. The Company also cannot provide any assurance that federal or state governments will not impose additional restrictions or adopt interpretations of existing laws or regulations that could have a material adverse effect on its business or financial performance.
Competitive Strengths
The Company has demonstrated its ability to serve a broad range of clients from large managed care organizations and state governments to employer groups with fewer than a thousand members. The Company believes its principal competitive strengths are:
Flexible, customized and independent services:  The Company believes a key differentiator between itself and its competitors is not only the Company’s ability to provide innovative PBM services, but also to deliver these services on an à la carte basis. The informedRx suite offers the flexibility of broad product choice along the entire PBM continuum, enabling enhanced customer control, solutions tailored to the Company’s customers’ specific requirements, and flexible pricing. The market for the Company’s products is divided between large customers that have the sophisticated technology infrastructure and staff required to operate a 24-hour data center and other customers that are not able or willing to operate these sophisticated systems. 
The Company’s business model allows its large customers to license the Company’s products and operate the Company’s systems themselves (with or without taking advantage of the Company’s significant customization, consulting and systems implementation services) and allows its other customers to utilize the Company’s systems’ capabilities on a fee-per-transaction or subscription basis through ASP processing from the Company’s data center. 
Leading technology and platform:  The Company’s technology is robust, scalable, and web-enabled. The Company’s payor offerings efficiently supported over 558 million transactions in 2011. The platform is able to instantly cross-check multiple processes, such as reviewing claim eligibility, adverse drug reaction and properly calculating member, pharmacy and payor payments. The Company’s technology is built on flexible, database-driven rule sets and broad functionality applicable for most any type of business. The Company believes it has one of the most comprehensive claims processing platforms in the market. 
The Company’s technology platform allows it to provide more comprehensive PBM services through informedRx by offering customers a selection of services to choose from to meet their unique needs versus requiring them to accept a one-size-fits-all solution. The Company believes this à la carte offering is a key differentiator from its competitors. 

32


Measurable cost savings for customers:  The Company provides its customers with increased control over prescription drug costs and drug benefit programs. The Company’s pricing model and flexible product offerings are designed to deliver measurable cost savings to the Company’s customers. The Company believes its pricing model is a key differentiator from its competitors for the Company’s customers who want to gain control of their prescription drug costs. For example, the Company’s pharmacy network contracts and manufacturer rebate agreements are made available by the Company to each customer. For customers who select the Company’s pharmacy network and manufacturer rebate services on a fixed fee per transaction basis, there is clarity to the rebates and other fees payable to the client. The Company believes that its pricing model together with the flexibility to select from a broad range of customizable services helps the customers realize measurable results and cost savings.
Selected trends and highlights for the year ended December 31, 2011 compared to the same period in 2010
Business trends
Our results for the year ended December 31, 2011 reflect the successful execution of our business model, which emphasizes the alignment of our financial interests with those of our clients through greater use of generics, low-cost brands and mail and specialty pharmacies. The positive trends we saw in 2010, including lower drug purchasing costs and increased generic usage, have continued to offset the negative impact of various marketplace forces affecting pricing and plan structure, among other factors, and thus we were able to continue to generate improvements in our results of operations. Additionally, as the regulatory environment evolves, we will continue to make significant investments designed to keep us ahead of the competition.
We successfully implemented our largest customer, HealthSpring, at the beginning of 2011, and have continued to fully integrate our recent acquisitions of MedfusionRx, LLC ("MedfusionRx"), MedMetrics Health Partners, Inc. ("Medmetrics"), PTRX, Inc. ("PTRX") and SaveDirectRx, Inc. ("SaveDirectRx") into our business. These events have helped drive overall growth in our top line revenue as well as in our overall operating results. We also continue to benefit from better management of ingredient costs through increased competition among generic manufacturers. The average generic dispensing rate ("GDR"), or the number of generic prescriptions as a percentage of the total number of prescriptions dispensed, for SXC clients reached 78% in 2011, a 2% trend increase from 2010. This increase was achieved through a broad range of plan design solutions, helped considerably by a continuing wave of major generic releases.
Financial results
Total revenue in 2011 was $5.0 billion as compared to $1.9 billion in 2010. The increase is largely attributable to an increase in PBM revenue of $3.0 billion due primarily to the implementation of the HealthSpring contract on January 1, 2011, recent acquisitions, as well as organic growth driven by volume from the Company's PBM customers. As a result, the Company's adjusted prescription claim volume increased 91.0% in 2011 to 91.7 million from 48.0 million during 2010. Adjusted prescription claim volume equals the Company's retail and specialty pharmacy prescriptions, plus mail pharmacy prescriptions multiplied by three. The mail pharmacy prescriptions are multiplied by three to adjust for the fact that they typically include approximately three times the amount of product days supplied compared with retail and specialty prescriptions.
The Company reported net income of $91.8 million, or $1.46 per share (fully-diluted), for the year ended December 31, 2011 compared to $64.7 million, or $1.03 per share (fully-diluted), for the same period in 2010. Net income is higher for the year ended December 31, 2011 as compared to the same period in 2010 due to higher gross profit attributable to an increase in PBM revenues from new customer starts, increased volume in the PBM segment due to organic growth of existing customers and from recent acquisitions. These increases were offset by an increase in SG&A expense to support the new business growth, as well as increased amortization of intangibles recognized in connection with our recent acquisitions. Amortization expense included in net income was $16.4 million in 2011 as compared to $7.9 million in 2010.
Operating income increased $42.0 million, or 42.7%, in 2011 to $140.6 million as compared to $98.5 million in 2010. This increase was driven by increased gross profit in the PBM segment due to new customer starts as compared to 2010, offset by an increase in SG&A expense and amortization expense due to the acquisitions of MedfusionRx, MedMetrics, PTRX and SaveDirectRx.
Strong operational results, driven by an increasing customer base, focus on cost control and strong attention to cash management yielded operating cash flow of $94.7 million in 2011.

Business combinations
Subsequent to the end of the Company's current reporting period, in January 2012, the Company completed the acquisition of all of the outstanding equity interests of HealthTran LLC (“HealthTran”), in exchange for $250 million in cash, subject to certain customary post-closing adjustments, in each case upon the terms and subject to the conditions contained in the HealthTran Purchase Agreement. HealthTran was an existing HCIT customer and utilizes one of the Company's platforms for its claims adjudication services.
On October 3, 2011, the Company completed its acquisitions of PTRX, a full-service PBM, and its exclusive mail-order pharmacy provider, SaveDirectRx, both based in San Antonio, Texas. The aggregate purchase price was $77.2 million in cash, subject to certain customary post-closing adjustments, with an opportunity for the former owners of SaveDirectRx to earn an additional $4.5 million, subject to the achievement of certain performance targets through 2012. The acquisitions of PTRX and SaveDirectRx are in line with the Company's strategy to acquire assets that currently utilize the Company's technology platform in order to ease the integration into the Company's business. Further, these acquisitions will allow the Company to extend, increase and expand its presence in the southwestern part of the U.S. and continue to expand its mail pharmacy business.
On June 1, 2011, the Company completed its acquisition of substantially all of the assets of MedMetrics, the full-service PBM subsidiary of Public Sector Partners, Inc., which is affiliated with a major medical school. The acquisition of MedMetrics is consistent with the Company's strategy to acquire assets that currently utilize the Company's technology platform, which allows for an efficient integration into the Company's business, and has provided the Company the opportunity to sell additional services, such as rebates, mail and specialty services, to MedMetrics'

33


customers. The acquisition has also helped increase and expand the Company's footprint in the northeastern part of the U.S.
On December 28, 2010, the Company completed its acquisition of MedfusionRx, a specialty pharmacy provider with expertise in providing clinical services to patients with complex chronic conditions. The purchase price for MedfusionRx was $101.5 million in cash, with an opportunity for the former owners of MedfusionRx to earn an additional $5.5 million in cash, subject to the satisfaction of certain performance targets in the 2012 fiscal year, upon the terms and subject to the conditions contained in the MedfusionRx Purchase Agreement. The acquisition has helped transform the Company's specialty pharmacy business by expanding its presence and enhancing its capabilities in the rapidly growing specialty sector of the pharmacy industry.
Recent developments
On January 31, 2012, Cigna Corporation (“Cigna”) announced it has completed its acquisition of HealthSpring in an all-cash transaction. HealthSpring accounted for 40.0% of the Company's total revenues for the year ended December 31, 2011. The Company's contract with HealthSpring (the “HealthSpring contract”) was effective on January 1, 2011 and has an initial three-year term (with two additional one-year extensions). Neither party to the HealthSpring contract has the right to terminate the agreement prior to the end of the initial term, except in the event of a material breach. While the Company does not currently anticipate any adverse impact to its financial results through the initial term of the HealthSpring contract, we can give no assurances that we will be able to continue to generate a substantial portion of our revenues from HealthSpring for the foreseeable future, or that we will be able to extend or renew the HealthSpring contract past the initial period.
On December 16, 2011, the Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMCB”), as a lender and as administrative agent, Bank of America, N.A., SunTrust Bank, Fifth Third Bank, PNC Bank, N.A. and The Toronto-Dominion Bank, as lenders and co-syndication agents, Barclays Bank PLC, Morgan Stanley Bank, N.A., Credit Suisse AG, Cayman Islands Branch, The Northern Trust Company, PNC Bank Canada Branch, U.S. Bank National Association and U.S. Bank National Association, Canadian Branch, as lenders, other lenders from time to time party thereto (collectively the "Lenders") and J.P. Morgan Securities LLC, as sole bookrunner and sole lead arranger, with respect to a new five-year senior unsecured revolving credit facility (the “Revolving Credit Facility”). The Credit Agreement provides that, upon the terms and subject to the conditions set forth therein, the Lenders will make loans to the Company from time to time, with an initial aggregate revolving commitment of $350 million, subject to increase from time to time up to a maximum aggregate revolving commitment of $450 million. The Company will use the proceeds from the Revolving Credit Facility for general corporate purposes. On January 3, 2012, the Company borrowed $0 million under the Revolving Credit Facility to pay a portion of the consideration in connection with the acquisition of HealthTran and certain transaction fees and expenses related to the acquisition. 
On May 11, 2011, at the Annual and Special Meeting of Shareholders, the Company’s shareholders approved an amendment to the SXC Health Solutions Corp. Long Term Incentive Plan ("LTIP") to increase the number of common shares available for issuance under the LTIP by 1,800,000.
Results of Operations
 
Years Ended December 31,
 
2011
 
2010
 
2009
 
In thousands, except per share data
Revenue
$
4,975,496

 
$
1,948,389

 
$
1,438,634

Cost of revenue
4,666,008

 
1,734,334

 
1,252,034

Gross profit
309,488

 
214,055

 
186,600

Product development costs
14,331

 
12,428

 
11,951

SG&A
131,457

 
89,254

 
85,797

Depreciation of property and equipment
6,744

 
5,995

 
5,811

Amortization of intangible assets
16,385

 
7,856

 
9,724

  Operating income
140,571

 
98,522

 
73,317

Interest income
(502
)
 
(727
)
 
(756
)
Interest expense and other expense, net
2,779

 
1,693

 
5,988

Income before income taxes
138,294

 
97,556

 
68,085

Income tax expense
46,508

 
32,821

 
22,024

Net income
$
91,786

 
$
64,735

 
$
46,061

Diluted earnings per share
$
1.46

 
$
1.03

 
$
0.86

Revenue
Revenue increased $3.0 billion, or 155.4%, to $5.0 billion during 2011 from $1.9 billion in 2010, primarily due to the implementation of the previously announced HealthSpring contract on January 1, 2011, recent acquisitions and organic growth from increased sales efforts, and other new customer starts during 2011. As a result of the increased business, the Company's adjusted prescription claim volume increased 91.0% to 91.7 million from 48.0 million during 2010.
Revenue increased $509.8 million, or 35.4%, to $1.9 billion during 2010 as compared to 2009 primarily due to new customer starts during 2010. Revenues also increased in 2010 compared to 2009 due to an increase in new PBM services sold to several existing HCIT customers

34


as a result of synergies between the HCIT and PBM segments which allowed the Company to focus on offering a broader array of products and services to the Company's customers.
Cost of Revenue
Cost of revenue increased $2.9 billion, or 169.0%, to $4.7 billion during 2011 from $1.7 billion in 2010, primarily due to the increased revenues from the PBM segment. As a percentage of revenue, cost of revenue was 93.8% and 89.0% for the years ended December 31, 2011 and 2010, respectively. The increase in cost of revenue as a percentage of revenue was mainly due to lower margins earned on new customer additions, principally related to the large increase in transactions under the Healthspring contract. Cost of revenue related to prescriptions dispensed through our network of participating pharmacies is comprised of the contractual cost of drugs dispensed by, and professional fees paid to, those participating pharmacies. Cost of revenue for our mail and specialty pharmacies consists primarily of the cost of prescriptions dispensed as well as costs incurred to process and dispense those prescriptions. All costs incurred for prescriptions dispensed at participating pharmacies as well as our mail and specialty pharmacies are net of any rebate amounts earned from pharmaceutical manufacturers or third-party rebate administrators. Cost of revenue for the HCIT segment relates primarily to the cost of labor to deliver the services provided.
During 2010, cost of revenue increased $482.3 million, or 38.5%, to $1.7 billion as compared to $1.3 billion in 2009. The increase in cost was consistent with the increased revenues during 2010, which was driven by the increased revenues from the PBM segment as a result of new customer starts in 2010 and additional services sold to existing customers.
Gross Profit
Gross profit increased $95.4 million, or 44.6%, to $309.5 million during 2011, mainly due to an increase in PBM gross profit of $96.9 million, or 60.7%, which was generated from the increased adjusted prescription claim volume from the implementation of the HealthSpring contract, recent acquisitions as well as other new customer starts. Consolidated gross profit percentage decreased from 11.0% of revenue for the year ended December 31, 2010 to 6.2% of revenue for the year ended December 31, 2011, as a result of the reduced gross profit percentage of the PBM segment. The PBM segment's gross profit percentage decreased due to the low gross profit percentage generated by the HealthSpring contract. While the gross profit percentage of the HealthSpring contract is lower than the Company's historical gross profit percentage, it brings a large volume of business to the Company. Additionally, the Company continues to increase the percentage of its revenues that are derived from the PBM segment as compared to the HCIT segment. Producing a greater percentage of the Company's total gross profit from PBM lowers the Company's consolidated gross profit percentage since these revenues carry a lower gross profit percentage as compared to HCIT revenues. As PBM revenues grow as a percentage of the Company's total revenues and gross profit, gross profit as a percentage of revenue will decrease.
Gross profit increased $27.5 million, or 14.7%, to $214.1 million during 2010 from 2009, mostly due to incremental PBM revenues. Gross profit percentage decreased from 13.0% of revenue for the year ended December 31, 2009 to 11.0% of revenue for the year ended December 31, 2010, as a result of the PBM business producing a greater percentage of the Company's total gross profit.
Product Development Costs
Product development costs for the year ended December 31, 2011 were $14.3 million compared to $12.4 million for the year ended December 31, 2010, and $12.0 million for the year ended December 31, 2009. Product development costs represent the cost of labor related to development activities and includes stock-based compensation cost of $0.1 million for the year end December 31, 2011 and $0.2 million for each of the years ended December 31, 2010 and 2009. Driving the change in product development expense between the years ended December 31, 2011 and 2010 was an increase in resources due to additional development initiatives. Product development continues to be a key focus of the Company as it continues to pursue enhancements of existing products, as well as the development of new offerings, to support market expansion and to take advantage of cross-selling opportunities within its existing customer base.
SG&A Costs
SG&A costs for the year ended December 31, 2011 were $131.5 million compared to $89.3 million and $85.8 million for the years ended December 31, 2010 and 2009, respectively. SG&A costs consist primarily of employee costs in addition to professional services costs, facilities and costs not related to cost of revenue. SG&A costs have increased $42.2 million, or 47.3%, from 2010 to 2011 due to the addition of operating costs related to the Company's recent acquisitions that were not present during 2010, as well as additional resources added to support the growth of the PBM segment. SG&A costs also include stock-based compensation cost of $8.7 million, $4.9 million and $2.8 million for the years ended December 31, 2011, 2010 and 2009, respectively. The increase in stock-based compensation was due to additional awards granted and increasing fair values per award.
Depreciation
Depreciation expense relates to property and equipment used in all areas of the Company except for those depreciable assets directly related to the generation of revenue, which is included in the cost of revenue in the consolidated statements of operations. Depreciation expense increased $0.7 million to $6.7 million  for the year ended December 31, 2011 from $6.0 million for the same period in 2010, and depreciation expense for the year ended December 31, 2010 increased $0.2 million from $5.8 million for the same period in 2009. The increases in 2011 and 2010 were primarily due to purchases related to the Company’s expansion of its data centers and information technology equipment to expand network capacity.
Amortization
Amortization expense for the year ended December 31, 2011 increased $8.5 million, or 108.6%, to $16.4 million compared to $7.9 million for the year ended December 31, 2010, mainly due to amortization of intangible assets acquired in the MedfusionRx, PTRX and SaveDirectRx acquisitions. These intangible assets are amortized in line with their estimated future economic benefits, which for certain assets is greater at the beginning of their life versus the end. Amortization expense for the year ended December 31, 2010 was $7.9 million compared

35


to $9.7 million for the year ended December 31, 2009. The decrease from 2009 to 2010 was due to many of the intangibles being amortized at a declining rate using a future economic benefit model instead of a straight- line methodology.
Refer to Note 6-Goodwill and Other Intangible Assets in the notes to the consolidated financial statements for more information on amortization expected in future years.
Interest Income and Expense and Other Expense, net
Interest income remained fairly flat for the years ended December 31, 2011, 2010 and 2009, due primarily to interest rates remaining at similar levels in each year. Interest expense and other expense, net, increased $1.1 million to $2.8 million for the year ended December 31, 2011 compared to the same period in 2010, primarily due to increased banking fees driven by a higher number of transactions as a result of business added from recent acquisitions and growth in the PBM segment. Interest expense and other expense, net, decreased $4.3 million to $1.7 million, respectively, for the year ended December 31, 2010 compared to the same period in 2009, due to the extinguishment of the Company's long-term debt in the fourth quarter of 2009.
Income Taxes
The Company recognized income tax expense of $46.5 million for the year ended December 31, 2011, representing an effective tax rate of 33.6%, compared to $32.8 million, representing an effective tax rate of 33.6%, for the same period in 2010.
The effective tax rate increased to 33.6% during the year ended December 31, 2010 compared to 32.3% for the same period in 2009, primarily due to the diminishing impact of the income tax benefit related to certain acquisitions, as well as an increase in taxable income and changes in the proportion of overall income among jurisdictions.
Segment Analysis
The Company manages its business in two segments: PBM and HCIT, and evaluates segment performance based on revenue and gross profit. Information about the Company’s reportable segments for the years ended December 31, 2011, 2010 and 2009 is presented below:
PBM
 
Years Ended December 31,
(dollars in thousands)
 
2011
 
2010
 
2009
Revenue
 
$
4,859,243

 
$
1,841,600

 
$
1,335,961

Cost of revenue
 
4,602,662

 
1,681,944

 
1,197,757

Gross profit
 
$
256,581

 
$
159,656

 
$
138,204

Gross profit %
 
5.3
%
 
8.7
%
 
10.3
%
Revenue was $4.9 billion for the year ended December 31, 2011 as compared to $1.8 billion for the same period in 2010. The $3.0 billion, or 163.9%, increase in revenue is primarily due to the PBM segment's prescription claim volume increasing 91.0% to 91.7 million from 48.0 million during 2010. The prescription claim volume increase was due to new customer contracts which started during 2011, lead by the implementation of the HealthSpring contract on January 1, 2011.
Revenue increased $505.6 million, or 37.8%, for the year ended December 31, 2010 as compared to the same period in 2009 due to new customer starts during 2010, as well as an increase in PBM services sold to several HCIT customers during 2010. As contracts with these existing customers were renewed or renegotiated to provide for additional PBM services, revenue derived from these customers' contracts was moved from the HCIT segment to the PBM segment.
Cost of revenue was $4.6 billion for the year ended December 31, 2011, compared to $1.7 billion for the same period in 2010, an increase of $2.9 billion, or 173.7%, in line with the increase in PBM revenue. Cost of revenue is predominantly comprised of the cost of prescription drugs. As a percentage of revenue, cost of revenue was 94.7% and 91.3% for the years ended December 31, 2011 and 2010, respectively. The increase in the cost of revenue as a percentage of revenue was primarily due to lower margins earned on new customer additions in 2011. Generally, new customer additions start at lower margins due to costs incurred to bring in the new business. This was partially offset by the increased use of lower cost generic drugs. Generic drug usage continues to be a focus of the industry, and the Company, to help drive down health care costs to our customers. The average GDR for PBM clients reached 78% in 2011, a 2% increase from 2010. This increase was achieved through a broad range of plan design solutions, helped considerably by a continuing wave of major generic releases. The Company will continue to seek opportunities for increased generic prescription drug usage to help reduce overall prescription drug costs to its customers and the Company.
For the year ended December 31, 2010, compared to the same period in 2009, cost of revenue increased $484.2 million, or 40.4%. The increase was in line with the increase in PBM revenues during this period. As a percentage of revenue, cost of revenue was 91.3% and 89.7% for the years ended December 31, 2010 and 2009, respectively. The increase in the cost of revenue as a percentage of revenue was due to lower margins earned on new customer starts in 2010.
Gross profit was $256.6 million for the year ended December 31, 2011, compared to $159.7 million for the same period in 2010. Gross profit increased $96.9 million, or 60.7%, due to growth in the customer base in 2011 compared to the same period in 2010. Gross profit percentage was 5.3% and 8.7% for the years ended December 31, 2011 and 2010, respectively. Gross profit percentage decreased during 2011 as compared to 2010 due to newer business being added at lower margins, driven by the implementation of the HealthSpring contract in 2011, which carries a significantly lower gross profit percentage than the Company's historical book of business.
During the year ended December 31, 2010, gross profit increased $21.5 million, or 15.5%, compared to gross profit for the same period in 2009. This growth was primarily due to expansion of the customer base in 2010 compared to the same period in 2009. Gross profit percentage

36


was 8.7% and 10.3% for the years ended December 31, 2010 and 2009, respectively, which was lower in 2010 versus 2009 primarily due to newer business brought on at a lower gross profit percentage as compared to existing customers.
HCIT
 
Years Ended December 31,
(dollars in thousands)
 
2011
 
2010
 
2009
Revenue
 
$
116,253

 
$
106,789

 
$
102,673

Cost of revenue
 
63,346

 
52,390

 
54,277

Gross profit
 
$
52,907

 
$
54,399

 
$
48,396

Gross profit %
 
45.5
%
 
50.9
%
 
47.1
%
Total HCIT revenue increased $9.5 million, or 8.9%, for the year ended December 31, 2011 as compared to the same period in 2010, and revenue increased $4.1 million, or 4.0%, for the year ended December 31, 2010 as compared to the same period in 2009. Revenues increased during both periods mainly due to an increase in transaction processing revenues. Transaction processing revenue consists of claims processing and generally increases as a result of the launch of new contracts as well as increased volumes of services provided to existing customers.
Cost of revenue increased 20.9% to $63.3 million for the year ended December 31, 2011 from $52.4 million for the year ended December 31, 2010. Cost of revenue includes the direct support costs for the HCIT business as well as depreciation expense of $2.7 million and $2.4 million for the years ended December 31, 2011 and 2010, respectively. In addition, cost of revenue includes stock-based compensation expense of $0.6 million and $0.7 million for the years ended December 31, 2011 and 2010, respectively. Cost of revenue increased during 2011 as compared to 2010 mainly due to the increased revenues.
Cost of revenue decreased 3.5% to $52.4 million for the year ended December 31, 2010 from $54.3 million for the year ended December 31, 2009. Included in the costs for the HCIT segment was depreciation expense of $2.4 million and $2.2 million for the years ended December 31, 2010 and 2009, respectively, as well as stock-based compensation expense of $0.7 million in each of the years ended December 31, 2010 and 2009. Cost of revenue decreased during 2010 as compared to 2009 mainly due to the continued focus by the Company to contain costs, as well as the conversion of some HCIT customers' contracts to the PBM segment, which transferred the associated revenue and costs to support these customers into the PBM segment.
Gross profit decreased $1.5 million, or 2.7%, to $52.9 million for the year ended December 31, 2011 as compared to $54.4 million for the same period in 2010. Gross profit percentage was 45.5% for the year ended December 31, 2011, as compared to 50.9% for the same period in 2010. Gross profit and gross profit percentage decreased for the year ended December 31, 2011, compared to the same period in 2010, due to the change in revenue mix.
Gross profit increased $6.0 million, or 12.4%, to $54.4 million for the year ended December 31, 2010 as compared to $48.4 million for the same period in 2009, and gross profit percentage was 50.9% for the year ended December 31, 2010, as compared to 47.1% for the same period in 2009. Gross profit and gross profit percentage increased for the year ended December 31, 2010, compared to the same period in 2009, due to changes in the revenue mix within HCIT as well as additional revenues earned for meeting certain contractual performance conditions during 2010.
Non-GAAP Measures
The Company reports its financial results in accordance with GAAP, but Company management also evaluates and makes operating decisions using EBITDA, Adjusted EBITDA and Adjusted EPS. The Company's management believes that these measures provide useful supplemental information regarding the performance of business operations and facilitates comparisons to its historical operating results. The Company also uses this information internally for forecasting and budgeting as it believes that the measures are indicative of the Company's core operating performance. Note however, that these items are performance measures only, and do not provide any measure of the Company's cash flow or liquidity. Non-GAAP financial measures should not be considered as a substitute for measures of financial performance in accordance with GAAP, and investors and potential investors are encouraged to review the reconciliations of EBITDA, Adjusted EBITDA and Adjusted EPS that are included below.
EBITDA and Adjusted EBITDA Reconciliation
EBITDA and Adjusted EBITDA are non-GAAP measures that management believes are useful supplemental measure of operating performance. EBITDA consists of earnings prior to interest income, interest expense and other expense, net, income taxes, depreciation, amortization, and the Company adds back stock-based compensation expenses to reach Adjusted EBITDA. Management believes it is useful to exclude depreciation, amortization, interest income and interest expense and other expense, net, as these are essentially fixed amounts that cannot be influenced by management in the short term. In addition, management believes it is useful to exclude stock-based compensation as this is a non-cash expense.
    








37


The following is a reconciliation of the Company's reported net income to EBITDA and adjusted EBITDA for the years ended December 31, 2011, 2010 and 2009.
EBITDA and Adjusted EBITDA Reconciliation
 
Years Ended December 31,
(in thousands)
 
2011
 
2010
 
2009
Net Income (GAAP)
 
$
91,786

 
$
64,735

 
$
46,061

Add:
 
 
 
 
 
 
Amortization of intangible assets
 
16,385

 
7,856

 
9,724

Depreciation of property and equipment
 
9,492

 
8,439

 
8,014

Interest income
 
(502
)
 
(727
)
 
(756
)
Interest expense and other expense, net
 
2,779

 
1,693

 
5,988

Income tax expense
 
46,508

 
32,821

 
22,024

EBITDA
 
$
166,448

 
$
114,817

 
$
91,055

Stock-based compensation
 
9,445

 
5,895

 
3,657

Adjusted EBITDA
 
$
175,893

 
$
120,712

 
$
94,712


EBITDA and Adjusted EBITDA increased $51.6 million and $55.2 million, respectively, for the year ended December 31, 2011 compared the same period of 2010, primarily due to an increase in sales within the PBM segment, driven by he implementation of the HealthSpring contract on January 1, 2011, recent acquisitions and other new contract starts during the year.
EBITDA and Adjusted EBITDA increased $23.8 million and $26.0 million, respectively, for the year ended December 31, 2010, compared to the same period of 2009. The growth in EBITDA and Adjusted EBITDA was related primarily to new contract starts during 2010 and improved purchasing efficiencies on prescription drugs.

Adjusted EPS Reconciliation

Adjusted EPS adds back the impact of all amortization of intangible assets, net of tax. Amortization of intangible assets arises from the acquisition of intangible assets in connection with the Company's business acquisitions. The Company excludes amortization of intangible assets from non-GAAP adjusted EPS because it believes (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of the Company's business operations and (ii) such expenses can vary significantly between periods as a result of new acquisitions and full amortization of previously acquired intangible assets. Investors should note that the use of these intangible assets contributes to revenue in the period presented as well as future periods and should also note that such expenses will recur in future periods. Below is a reconciliation of the Company's reported net income to Non-GAAP net income and the related adjusted EPS for the years ended December 31, 2011 , 2010 and 2009.
Adjusted EPS Reconciliation
 
 
Years Ended December 31,
(in thousands, except per share data)
 
2011
 
2010
 
2009
 
 
 
Operational Results
 
Per Diluted Share
 
Operational Results
 
Per Diluted Share
 
Operational Results
 
Per Diluted Share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (GAAP)
 
 
$
91,786

 
$
1.46

 
$
64,735

 
$
1.03

 
$
46,061

 
$
0.86

Amortization of intangible assets
 
 
16,385

 
0.26

 
7,856

 
0.12

 
9,724

 
0.18

Tax effect of reconciling item
 
 
(5,505
)
 
(0.09
)
 
(2,640
)
 
(0.04
)
 
(3,141
)
 
(0.06
)
Non-GAAP Net-Income
 
 
$
102,666

 
$
1.63

 
$
69,951

 
$
1.11

 
$
52,644

 
$
0.98

Adjusted EPS for the year ended December 31, 2011 was $1.63 as compared to $1.11 in the same period of 2010. Increased gross profit earned from the expansion of the Company's PBM business, as well as recent acquisitions of MedfusionRx and PTRX, helped improve the Company's adjusted EPS during 2011. This was partially offset by increased costs incurred to support the Company's increased business, as well as the increase in the number of diluted shares outstanding during 2011 as compared to 2010.
Adjusted EPS for the year ended December 31, 2010 was $1.11 as compared to $0.98 for the same period in 2009. Increased gross profit from an increased customer base within the PBM segment was the main driver of the adjusted EPS increase in 2010 over 2009.
Liquidity and Capital Resources
The Company’s sources of liquidity have primarily been cash provided by operating activities, proceeds from its public offerings, stock option exercises, and proceeds from credit facilities. On December 16, 2011, the Company entered into a Credit Agreement and Revolving Credit Facility with an initial aggregate revolving commitment of $350 million, subject to increase from time to time up to a maximum aggregate revolving commitment of $450 million. The Company will use the proceeds from borrowings under the Revolving Credit Facility for general corporate purposes. As of December 31, 2011, no amount was outstanding under the Revolving Credit Facility. See Note 8 - Long-Term Liabilities to the consolidated financial statements for additional information regarding the Revolving Credit Facility. The Company’s principal uses of cash have been to fund working capital, finance capital expenditures, satisfy contractual obligations and to meet acquisition and investment needs. The Company anticipates that these uses will continue to be the principal demands on cash in the future.

38


At December 31, 2011 and 2010, the Company had cash and cash equivalents totaling $341.4 million and $321.3 million, respectively. In October 2011, the Company completed its acquisitions of PTRX and SaveDirectRx. The Company disbursed approximately $77.2 million from cash on hand in order to complete these acquisitions. As disclosed previously, subsequent to the end of the current reporting period, the Company completed its acquisition of HealthTran. The Company disbursed approximately $250 million from cash on hand and available revolver borrowings in order to complete this acquisition. The Company drew $100 million from its Revolving Credit Facility in January 2012 to partially fund the HealthTran acquisition. The Company believes that its cash on hand, together with cash generated from operating activities, and the amount remaining on its Revolving Credit Facility, will be sufficient to support planned operations for the foreseeable future.
At December 31, 2011, cash and cash equivalents consist of cash on hand, deposits in banks and bank term deposits with original maturities of 90 days or less. During the first quarter of 2010, the Company repositioned its funds previously placed in money market funds and moved the funds into cash on deposit accounts. The Company assessed that it would earn a greater return from cash on deposit accounts due to the historically low rates paid on the U.S. money market funds. Further, the Company reduced expenses by moving the funds to cash on deposit accounts as the fees charged for those accounts are lower than for U.S. money market fund accounts.
As of December 31, 2011, all of the Company’s cash and cash equivalents were exposed to market risks, primarily changes in U.S. interest rates. Declines in interest rates over time would reduce interest income related to these balances.
Consolidated Balance Sheets
Selected balance sheet highlights at December 31, 2011 are as follows:
•
Accounts receivable are made up of trade accounts receivable from our customers. Accounts receivable increased $118.3 million to $240.4 million at December 31, 2011 from $122.2 million at December 31, 2010, driven by increases in revenue of $3.0 billion during the year ended December 31, 2011, as a result of increased PBM revenue from new customer starts in 2010, as well as additional sales generated at the mail and specialty pharmacies driven by the acquisition of MedfusionRx. The accounts receivable balance is impacted by changes in revenues, as well as the timing of collections, and is continually monitored by the Company to ensure timely collections and to assess the need for any changes to the allowance for doubtful accounts.
•
Rebates receivable of $33.8 million relate to billed and unbilled PBM receivables from pharmaceutical manufacturers and third party administrators in connection with the administration of the rebate program where the Company is the principal contracting party. The receivable and related payables are based on estimates, which are subject to final settlement. Rebates receivable decreased $0.4 million to $33.8 million from $34.2 million at December 31, 2010, due primarily to the timing of payments from pharmaceutical manufacturers and third party administrators. The Company does not process rebates for all PBM customers and accordingly the rebates receivable balance does not always fluctuate proportionately with changes in revenues and prescription claim volumes.
•
The Company’s inventory balance of $19.6 million consists predominantly of prescription drugs and medical supplies at its mail and specialty pharmacy locations. As of December 31, 2011, the inventory balance has increased $10.8 million from $8.7 million at December 31, 2010, mainly due to the increased business at the Company's mail and specialty pharmacy locations as a result of increased volume from PBM customers and growth from recent acquisitions. Changes in the inventory balance from period to period are caused by some seasonality in certain products, taking advantage of buying opportunities, and changing inventory levels due to customer demands.
•
The accounts payable balance of $19.7 million represents amounts owed to the Company's suppliers for prescription drugs at the mail and specialty pharmacy locations, as well as amounts due to vendors for general operating expenses. As of December 31, 2011, the accounts payable balance has decreased $11.3 million from $30.9 million at December 31, 2010, mainly due to the timing of payments made for purchases of prescriptions drugs from the Company's suppliers.
•
Pharmacy benefit management rebates payable represents amounts owed to PBM customers for rebates from pharmaceutical manufacturers and third party administrators where the Company administers the rebate program on the customer’s behalf, and the Company is the principal contracting party. The payables are based on estimates, which are subject to final settlement. Pharmacy benefit management rebates payable decreased $2.1 million to $59.2 million at December 31, 2011, from $61.4 million at December 31, 2010, due to timing of when rebates were paid, offset by increases in rebate rates and volumes. Similar to the change in rebates receivable, the Company does not process rebates for all customers, and accordingly the rebates payable balance does not always fluctuate proportionately with changes in revenues and prescription claim volumes.
•
Pharmacy benefit claims payable of $199.7 million predominantly relates to amounts owed to our participating pharmacy network for prescription drug costs and dispensing fees in connection with prescriptions dispensed by the participating pharmacies for the Company’s PBM segment customers when the Company is the principal contracting party with the pharmacy. Pharmacy benefit claims payable increased $115.1 million from $84.6 million at December 31, 2010, due to increased transaction volumes during 2011 driven by new customer contracts, as well as the timing of payments to the participating pharmacies.
Cash flows from operating activities
For the year ended December 31, 2011, the Company generated $94.7 million of cash through its operations. Cash provided by operating activities has decreased slightly by $1.6 million compared to the same period in 2010. Operating cash flow consists mainly of net income which increased $27.1 million from $64.7 million for 2010. This increase is attributed to the increased transaction volume, and associated increase in gross profit, in the PBM segment propelled by new customer starts during 2011, as well as the additional business generated as a result of the Company's recent acquisitions. Cash from operations decreased due to an increase in accounts receivable of $110.5 million as a result of the increase in pharmacy transactions in the PBM segment from new customer starts during 2011 and the timing of when the Company received

39


payments on its accounts receivable balances. This decrease in cash from operations was offset by an increase in pharmacy benefit claims payable of $115.1 million as a result of the increased volume of pharmacy transactions during 2011 and the timing of when payments are made for these transactions.
Changes in the Company’s cash from operations result primarily from increased gross profits and the timing of payments on accounts receivable, rebates receivable, and the payment or processing of its various accounts payable and accrued liabilities. The Company continually monitors its balance of trade accounts receivable and devotes ample resources to collection efforts on those balances. Rebates receivable and the related payable are primarily estimates based on claims submitted. Rebates are typically paid to customers on a quarterly basis upon receipt of the billed funds from the third-party rebate administrators and pharmaceutical manufacturers. The timing of the rebate payments to customers and collections of rebates from third-party rebate administrators and pharmaceutical manufacturers causes fluctuations on the balance sheet, as well as in the Company’s cash from operating activities.
Changes in non-cash items such as depreciation and amortization are caused by the purchase and acquisition of capital and intangible assets. In addition, as assets become fully depreciated or amortized, the related expenses will decrease.
Changes in operating assets and liabilities, as well as non-cash items related to income taxes, will fluctuate based on working capital requirements and the tax provision, which is determined by examining taxes actually paid or owed, as well as amounts expected to be paid or owed in the future.
For the year ended December 31, 2010, the Company generated $96.3 million of cash through its operations. Cash provided by operating activities increased $9.9 million compared to the same period in 2009, mainly due to the increased profitability of the Company. Net income increased $18.6 million from $46.1 million during 2009. This increase was mainly due to increased transaction volume from new customer starts. Additionally, cash from operations increased due to an increase in pharmacy benefit rebates and claims payable of $14.8 million and $22.9 million, respectively, as a result of the increased volume of pharmacy transactions during 2010 and the timing of when payments are made for these transactions. These increases in cash from operations were offset by an increase in accounts receivable of $9.5 million due to the increase in pharmacy transactions in the PBM segment resulting from new customer starts during 2010 and the timing of when the Company received payments on its accounts receivable balances.
Cash flows from investing activities
For the year ended December 31, 2011, the Company used $89.5 million of cash for investing activities, which consisted primarily of cash used to acquire PTRX, SaveDirectRx and Medmetrics. Additionally, the Company used $9.7 million for purchases of property and equipment to support increased transaction volume.
As the Company grows, it continues to purchase capital assets to support increases in its information technology network capacity and personnel. The Company monitors and budgets these costs to ensure the expenditures aid in the strategic growth of the Company.
For the year ended December 31, 2010, the Company used $103.7 million of cash for investing activities, which consisted primarily of cash used to acquire MedfusionRx. Additionally, the Company used $9.1 million for purchases of property and equipment to support increased transaction volume, and $2.2 million to purchase short-term investments.
For the year ended December 31, 2009, the Company used $15.8 million of cash for investing activities, which consisted primarily of of $9.0 million for purchases of property and equipment to support increased transaction volume, and $5.1 million to purchase short-term investments.
Cash flows from financing activities
For the year ended December 31, 2011, the Company generated $14.9 million of cash from financing activities, which mainly consisted of proceeds from the exercise of stock options of $5.7 million and a $10.8 million tax benefit on the exercise of stock options.
Cash flows from financing activities generally fluctuate based on the timing of option exercises by the Company’s employees, which are affected by market prices, vesting dates and expiration dates. The associated tax benefit on the exercise of stock options will also fluctuate based on the timing of option exercises, the market price of the Company's shares at the time of exercise, and the exercise price of the option.
For the year ended December 31, 2010, the Company generated $24.1 million of cash from financing activities, which mainly consisted of proceeds from the exercise of stock options of $11.0 million and a $13.1 million tax benefit on the exercise of stock options.
For the year ended December 31, 2009, the Company generated $166.2 million of cash from financing activities, which consisted of $203.1 million in net proceeds from the public offering of 10,350,000 common shares in September 2009. In addition to the cash generated from the public offering, cash inflows from financing activities included proceeds from the exercise of stock options of $6.3 million and a $4.5 million tax benefit on the exercise of stock options. These were partially offset by the repayment of all of the Company's long term debt of $47.6 million.
Future Capital Requirements
The Company’s future capital requirements depend on many factors, including its product development programs. The Company expects to fund its operating and working capital needs, and business growth requirements through cash flow from operations, its cash and cash equivalents on hand and its Revolving Credit Facility. See Note 8 - Long-Term Liabilities to the consolidated financial statements for more information on the Company's Revolving Credit Facility. The Company expects that purchases of property and equipment will remain consistent with prior years. The Company cannot provide assurance that its actual cash requirements will not be greater than expected as of the date of this Annual Report. In order to meet business growth goals, the Company will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services and technologies, which might impact liquidity requirements or cause the issuance of additional equity or debt securities. Any issuance of additional equity or debt securities may result in dilution to shareholders, and the Company cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to the Company, or at all.

40


If sources of liquidity are not available or if it cannot generate sufficient cash flow from operations during the next twelve months, the Company might be required to obtain additional funds through operating improvements, capital markets transactions, asset sales or financing from third parties or a combination thereof. The Company cannot provide assurance that these additional sources of funds will be available or, if available, will have reasonable terms.
If adequate funds are not available to finance the Company's business growth goals, the Company may have to substantially reduce or eliminate expenditures for marketing, research and development, and testing of proposed products, or obtain funds through arrangements with partners that require the Company to relinquish rights to certain of its technologies or products. There can be no assurance that the Company will be able to raise additional capital if its capital resources are exhausted. A lack of liquidity and an inability to raise capital when needed may have a material adverse impact on the Company’s ability to continue its operations or expand its business.
Contractual Obligations
The following table summarizes the Company’s significant contractual obligations as of December 31, 2011 and the effect such obligations are expected to have on the Company’s liquidity and cash in future periods assuming all obligations reach maturity (in thousands):
 
Total
 
Less than 1 year
 
Years 1 - 3
 
Years 4 - 5
 
More than 5 years
Operating leases
$
27,190

 
$
4,637

 
$
8,638

 
$
7,629

 
$
6,286

Capital leases
56

 
56

 
—

 
—

 
—

Purchase obligations(1)
144

 
144

 
—

 
—

 
—

Earn-out payments (2)
9,406

 
—

 
9,406

 
—

 
—

Total
$
36,796

 
$
4,837

 
$
18,044

 
$
7,629

 
$
6,286

(1)
As of December 31, 2011, certain contracts with the Company’s utilities providers require minimum annual purchases.
(2)
The earn-out payments relate to our MedfusionRx and SaveDirectRx acquisitions and they are subject to the achievement of certain performance targets in the 2012 fiscal year.
The above table excludes $0.6 million related to the Company’s accrued liability for uncertain tax positions; the Company is unable to reliably estimate the period of cash settlement, if any, with the respective taxing authorities. In addition, on December 16, 2011, the Company entered into a Credit Agreement with respect to a new five-year senior unsecured Revolving Credit Facility with an initial aggregate revolving commitment of $350 million, subject to increase from time to time up to a maximum aggregate revolving commitment of $450 million. The Company will use the proceeds from borrowings under the Revolving Credit Facility for general corporate purposes. As of December 31, 2011, no amount was outstanding under the Revolving Credit Facility. In January 2012 the Company borrowed $100 million under its Revolving Credit Facility to finance in part the purchase price for the HealthTran acquisition. See Note 8 - Long-Term Liabilities to the consolidated financial statements for more information regarding the Company's Revolving Credit Facility.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Outstanding Securities
As of January 31, 2012, the Company had 62,384,161 common shares outstanding, 1,249,873 options outstanding and 609,909 restricted stock units (“RSUs”) outstanding. The options are exercisable on a one-for-one basis into common shares. The outstanding RSUs are subject to time-based and performance-based vesting restrictions. The number of outstanding RSUs as of January 31, 2012 assumes the associated performance targets will be met at the maximum level for the performance-based RSUs. Once vested, RSUs convert on a one-for-one basis into common shares.
Summary of Quarterly Results
The following table provides summary quarterly results (unaudited) for the eight quarters prior to and including the quarter ended December 31, 2011 (in thousands except share and per share data):
 
2011 (1)
 
 
2010 (2)(3)
 
Fourth
Quarter
 
Third
Quarter
 
Second
Quarter
 
First
Quarter
 
 
Fourth
Quarter
 
Third
Quarter
 
Second
Quarter
 
First
Quarter
Revenue
$
1,378,515

 
$
1,287,290

 
$
1,212,039

 
$
1,097,652

 
 
$
526,873

 
$
489,922

 
$
479,446

 
$
452,148

Gross profit %
6.5
%
 
6.4
%
 
6.1
%
 
5.8
%
 
 
10.9
%
 
10.8
%
 
11.2
%
 
11.1
%
Net income
$
26,684

 
$
25,266

 
$
21,565

 
$
18,271

 
 
$
16,622

 
$
16,176

 
$
17,145

 
$
14,792

Basic EPS
$
0.43

 
$
0.41

 
$
0.35

 
$
0.30

 
 
$
0.27

 
$
0.27

 
$
0.28

 
$
0.25

Diluted EPS
$
0.42

 
$
0.40

 
$
0.34

 
$
0.29

 
 
$
0.26

 
$
0.26

 
$
0.27

 
$
0.24

1)
The Company completed its acquisition of PTRX and SaveDirectRx on October 3, 2011. The aggregate purchase price for PTRX and SaveDirectRx was $77.2 million in cash, subject to customary working capital adjustments, with an additional $4.5 million potential earn-out payment, subject to the achievement of certain performance targets in the 2012 fiscal year.
2)
The Company acquired MedfusionRx on December 28, 2010 in exchange for $101.5 million in cash, with an additional $5.5 million

41


potential earn-out payment, subject to the achievement of certain performance targets in the 2012 fiscal year.
3)
On September 17, 2010, the Company executed a two-for-one stock split effected by a stock dividend on the issued and outstanding common shares of the Company. All share and per share data presented in this Annual Report have been adjusted to reflect this stock split.
Critical Accounting Policies and Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the period. Significant items subject to such estimates and assumptions include revenue recognition, purchase price allocation in connection with acquisitions, the carrying amount of property and equipment, the value of intangible assets acquired and related amortization periods, impairment of goodwill, rebates, contingencies, the valuation allowances for receivables and future income taxes and accruals for income tax uncertainties. Actual results could differ from those estimates. Note 2 - Significant Accounting Policies to the Company’s 2011 consolidated financial statements includes a Summary of Significant Accounting Policies. The understanding of the accounting policies used to prepare the consolidated financial statements is important to understanding the Company’s results of operations and financial condition.
Revenue recognition
The Company’s revenue is derived from prescription drug sales along with transaction processing services, maintenance, professional services, and systems sales (including software license and hardware sales).
The Company recognizes revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement; (ii) the service or product has been provided to the customer and no uncertainties exist surrounding product acceptance; (iii) the amount of fees to be paid by the customer is fixed or determinable; and (iv) the collection of fees is reasonably assured. Areas of judgment and subjectivity in the Company’s revenue recognition include principal versus agent considerations for PBM contracts, arrangements with multiple elements, and professional service revenues under long-term contracts for HCIT contracts.
Principal versus agent considerations:  The Company evaluates customer contracts using the indicators of the principal versus agent revenue accounting guidance to determine whether the Company acts as a principal or as an agent in the fulfillment of prescriptions through the participating pharmacy network. Assessing each contract requires judgment, and the conclusions reached on each contract will greatly impact the amount of revenue recorded. While gross profit is not impacted by the conclusion reached, revenues and cost of revenues will vary significantly. The Company assesses each contract to determine if the Company is acting as a principal or an agent. Key factors that the Company considers when determining whether it acts as a principal or an agent includes: (i) whether the Company has separate contractual relationships with customers and with pharmacies, (ii) is the Company responsible to validate and manage a claim through its claims adjudication process, (iii) does the Company commit to set prescription prices for the pharmacy, including instructing the pharmacy as to how that price is to be settled (co-payment requirements), (iv) does the Company manage the overall prescription drug plan relationship with the patients, who are participants of customers’ plans, (v) who has credit risk for the amount due from the customer, and (vi) does the Company have direct obligations to the participating pharmacies to pay for the prescription drug spend. The Company weighs the criteria that are present in order to conclude whether the contract should be recorded gross as a principal, or net as an agent.
Arrangements with multiple elements:  When the Company enters into arrangements with multiple deliverables it must consider: (i) whether the delivered item has value to the customer on a stand-alone basis, and (ii) if the contract includes a general right of return relative to the delivered item, whether delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. In most cases, the Company is able to conclude that the separate deliverables have stand alone value since most of the deliverables are sold as stand alone products or services. A key area of judgment is for the Company to determine the relative selling prices of the undelivered items. The relative selling prices of undelivered elements, such as professional services, or ASP services, are determined based on stated pricing within the contract with each customer, or pricing for the same product sold to other customers. Professional services relative selling prices are determined based on billing rates per hour based on the type of professional services provided, whereas ASP services are generally based on transaction fee rates, or standard monthly access and processing fees. When the Company is unable to determine the relative selling prices based on contractual terms with the customer or from pricing of the same product sold to other customers, the Company uses its best estimate of the selling price for that deliverable. Once the relative selling prices are determined, revenue is allocated to each unit of accounting or element based on relative fair values.
Professional service revenues under long-term contracts:  As part of the Company’s professional services offerings, the Company enters into contracts to provide professional services over a specified time frame, or for a specific contract deliverable. In cases where the contracts require professional services to be delivered for an extended time frame, the Company records revenue based on a percentage of completion model. The percentage of completion model is impacted by management’s estimate of hours required to complete a deliverable and the mix of staffing required for the project. When projects have a fixed fee, the Company must estimate the total cost to complete the deliverable in order to assess a projected margin from the project. Revenues are then recorded based on the hours completed for the project and the calculated margin to be earned from the project. Revenues are impacted based on management’s estimate of margin to be earned on the project, and may fluctuate throughout the project as estimates are revised. Whenever management expects a loss on a project, the Company records the expected loss immediately in its consolidated statement of operations.
Rebates
The Company administers rebate programs through which it receives rebates and administrative fees from pharmaceutical manufacturers and third party administrators that are shared with customers. The Company recognizes rebates when the Company is entitled to them, and when the amounts of the rebates are determinable. The amount recorded for rebates earned by the Company from the pharmaceutical manufacturers, third party administrators, and from administrative fees are recorded as a reduction of cost of sales. Rebates owed to the Company’s customers are recorded as a reduction of revenue. The Company determines the amount of rebates to record based on the number and types of

42


claims submitted, the rebate program terms with its customers, the Company’s rebate contracts, and any additional information that becomes available. The amount of rebates ultimately earned by the Company, or paid to its customers, is contingent upon several factors, including validation of claims data submitted by the Company, and may require adjustments in future periods to the amounts originally estimated. Historically, adjustments to the Company’s original rebate estimates have not been significant.
Goodwill and intangible assets
Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the identifiable assets acquired, less liabilities assumed, based on their fair values. Goodwill is allocated to the Company’s reporting units that are expected to benefit from the business combination as of the date of the business combination. Intangible assets acquired individually or as part of a group of other assets are initially recognized and measured at cost. The cost of a group of intangible assets acquired in a transaction, including those acquired in a business combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets acquired based on their fair values.
Goodwill and intangible assets are impacted by the Company’s fair value measurements at initial recording. Beginning in 2009, the Company applied the revised business combination guidance as issued by the Financial Accounting Standards Board (“FASB”). Measurements of goodwill and purchased intangible assets are based on models derived from a market participant point of view. Along with the methodology used to measure assets and liabilities acquired, the new guidance also impacts the types of assets and liabilities required to be measured and recognized. Management’s conclusions about the composition of relevant market participants, the types of assets and liabilities required to be measured, and the methodology used to measure the assets and liabilities will all have a significant impact on the purchase price allocation for business combinations.
Asset impairments
The Company’s goodwill and long-lived assets (including property and equipment, and purchased intangibles subject to amortization) are subject to periodic impairment testing. Pursuant to the new accounting standards update related to the testing of goodwill impairment in 2011 the Company performed a qualitative assessment to determine if indicators of impairment were present. In addition, the Company also performed a quantitative assessment of the carrying value of goodwill as of October 31, 2011. See Note 2 - Significant Accounting Policies to the consolidated financial statements for additional information on the Company's 2011 goodwill impairment test. Long-lived assets are only required to be tested for impairment when events or circumstances indicate that the net carrying amount of the asset may not be recoverable. Both asset impairment tests and considerations are impacted by various estimates and judgments made by management. Events that may cause a potential impairment in the Company's goodwill or long-lived assets would be the loss of a significant customer or group of customers, a fundamental change in the structure of the healthcare industry, including the method and manner in which pharmacy benefit managers are compensated or a significant decline in future expected profitability.
The annual qualitative assessment for goodwill is impacted by management’s assessment of reporting units, allocation of the consolidated Company’s assets and liabilities to each reporting unit, management’s estimate of future operating results, and a selection of peers to establish a comparable market group. The annual impairment test completed for 2011 did not indicate any impairment of the Company’s two reporting units, and did not reveal that an impairment would be reasonably likely in the near future.
As noted above, long-lived assets are only required to be tested for impairment when events or circumstances indicate that the net carrying amount of the asset may not be recoverable. Assessing whether an impairment test is necessary requires management to monitor results of the business that utilize the long-lived assets, as well as outside market forces that may impact the future recoverability of the long-lived assets. No events or other circumstances occurred in 2011 that caused management to conclude any of its long-lived tangible or intangible assets may not be recoverable. The Company considered the recent turmoil in the credit markets in assessing whether these events may indicate that one of the Company's long-lived assets were impaired. The assets assessed are mostly computer equipment, acquired customer lists and goodwill. The Company's assessment of the turmoil in the credit markets did not indicate that value of these assets were significantly impacted by the recent turmoil in the credit markets.
Valuation of allowance for doubtful accounts
In assessing the valuation of the allowance for doubtful accounts, management reviews the collectability of accounts receivable in aggregate and on an individual account-basis. Delinquency is assessed based primarily on contractual terms, and management’s judgment is used as the basis for allowances required. Management reviews the accounts receivable on an individual customer-basis to determine if events such as subsequent collections, discussions with management of the debtor companies, or other activities lead to the conclusion to either increase or decrease the calculated allowance. Factors considered when reviewing accounts receivable in the aggregate include the overall age of receivables, macro-economic issues impacting classes of customers and recent collection trends. The conclusions and estimates made are further impacted by changes in economic and market conditions as well as changes to the customers’ financial condition. Changes in estimates for the allowance of doubtful accounts have not had a significant impact on the results of the Company during 2011, 2010, or 2009.
Contingencies
From time to time in connection with its operations, the Company is named as a defendant in actions for damages and costs allegedly sustained by the plaintiffs. Management also considers other areas of the Company’s business that may be subject to litigation and liability for damages arising from errors in processing the pricing of prescription drug claims, failure to meet performance measures within certain contracts relating to its services performed or its ability to obtain certain levels of discounts or rebates on prescription purchases from participating pharmacies, drug manufacturers and third party administrators or other actions or omissions. Reserves for contingencies are based upon the Company’s consideration of these proceedings and disputes. Management assesses the probability that these contingencies will be realized, and whether the outcome is reasonably estimable. The Company’s estimates for reserves recorded may be impacted by the history of similar claims, the limitations of any insurance coverage, advice from outside counsel, and management’s strategy with regard to the settlement or defense

43


against such claims and obligations.
Income taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Benefits from tax positions are recognized in the consolidated financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority having full knowledge of all relevant information. Management’s estimates of future operating results and tax planning strategies, assessment of the probability of future tax benefits realization, and the determination of the likelihood of tax positions being sustained upon exam, are key judgments which management makes which impact the accounting for income taxes and necessary valuation allowances.
Recent Accounting Standards
See Note 2 - Significant Accounting Policies to the consolidated financial statements for information on recent accounting pronouncements that the Company adopted. The Company is currently assessing the impact on its financial condition and future operating results for recently issued accounting guidance, and does not expect the recently issued guidance to have a significant impact on the Company’s financial condition or future results of operations.

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE PRICE SENSITIVITY
As of December 31, 2011, the Company had cash and cash equivalents totaling $341.4 million, most of which is held in cash on deposit accounts. The Company previously paid interest based on the current LIBOR interest rate, however, the associated debt was fully repaid in December 2009, alleviating the Company’s exposure to interest rate risks for interest due on outstanding debt. On December 16, 2011, the Company entered into a Credit Agreement with JPMorgan Chase Bank, N.A. with respect to a new five-year senior unsecured revolving credit facility. The Credit Agreement provides that the lenders will make loans to the Company from time to time, with an initial aggregate revolving commitment of $350 million, subject to increase from time to time up to a maximum aggregate revolving commitment of $450 million. On January 3, 2012, the Company borrowed $0 million under the Revolving Credit Facility to pay a portion of the consideration in connection with the acquisition of HealthTran and certain transaction fees and expenses related to the acquisition. The interest rates applicable to borrowings under the Revolving Credit Facility are based on a fluctuating rate and are described in more detail in Note 8 - Long-Term Liabilities to the Company's consolidated financial statements.
Throughout 2011, the Company’s effective interest income rate was less than 1%, and there were no outstanding borrowings under the Revolving Credit Facility. Accordingly, the Company did not perform a sensitivity analysis as of December 31, 2011, assuming a hypothetical one percentage point decrease. As the interest rates at which the Company is earning interest are at historic lows, the Company would not expect a material change in its interest income if rates fell below those applicable in 2011. Actual increases or decreases in earnings in the future could differ materially from this assumption based on the timing and amount of both interest rate changes and the levels of cash held by the Company. An analysis on the hypothetical impact to the Company’s interest expense was not performed since the long-term debt was extinguished during the fourth quarter of 2009, and the Company no longer has a risk due to interest rate fluctuations related to debt.
FOREIGN EXCHANGE RISK
The Company is subject to foreign exchange risk related to its operations in Canada. The Company does not enter into derivative instruments to mitigate this risk. Exposure to fluctuations in Canadian-dollar denominated transactions is partially offset by Canadian-dollar denominated assets and liabilities. The realized foreign exchange gains and losses for each of the periods presented were insignificant to the Company's consolidated operations. The Company performed a sensitivity analysis as of December 31, 2011, assuming a hypothetical 10% fluctuation in the U.S. dollar to Canadian dollar exchange rate. Holding other variables constant, a 10% fluctuation in either direction in the exchange rate would affect the Company’s pre-tax income by less than $0.1 million.
There are inherent limitations in the sensitivity analysis presented, primarily due to the assumption that foreign exchange rate movements are linear and instantaneous. As a result, the analysis is unable to reflect the potential effects of more complex market changes that could arise, which may positively or negatively affect income.


44


ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
The Board of Directors and Shareholders
SXC Health Solutions Corp.:
We have audited the accompanying consolidated balance sheets of SXC Health Solutions Corp. (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for each of the years in the three-year period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SXC Health Solutions Corp. as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011 in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 24, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 /s/ KPMG LLP
Chicago, Illinois
February 24, 2012




45


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
The Board of Directors and Shareholders
SXC Health Solutions Corp.:
We have audited SXC Health Solutions Corp.’s (the Company) internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for the three-year period ended December 31, 2011, and our report dated February 24, 2012 expressed an unqualified opinion on those consolidated financial statements.

/s/  KPMG LLP
Chicago, Illinois
February 24, 2012


46


SXC HEALTH SOLUTIONS CORP.
Consolidated Balance Sheets
 
December 31,
 
2011
 
2010
 
(In thousands, except share data)
ASSETS
 
 
 
Current assets
 

 
 

Cash and cash equivalents
$
341,382

 
$
321,284

Restricted cash
12,017

 
13,790

Accounts receivable, net of allowance for doubtful accounts of $2,725 (2010 - $3,553)
240,425

 
122,175

Rebates receivable
33,834

 
34,249

Prepaid expenses and other current assets
6,409

 
4,888

Inventory
19,554

 
8,736

Income tax recoverable
—

 
5,285

Deferred income taxes
9,642

 
6,647

Total current assets
663,263

 
517,054

Property and equipment, net of accumulated depreciation of $43,304 (2010 - $35,861)
21,658

 
20,896

Goodwill
291,045

 
220,597

Other intangible assets, net of accumulated amortization of $48,072 (2010 - $31,687)
69,777

 
56,282

Other assets
4,564

 
1,961

Total assets
$
1,050,307

 
$
816,790

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 

 
 

Accounts payable
$
19,679

 
$
30,930

Accrued expenses and other current liabilities
66,729

 
61,038

Pharmacy benefit management rebates payable
59,235

 
61,364

Pharmacy benefit claim payments payable
199,701

 
84,599

       Total current liabilities
345,344

 
237,931

Deferred income taxes
18,361

 
15,111

Other liabilities
15,564

 
10,492

Total liabilities
379,269

 
263,534

Commitments and contingencies (Note 14)


 


Shareholders’ equity
 

 
 

Common shares: no par value, unlimited shares authorized; 62,383,661 shares issued and outstanding at December 31, 2011 (2010 —  61,602,997)
394,769

 
381,736

Additional paid-in capital
37,936

 
24,973

Retained earnings
238,333

 
146,547

Total shareholders’ equity
671,038

 
553,256

Total liabilities and shareholders’ equity
$
1,050,307

 
$
816,790

 See accompanying notes to the consolidated financial statements.

47


SXC HEALTH SOLUTIONS CORP.
Consolidated Statements of Operations
 
 
Years Ended December 31,
 
2011
 
2010
 
2009
 
(In thousands, except per share data)
 
 
 
 
 
 
Revenue
$
4,975,496

 
$
1,948,389

 
$
1,438,634

Cost of revenue
4,666,008

 
1,734,334

 
1,252,034

Gross profit
309,488

 
214,055

 
186,600

Expenses:
 

 
 

 
 

Product development costs
14,331

 
12,428

 
11,951

Selling, general and administrative
131,457

 
89,254

 
85,797

Depreciation of property and equipment
6,744

 
5,995

 
5,811

Amortization of intangible assets
16,385

 
7,856

 
9,724

 
168,917

 
115,533

 
113,283

Operating income
140,571

 
98,522

 
73,317

Interest income
(502
)
 
(727
)
 
(756
)
Interest expense and other expense, net
2,779

 
1,693

 
5,988

Income before income taxes
138,294

 
97,556

 
68,085

Income tax expense (benefit):
 

 
 

 
 

Current
52,402

 
29,531

 
22,285

Deferred
(5,894
)
 
3,290

 
(261
)
 
46,508

 
32,821

 
22,024

Net income
$
91,786

 
$
64,735

 
$
46,061

Earnings per share:
 

 
 

 
 

Basic
$
1.48

 
$
1.07

 
$
0.89

Diluted
$
1.46

 
$
1.03

 
$
0.86

 
See accompanying notes to the consolidated financial statements.


48


SXC HEALTH SOLUTIONS CORP.
Consolidated Statements of Comprehensive Income
 
Years Ended December 31,
 
2011
 
2010
 
2009
 
(In thousands)
Net income
$
91,786

 
$
64,735

 
$
46,061

Other comprehensive income, net of tax
 

 
 

 
 

Unrealized gain on cash flow hedges and other (net of income tax expense of $1 and $255 in 2010 and 2009, respectively)
—

 
1

 
429

Comprehensive income
$
91,786

 
$
64,736

 
$
46,490

See accompanying notes to the consolidated financial statements.


49


SXC HEALTH SOLUTIONS CORP.
Consolidated Statements of Cash Flows
 
Years Ended December 31,
 
2011
 
2010
 
2009
 
(In thousands)
Cash flows from operating activities:
 

 
 

 
 

Net income
$
91,786

 
$
64,735

 
$
46,061

Items not involving cash:
 

 
 

 
 

Stock-based compensation
9,445

 
5,895

 
3,657

Depreciation of property and equipment
9,492

 
8,439

 
8,014

Amortization of intangible assets
16,385

 
7,856

 
9,724

Deferred lease inducements and rent
759

 
(462
)
 
(593
)
Deferred income taxes
(5,894
)
 
3,290

 
(261
)
Tax benefit on option exercises
(10,804
)
 
(13,107
)
 
(4,464
)
Changes in operating assets and liabilities, net of effects from acquisitions:
 

 
 

 
 

Accounts receivable
(110,528
)
 
(9,456
)
 
(16,705
)
Rebates receivable
5,267

 
(16,619
)
 
11,956

Restricted cash
1,773

 
379

 
(1,671
)
Prepaid expenses and other current assets
(1,473
)
 
(824
)
 
1

Inventory
(10,291
)
 
501

 
(401
)
Income tax recoverable
21,977

 
10,523

 
6,098

Accounts payable
(20,303
)
 
2,169

 
1,635

Accrued expenses and other current liabilities
(10,806
)
 
(5,708
)
 
1,188

Pharmacy benefit claim payments payable
115,102

 
22,930

 
10,263

Pharmacy benefit management rebates payable
(6,019
)
 
14,758

 
10,280

Other
(1,200
)
 
965

 
1,602

Net cash provided by operating activities
94,668

 
96,264

 
86,384

Cash flows from investing activities:
 

 
 

 
 

Acquisitions, net of cash acquired
(79,825
)
 
(99,200
)
 
(2,176
)
Purchases of property and equipment
(9,690
)
 
(9,070
)
 
(8,994
)
Proceeds from sale of short term investments
—

 
6,828

 
449

Purchases of short term investments
—

 
(2,208
)
 
(5,098
)
Net cash used in investing activities
(89,515
)
 
(103,650
)
 
(15,819
)
Cash flows from financing activities:
 

 
 

 
 

Proceeds from exercise of options
5,735

 
11,024

 
6,264

Tax benefit on option exercises
10,804

 
13,107

 
4,464

Payment of financing costs
(1,595
)
 
—

 
—

Proceeds from public offering, net of issuance costs
—

 
—

 
203,121

Repayment of long-term debt
—

 
—

 
(47,640
)
Net cash provided by financing activities
14,944

 
24,131

 
166,209

Effect of foreign exchange on cash balances
1

 
169

 
(119
)
Increase in cash and cash equivalents
20,098

 
16,914

 
236,655

Cash and cash equivalents, beginning of period
321,284

 
304,370

 
67,715

Cash and cash equivalents, end of period
$
341,382

 
$
321,284

 
$
304,370

 
See accompanying notes to consolidated financial statements.

50


SXC HEALTH SOLUTIONS CORP.
Consolidated Statements of Shareholders’ Equity
(in thousands, except share data)



 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
 
 
Common Shares
 
Additional Paid-in Capital
 
Retained Earnings
 
 
 
 
Shares
 
Amount
 
 
 
 
Total
 
(In thousands, except share data)
Balance at December 31, 2008
48,206,064

 
$
146,988

 
$
11,854

 
$
35,751

 
$
(430
)
 
$
194,163

Net income
—

 
—

 
—

 
46,061

 
—

 
46,061

Exercise of stock options
1,465,674

 
9,063

 
(2,799
)
 
—

 
—

 
6,264

Issuance of common shares
10,350,000

 
203,121

 
—

 
—

 
—

 
203,121

Issuance of common shares for acquisition
494

 
4

 
—

 
—

 
—

 
4

Vesting of restricted stock units
92,330

 
2,023

 
(2,023
)
 
—

 
—

 
—

Tax benefit on options exercised
—

 
—

 
4,464

 
—

 
—

 
4,464

Stock-based compensation
—

 
—

 
3,657

 
—

 
—

 
3,657

Tax benefit of share issuance costs
—

 
331

 
—

 
—

 
—

 
331

Discontinuance of hedge accounting, net of tax
—

 
—

 
—

 
—

 
430

 
430

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Balance at December 31, 2009
60,114,562

 
361,530

 
15,153

 
81,812

 
(1
)
 
458,494

Net income
—

 
—

 
—

 
64,735

 
—

 
64,735

Exercise of stock options
1,366,193

 
15,643

 
(4,619
)
 
—

 
—

 
11,024

Vesting of restricted stock units
122,242

 
4,563

 
(4,563
)
 
—

 
—

 
—

Tax benefit on options exercised
—

 
—

 
13,107

 
—

 
—

 
13,107

Stock-based compensation
—

 
—

 
5,895

 
—

 
—

 
5,895

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
1

 
1

Balance at December 31, 2010
61,602,997

 
381,736

 
24,973

 
146,547

 
—

 
553,256

Net income
—

 
—

 
—

 
91,786

 
—

 
91,786

Issuance of common shares for acquisition and other
1,355

 
12

 
—

 
—

 
—

 
12

Exercise of stock options
691,482

 
8,191

 
(2,456
)
 
—

 
—

 
5,735

Vesting of restricted stock units
87,827

 
4,830

 
(4,830
)
 
—

 
—

 
—

Tax benefit on options exercised
—

 
—

 
10,804

 
—

 
—

 
10,804

Stock-based compensation
—

 
—

 
9,445

 
—

 
—

 
9,445

Balance at December 31, 2011
62,383,661

 
$
394,769

 
$
37,936

 
$
238,333

 
$
—

 
$
671,038

 
See accompanying notes to the consolidated financial statements.


51


SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.
Description of Business
SXC Health Solutions Corp. (the “Company”) is a leading provider of pharmacy benefits management (“PBM”) services and healthcare information technology (“HCIT”) solutions to the healthcare benefits management industry. The Company’s product offerings and solutions combine a wide range of PBM services, software applications, application service provider (“ASP”) processing services and professional services designed for many of the largest organizations in the pharmaceutical supply chain, such as federal, provincial, and state and local governments, pharmacy benefit managers, managed care organizations, retail pharmacy chains and other healthcare intermediaries. The Company is headquartered in Lisle, Illinois with several locations in the U.S. and Canada. The Company trades on the Toronto Stock Exchange under ticker symbol “SXC” and on the Nasdaq Stock Market under ticker symbol “SXCI.”

2.
Significant Accounting Policies
(a) Significant accounting policies are summarized below:
Basis of presentation:
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. Amounts in the consolidated financial statements are expressed in U.S. dollars, except where otherwise indicated. Certain reclassifications have been made to conform the prior years’ consolidated financial statements to the current year’s presentation. 
Accounting Standards Codification:
Effective with the quarter ended September 30, 2009, the Company adopted the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification (“the Codification”), which is now the exclusive authoritative reference for nongovernmental U.S. GAAP. Where applicable, titles and references to accounting standards have been updated to reflect the Codification.
Use of estimates:
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant items subject to such estimates and assumptions include revenue recognition, purchase price allocation and contingent consideration in connection with acquisitions, valuation of property and equipment, valuation of intangible assets acquired and related amortization periods, impairment of goodwill, contingencies, valuation allowances for receivables and income taxes. Actual results could differ from those estimates.
Revenue recognition:
The Company's revenue is derived from prescription drug sales along with transaction processing services, maintenance, professional services, and systems sales (including software license and hardware sales). 
The Company recognizes revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement; (ii) the service or product has been provided to the customer and no uncertainties exist surrounding product acceptance; (iii) the amount of fees to be paid by the customer is fixed or determinable; and (iv) the collection of fees is reasonably assured.
When the Company enters into arrangements with multiple deliverables, exclusive of arrangements with software deliverables, it applies the FASB's guidance for revenue arrangements with multiple deliverables and evaluates each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (i) whether the delivered item has value to the customer on a stand-alone basis, and (ii)  if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. Revenue is allocated to each unit of accounting or element based on relative selling prices. The Company determines relative selling prices by using either (i) vendor specific objective evidence (“VSOE”) if it exists; or (ii) third-party evidence of selling price ("TPE"). When neither VSOE nor TPE of selling price exists for a deliverable, the Company uses its best estimate of the selling price for that deliverable.
After determining which deliverables represent a separate unit of accounting, each unit is then accounted for under the applicable revenue recognition guidance. In cases where elements cannot be treated as separate units of accounting, the elements are combined into a single unit of accounting for revenue recognition purposes.
When the Company enters into arrangements with multiple deliverables involving software, the Company applies the American Institute of Certified Public Accountant’s ("AICPA") accounting guidance for software. The entire arrangement fee is allocated to each element in the arrangement based on the respective VSOE of fair value of each element.
When an arrangement includes software and non-software deliverables, the Company allocates the arrangement consideration to the non-software deliverables, and to the software deliverables as a group, based on the relative selling prices of all deliverables in the arrangement. When a tangible product contains software that is not essential to the product’s functionality, that nonessential software and any other deliverables within the arrangement that relate to that nonessential software are accounted for under accounting guidance for software. The non-software deliverables sold by the Company typically do not include software deliverables that are considered essential to the functionality of a tangible product.
Revenue is recognized for specific types of transactions as follows:
PBM revenue:  The Company’s PBM revenue is primarily derived from sales of prescription drugs, together with any associated

52
SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


administrative fees, to customers and participants through the Company’s nationwide network of pharmacies. Revenue related to the sales of prescription drugs by the Company’s nationwide network of pharmacies is recognized when the claims are adjudicated. Claims are adjudicated at the point-of-sale using the Company’s on-line processing system. The Company records an offsetting reduction to revenue for any rebates earned from pharmaceutical manufacturers and third party administrators which are payable to the Company’s customers.
For transactions at the Company's participating pharmacies, under the terms of the customer contracts, the pharmacy is solely obligated to collect the co-payments from the participants. The Company does not assume liability for participant co-payments in non-Company owned pharmacy transactions, and therefore does not include participant co-payments in revenue or cost of revenue. If these amounts were included in the Company’s operating results, its operating income and net income would not have been affected.
The Company evaluates customer contracts to determine whether the Company acts as a principal or as an agent in the fulfillment of prescriptions through its participating pharmacy network. The Company acts as a principal in certain of its transactions with customers and, in these cases, revenues are recognized at the prescription price (ingredient cost plus dispensing fee) negotiated with customers, plus the Company’s administrative fees (“gross reporting”). Gross reporting is appropriate when the Company (i) has separate contractual relationships with customers and with pharmacies, (ii) is responsible to validate and manage a claim through its claims adjudication process, (iii) commits to set prescription prices for the pharmacy, including instructing the pharmacy as to how that price is to be settled (co-payment requirements), (iv) manages the overall prescription drug plan relationship with the patients, who are members of customers’ plans, and (v) has credit risk for the amount due from the customer.
Revenue for the sale of prescription drugs dispensed at the Company's mail and specialty pharmacies, including amounts due from third-party payors and member co-payments, is recorded when the prescription drugs are shipped.
HCIT revenue: HCIT revenues are generated from transaction processing, system sales, maintenance, and professional services. Revenue is recognized for the specific types of HCIT transactions as follows:
Transaction processing revenue:  Revenue from transaction processing includes ASP and switching services. ASP services consist primarily of hosting, claims adjudication, customer support, financial reporting, data storage, and rebate administration services. The Company earns a transaction fee for each transaction processed. The Company recognizes revenue at the time the transaction is processed, with the exception of any undelivered elements.
System sales revenue:  Revenue from software licenses is recognized in accordance with the AICPA's accounting guidance for software.  Revenue is recognized when all the conditions described above are satisfied. In the event the fee is not fixed or determinable, revenue is recognized as the payments become due from the customer. In cases where collection is not deemed probable, revenue is recognized upon receipt of cash, assuming all other criteria have been met.
Typically, software license agreements are multiple element arrangements as they may also include professional services, related maintenance, hardware, and implementation services fees. Arrangements that include non-software elements are evaluated to determine whether those services are considered essential to the functionality of the software. In general, the software sold by the Company is not essential to the functionality of the non-software elements, including tangible products, sold by the Company; accordingly, all software elements in multiple element arrangements are recognized under accounting guidance for software.
When non-software elements are not considered essential to the functionality of the software and significant customization of the software is not required, the entire arrangement fee is allocated to each element in the arrangement based on the respective VSOE of fair value of each element. VSOE of fair value used in determining the fair value of license revenues is based on the price charged by the Company when the same element is sold in similar volumes to a customer of similar size and nature on a stand-alone basis. As the Company has not sold many licenses over the past several years, VSOE of fair value for licenses is not always established. VSOE used in determining revenue for consulting is based on the standard daily rates for the type of services being provided multiplied by the estimated time to complete the task. VSOE used in determining the fair value of maintenance and technical support is based on the annual renewal rates. The revenue allocable to the consulting services is recognized as the services are performed. In instances where VSOE exists for undelivered elements but does not exist for delivered elements of a software arrangement, the Company uses the residual method of allocation of the arrangement fees for revenue recognition purposes. The Company has used the residual method of revenue recognition to determine the amount of revenue to be applied to any software licenses that contain multiple elements for the periods covered in this Annual Report as VSOE of fair value of the software licenses was not available. If VSOE of fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue under the arrangement is deferred until these elements have been delivered or VSOE can be established.
Maintenance revenue:  Maintenance revenues consist of revenue derived from contracts to provide post-contract customer support (“PCS”) to license holders. These revenues are recognized ratably over the term of the contract. Advance billings of PCS are not recorded to the extent that the term of the PCS has not commenced or payment has not been received.
Professional services revenue:  Professional services revenues are recognized as the services are performed, generally on a time and material basis. Professional services revenues attributed to fixed price arrangements are recognized over the service period based on a proportionate performance method whereby the performance is estimated utilizing direct labor hours incurred to date as a percentage of total estimated direct labor hours to complete the project.
Cost of revenue:
The Company’s cost of revenue includes the cost of pharmaceuticals dispensed, either directly dispensed at its mail and specialty pharmacy locations, or indirectly through its nationwide network of participating pharmacies. Cost of revenue is reduced for rebates earned from pharmaceutical manufacturers and third party administrators. Cost of revenue also includes the cost of personnel to support the Company’s transaction processing services, system sales, maintenance, and professional services. In addition, the Company includes in cost of revenue an amount of depreciation expense that is related to property and equipment used to provide services to customers.



53
SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Cash and cash equivalents:
The Company considers cash on hand, deposits in banks, money market funds, and bank term deposits with original maturities of ninety days or less as cash and cash equivalents. The amounts presented in the consolidated balance sheets approximate fair value of cash and cash equivalents. These assets are deemed Level 1 securities in the fair value hierarchy.
Restricted cash:
Restricted cash balances at December 31, 2011 are restricted as to use and relate primarily to minimum cash balances required in accordance with various state statutes, contractual terms with customers and other customer restrictions related to the Company’s PBM business.
Fair value measurements:
The Company applies the fair value accounting guidance for measuring its financial and non-financial assets and liabilities. Currently, none of the Company’s non-financial assets are required to be carried at fair value. The Company would apply the fair value accounting guidance to non-financial assets and liabilities in the event that a non-financial asset or liability was impaired, or, if non-financial assets and liabilities were purchased in a business acquisition.
The fair value of the contingent purchase price liability associated with the acquisitions of MedfusionRx and SaveDirectRx are based upon probability weighted discounted cash flow models, utilizing the Company's expectation of the amounts to be paid in the future to settle the contingent purchase price. The inputs utilized in calculating the fair value of the contingent purchase price liabilities are not observable in the market place. The fair value of the Company’s interest rate contracts is based upon observable market-based inputs that reflect the current value of the difference between the fixed rate payments the Company will make to the counter party, and the future variable rate receipts from the counterparty.
Other assets and liabilities held by the Company deemed as financial instruments and required to be carried at fair value include cash and cash equivalents, accounts receivable, rebates receivable, accounts payable, accrued liabilities (current portion), pharmacy benefit management rebates payable and pharmacy benefit claim payments payable. The estimated fair values of these financial instruments approximate their carrying amounts due to the short-term nature of their maturities.
Inventory:
Inventory consists primarily of prescription drugs and medical supplies, computer hardware and sub-licensed software held for resale and is carried at the lower of cost or net realizable value. Inventory costs are calculated using the first-in, first-out method and the weighted-average method.
Property and equipment:
Property and equipment (“P&E”) are stated at cost less accumulated depreciation. Depreciation is generally calculated over the expected estimated useful lives of the assets. Assets are depreciated in the following manner: 1) Furniture and equipment is depreciated using the straight- line method based on a useful life of five years, 2) Computer equipment and software assets are depreciated using a straight-line method and a useful life of three to five years, and 3) Leasehold improvements are depreciated on a straight-line basis over the shorter of the asset’s life or the lease term.
Accounts receivable and allowance for doubtful accounts:
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. In assessing the valuation of the allowance for doubtful accounts, management reviews the collectability of accounts receivable in aggregate and on an individual account-basis. Individual customer events such as subsequent collections, discussions with management of the debtor companies, or other activities are used by management as factors in concluding whether to increase or decrease the calculated allowance. Any increase or decrease to the allowance is recognized in the statements of operations as bad debt expense within selling, general and administrative expense.
Impairment of long-lived assets:
Long-lived assets or asset groups held and used, including P&E and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; the accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and a current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its previously estimated useful life. Recoverability is assessed based on the carrying amount of the asset and the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset or asset group. An impairment loss is recognized when the carrying amount is not recoverable and exceeds the fair value of the asset or asset group. The impairment loss is measured as the amount by which the carrying amount exceeds fair value. During each of the years ended December 31, 2011, 2010, and 2009, no events or circumstances occurred that indicated that the carrying amounts of the long-lived assets may not be recoverable.
Goodwill:
Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the identifiable assets acquired, less liabilities assumed, based on their fair values. Goodwill is allocated to the Company’s reporting unit that is expected to benefit from the business combination as of the date of the business combination. As of December 31, 2011, the amount of goodwill carried at the HCIT and PBM segments were $19.7 million and $271.4 million, respectively.
Goodwill is not amortized, but rather, is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company completes its goodwill impairment test annually as of October 31. Circumstances that could trigger an interim impairment test include: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; the loss of key personnel; a change in reporting units; the likelihood that a reporting unit

54
SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


or significant portion of a reporting unit will be sold or otherwise disposed of; the results of testing for recoverability of a significant asset group within a reporting unit; and the recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.
During the current year the Company adopted the amendment to the goodwill impairment testing standard that allows the Company to perform a qualitative analysis to determine whether further impairment testing is necessary. The Company performed the qualitative goodwill impairment assessment, as well as the quantitative test to create a baseline assessment to utilize in future qualitative tests. Neither the qualitative or quantitative tests indicated an impairment to the Company's goodwill balances was present and an impairment in the near future is not considered reasonably likely. The Company previously completed impairment tests in 2010 and 2009 and concluded no impairments existed.
The qualitative assessment performed by the Company considered the current operating results of the Company's reporting units, future expectations of each reporting unit, industry and competitor performance and other recent events that may impact each reporting unit. The Company then assessed whether, in light of the evidence gathered if it was more likely than not that a reporting unit's fair value is less than its carrying amount. As noted above, the Company concluded that it was not more likely than not that a reporting unit's fair value was less than its carrying value. If in the future the Company's qualitative assessment indicates that a reporting unit's fair value may be below its carrying value, the Company would prepare a quantitative test to determine whether an impairment existed, and the amount of such impairment.
The quantitative impairment test is carried out in two steps for each of the Company's reporting units. In the first step, the carrying amount of the reporting unit is compared with its fair value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and the second step of the impairment test is unnecessary. The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case the implied fair value of the reporting unit’s goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the value of goodwill is determined in a business combination using the fair value of the reporting unit as if it was the purchase price. When the carrying amount of reporting unit goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess and is presented as a separate line item in the consolidated statements of operations.
Intangible assets:
Intangible assets acquired individually or as part of a group of other assets are initially recognized and measured at cost. The cost of a group of intangible assets acquired in a transaction, including those acquired in a business combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets acquired based on their fair values.
Intangible assets with finite useful lives are amortized over their estimated useful lives on either a straight-line basis or in proportion to the economic benefits expected to be consumed. Customer relationships acquired with the acquisitions are amortized based on projected cash flows associated with existing customers at the acquisition date and typically have a life of 5 to 8 years. The Company's remaining intangible assets are amortized on a straight-line basis over 1 to 15 years.
Rebates:
The Company administers a rebate program through which it receives rebates and administrative fees from pharmaceutical manufacturers and third party administrators that are shared with a majority of the Company’s customers. The rebates earned for the administration of the program are recorded as a reduction of cost of revenue and the portion of the rebate payable to customers, if applicable, is treated as a reduction of revenue. Rebates receivable include billed and unbilled PBM receivables from pharmaceutical manufacturers and third party administrators. The Company records the gross rebate receivable and the related payable to the customers based on estimates, which are subject to final settlement due to the required validation of claims data submitted to the pharmaceutical manufacturers and third party administrators, as well as contingent items contained in the total calculation for rebates earned. The estimates are based upon claims submitted and the Company’s rebate contracts, and are adjusted as additional information becomes available. Upon billing the pharmaceutical manufacturer or third party administrator, any difference between the Company’s estimate and the actual amount of the rebate receivable is recorded to cost of revenue, net of the estimated impact to the Company’s customers. The Company generally pays rebates to its customers on a quarterly basis, or as agreed upon with its customers. There are certain instances where the Company pays rebates to its customers on a more accelerated basis. 
As of December 31, 2011 and 2010, total unbilled pharmaceutical manufacturer rebates receivable amounted to $8.9 million and $9.3 million, respectively.
Research and product development:
Research costs are expensed as incurred. Costs related to development of software are expensed as incurred unless such costs meet the criteria for capitalization and amortization. The Company has not capitalized any software development costs incurred during 2011, 2010, or 2009.
Stock-based compensation:
For stock-based awards issued to employees and directors, compensation cost related to those awards is measured based on the fair value of the awards on the date of the grant. For stock options, the fair value is determined by using the Black-Scholes-Merton option-pricing model. The compensation cost of the awards expected to vest is recognized on a straight-line basis over the service period as compensation expense and additional paid-in capital. In addition, the Company estimates forfeitures as part of the initial measure of the grant date fair value of the award.
The cumulative compensation cost is treated as a temporary difference for stock-based awards that are deductible for tax purposes. If a deduction reported on a tax return exceeds the cumulative compensation cost for those awards, any resulting realized tax benefit that exceeds the previously recognized deferred tax asset for those awards (the excess tax benefit) is recognized as additional paid-in capital. If the amount deductible is less than the cumulative compensation cost recognized for financial reporting purposes, the write-off of a deferred tax asset related to that deficiency, net of the related valuation allowance, if any, is first offset to the extent of any remaining additional paid-in capital from excess tax benefits from previous awards with the remainder recognized in the statement of operations.

55
SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Derivatives:
The Company accounts for derivative instruments pursuant to the FASB’s derivative and hedge accounting guidance. The guidance requires that all derivative instruments are recorded on the balance sheet at their respective fair values. Changes in the fair value of the Company’s derivative instruments not deemed cash flow hedges are recorded in the statements of operations each reporting period. The Company records the change in the fair value of its derivative instruments deemed as cash flow hedges through other comprehensive income in each reporting period.
Foreign currency:
The Company’s functional currency and reporting currency is the U.S. dollar. Monetary items denominated in foreign currency are translated to U.S. dollars at exchange rates in effect at the balance sheet date and non-monetary items are translated at rates in effect when the assets were acquired or obligations incurred. Revenue and expenses are translated at rates in effect at the time of the transactions. Foreign exchange gains and losses are included in the consolidated statements of operations as "Other (income) expense."
Earnings per share:
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income by the weighted-average number of common shares adjusted for the dilutive effect of outstanding stock-based awards. The dilutive effect is calculated by assuming that the proceeds from the exercise of in-the-money stock options were used to acquire shares of common stock at the average market price for the period.
Income taxes:
The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment.
Future tax benefits resulting from historical net operating losses (“NOLs”) and deductible temporary differences are recognized in accordance with tax accounting guidance. In assessing the realizability of the related deferred income tax assets (“DTAs”), management considers whether it is more likely than not that some portion or all of the DTAs will be realized. The ultimate realization of DTAs is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible, in addition to management’s tax planning strategies. Management considers projected future taxable income, uncertainties related to the industry in which the Company operates, tax planning strategies, historical taxable income, and a comparison of actual levels of taxable income with pre-tax book income in making this assessment. Valuation allowances are established for DTAs that are not considered more likely than not to be realized. The amount of this valuation allowance is subject to adjustment by the Company in future periods based upon its assessment of evidence supporting the degree of probability that DTAs will be realized.
The Company recognizes liabilities for uncertain tax positions, although the Company believes its tax position is supportable, when the Company believes that the tax positions may not be fully sustained upon review by tax authorities. Benefits from uncertain tax positions are recognized in the consolidated financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority having full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
Non-refundable investment tax credits for Scientific Research and Experimental Development (“SRED”) activities are recorded when the Company has reasonable assurance that the credit will be realized. Management has made a number of estimates and assumptions in determining the expenditures eligible for the investment tax credit claim. It is possible that the allowable amount of the investment tax credit claim could be materially different from the recorded amount upon assessment by the Canada Revenue Agency. Non-refundable investment tax credits are recorded as a reduction of income tax expense on the consolidated statements of operations.
(b) Recent accounting standards implemented are summarized below:
Goodwill impairment:
Effective September 15, 2011, the Company adopted the amendment to the goodwill impairment testing standard. The updated accounting guidance provides entities with an option to perform a "qualitative" assessment to determine whether further impairment testing is necessary.

3. Stock Split
On September 2, 2010, the Company announced that its board of directors had declared a two-for-one stock split effected by a stock dividend on the issued and outstanding common shares of the Company. On September 17, 2010, shareholders of record at the close of business on September 14, 2010 were issued one additional common share for each share owned as of that date. All share and per share data presented in this Annual Report have been adjusted to reflect this stock split.

4.
Business Combinations
PTRX and SaveDirectRx Acquisitions
On October 3, 2011, the Company completed the acquisitions of PTRX, Inc. (“PTRX”), a full-service PBM, and its exclusive mail-order pharmacy provider, SaveDirectRx, Inc. (“SaveDirectRx”), both based in San Antonio, Texas. The combined purchase price was $77.2 million in cash, subject to certain customary post-closing adjustments, with an opportunity for the former owners of SaveDirectRx to earn an

56
SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


additional $4.5 million, subject to the achievement of certain performance targets through 2012.
The acquisitions of PTRX and SaveDirectRx continue upon the Company's strategy to acquire assets that currently utilize the Company's technology platform in order to ease the integration into the Company's business. Further, these acquisitions will allow the Company to extend its presence in the southwestern part of the U.S. and expand its mail pharmacy business. The results of operations of these businesses are included in the Company's consolidated statements of operations from the date of their acquisition.
The purchase price of the acquired PTRX and SaveDirectRx operations was comprised of the following (in thousands):
Cash payment to PTRX shareholders
$
77,181

Fair value of contingent purchase price
4,225

Total purchase price
$
81,406

The SaveDirectRx purchase agreement includes contingent purchase price consideration in the form of an earn-out payment of up to $4.5 million contingent upon the SaveDirectRx book of business meeting or exceeding certain gross profit and revenue targets for the 2012 fiscal year. The $4.2 million fair-value of the contingent purchase price was accrued at the date of acquisition as part of the total consideration transferred. The Company utilized a probability weighted discounted cash flow method with expected future performance of SaveDirectRx, and its ability to meet the target performance objectives, as the main driver of the valuation, to arrive at the fair value of the contingent consideration. The Company will continue to reassess the fair value of the contingent purchase price until the applicable earn-out period has lapsed. Any future changes to the fair value of the contingent purchase price will be recognized in earnings of the Company. As the fair value measurement for the contingent consideration is based on inputs not observed in the market, the measurement is classified as a Level 3 measurement as defined by the fair value hierarchy.
Costs related to the PTRX and SaveDirectRx acquisitions of $0.4 million are included in selling, general and administrative expenses for the year ended December 31, 2011. The costs incurred are comprised of legal, accounting, valuation, and professional services fees associated with the PTRX and SaveDirectRx acquisition. Due to the previous contractual relationship between the Company and PTRX, there were pre-existing transactions between the two entities which resulted in approximately $2.4 million in accounts receivable due to the Company from PTRX and SaveDirectRx mainly for PBM services provided, and approximately $2.6 million due to PTRX and SaveDirectRx primarily for pharmacy benefit management rebates. No gain or loss was generated from the subsequent settlement of these pre-existing balances.
Purchase Price Allocation
The PTRX and SaveDirectRx acquisitions were accounted for under the acquisition method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisitions have been allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. The carrying values for current assets and liabilities were deemed to approximate their fair value due to the short-term nature of their maturities. Fair values for acquired amortized intangible assets were determined as follows: customer lists are valued using an excess earnings model based on expected future revenues derived from the customers acquired, non-compete agreements were valued using discounted cash flow models based on expected future results of PTRX and SaveDirectRx, trademarks/tradenames were valued using a royalty savings model based on future projected revenues of PTRX and SaveDirectRx, and applicable market royalty rates and licenses utilized a replacement cost approach. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. The assets and liabilities recorded for PTRX and SaveDirectRx were recorded in the PBM segment. Goodwill is non-amortizing for financial statement purposes and $25.0 million of the goodwill balance generated from the PTRX and SaveDirectRx acquisitions is tax deductible. The goodwill recorded for PTRX and SaveDirect was included in the PBM segment.
The goodwill recognized by the Company represents many of the synergies and business growth opportunities that may be realized from these acquisitions. The opportunity to bring SXC's full suite of PBM services to PTRX and SaveDirectRx clients is a significant driver of the goodwill created. In addition, there are cost saving opportunities through adding PTRX and SaveDirectRx into the Company's pharmacy and purchasing networks.
The following summarizes the preliminary fair values assigned to the assets acquired and liabilities assumed at the acquisition date and are subject to change. The purchase price allocation and related valuation process are not complete. Final determination of the fair value may result in further adjustments to the amounts presented below (in thousands):
Current assets
$
19,063

Property and equipment
573

Goodwill
61,450

Intangible assets
25,380

Total assets acquired
106,466

Current liabilities
19,476

Deferred income taxes
5,584

Total liabilities assumed
25,060

Net assets acquired
$
81,406

During the year ended December 31, 2011, the Company recognized $1.4 million of amortization expense from intangible assets acquired. Amortization for 2012 is expected to be $4.8 million.

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SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The estimated fair values and useful lives of intangible assets acquired are as follows (dollars in thousands):
 
Fair Value
 
Useful Life
Trademarks/Trade names
$
400

 
6 months
Customer relationships
20,800

 
8 years
Non-compete agreements
3,800

 
3-4 years
Licenses
380

 
3 years
Total
$
25,380

 
 
None of the acquired intangible assets will have any residual value at the end of the amortization periods. There were no in-process research and development assets acquired.
MedfusionRx Acquisition
On December 28, 2010, the Company, through its direct wholly owned subsidiary SXC Health Solutions, Inc. (“SXC Inc.”), completed the acquisition of MedfusionRx, L.L.C. and certain affiliated entities and certain assets of Medtown South, L.L.C (collectively, "MedfusionRx"), a specialty pharmacy provider with significant expertise in providing clinical services to patients with complex chronic conditions. The purchase price for MedfusionRx was $101.5 million in cash, subject to a customary post-closing working capital adjustment, and an opportunity for the former owners of MedfusionRx to earn an additional $5.5 million in cash, subject to the satisfaction of certain performance targets in the 2012 fiscal year, in each case based upon the terms and subject to the conditions contained in the Purchase Agreement. MedfusionRx's results of operations from the date of acquisition through December 31, 2010 were not material to the Company’s results of operations for 2010.
The acquisition of MedfusionRx has helped transform the Company's specialty pharmacy business by expanding its presence and enhancing its capabilities in this rapidly growing sector of the PBM industry. The acquisition also provides an opportunity to create new revenues and generate cost savings through purchasing synergies.
The purchase price of the acquired MedfusionRx operations was comprised of the following (in thousands):
Cash payment to MedfusionRx shareholders
$
101,514

Fair value of contingent purchase price
4,865

Total purchase price
$
106,379


The MedfusionRx purchase agreement includes contingent purchase price consideration in the form of an earn-out payment of up to $5.5 million contingent upon the MedfusionRx book of business meeting or exceeding certain gross profit targets for the year ended December 31, 2012. The $4.9 million fair-value of the contingent purchase price was accrued at the date of acquisition as part of the total consideration transferred. The Company utilized a probability weighted discounted cash flow method, with expected future performance of MedfusionRx, and its ability to meet the target performance objectives as the main driver of the valuation, to arrive at the fair value of the contingent consideration. In determining the fair value of the contingent purchase price, the Company considered the impact of the potential legal matters that may arise in connection with the recent proceedings involving certain of MedfusionRx's former owners and employees as noted in Note 14-Commitments and Contingencies. Currently, the Company does not believe the potential legal matters will impact the likelihood or amount of additional purchase price that will be paid.
    The Company will continue to reassess the fair value of the contingent purchase price until the applicable earn-out period has lapsed. Any future changes to the fair value of the contingent purchase price will be recognized in earnings of the Company. As the fair value measurement for the contingent consideration is based on inputs not observed in the market, the measurement is classified as a Level 3 measurement as defined by fair value measurements guidance.
Costs related to the MedfusionRx acquisition of $2.4 million are included in selling, general and administrative expenses for the year ended December 31, 2010. The costs incurred are comprised of legal, accounting, valuation, and professional services fees associated with the MedfusionRx acquisition.
Purchase Price Allocation
The MedfusionRx acquisition was accounted for under the acquisition method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. The carrying values for current assets and liabilities were deemed to approximate their fair value due to the short-term nature of their maturities. Fair values for acquired amortized intangible assets were determined as follows: customer lists are valued using an excess earnings model based on expected future revenues derived from the customers acquired, non-compete agreements were valued using discounted cash flow models based on expected future results of MedfusionRx, trademarks/ tradenames and software were valued using a royalty savings model based on future projected revenues of MedfusionRx and applicable market royalty rates, and licenses utilized a replacement cost approach. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. All of the assets and liabilities recorded for the MedfusionRx acquisition are included within the Company's PBM segment. Goodwill is non-amortizing for financial statement purposes and the entire goodwill balance generated from the MedfusionRx acquisition is tax deductible.
The goodwill recognized by the Company represents many of the synergies and business growth opportunities that may be realized
from this acquisition. The opportunity to pull through more specialty sales to the Company's existing customer base is a significant driver of

58
SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


the goodwill created.The acquisition of MedfusionRx adds to our ability to service customers more efficiently and effectively due to the
addition of specialty pharmacy locations and expands the Company's product offerings. Further, the Company expects to drive cost savings due to the increased volume of prescription drug purchases of the combined entities which should yield improved pricing from the Company's suppliers.
The following summarizes the final fair values assigned to the assets acquired and liabilities assumed at the acquisition date (in thousands):
Current assets
$
20,781

Property and equipment
360

Goodwill
79,034

Intangible assets
26,262

Total assets acquired
126,437

Current liabilities
20,058

Total liabilities assumed
$
20,058

Net assets acquired
$
106,379

During the year ended December 31, 2011, the Company recognized $7.0 million of amortization expense from intangible assets acquired. Amortization for 2012 is expected to be $4.9 million.
The estimated fair values and useful lives of intangible assets acquired are as follows (dollars in thousands):
 
Fair Value
 
Useful Life
Trademarks/Trade names
$
10,000

 
10 years
Customer relationships
14,562

 
5 years
Non-compete agreements
1,400

 
5 years
License
300

 
3 years
Total
$
26,262

 
 
None of the acquired intangible assets will have any residual value at the end of the amortization periods. There were no in-process research and development assets acquired.
MedMetrics Health Partners Acquisition
On June 1, 2011, the Company completed the acquisition of substantially all of the assets of MedMetrics Health Partners, Inc. (“MedMetrics”), the full-service PBM subsidiary of Public Sector Partners, Inc., which is affiliated with a major medical school. MedMetrics' results of operations are included in the 2011 consolidated statements of operations commencing June 1, 2011. Prior to the acquisition, MedMetrics was a customer of the Company and its associated revenue was accounted for in the PBM segment. Due to the previous contractual relationship between the Company and MedMetrics, there were pre-existing transactions between the two entities which resulted in approximately $10.6 million in accounts receivable due to the Company from MedMetrics for PBM services provided. No gain or loss was generated from the subsequent settlement of these pre-existing balances.
The acquisition of MedMetrics is consistent with the Company's strategy to acquire assets that currently utilize the Company's technology platform which facilitates the integration into the Company's business and will allow the Company the opportunity to sell additional services, such as mail and specialty services, to MedMetrics' customers. The acquisition will also help extend the Company's footprint in the northeastern part of the U.S.
The MedMetrics acquisition was accounted for under the acquisition method of accounting, with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. All of the assets and liabilities recorded for the MedMetrics acquisition are included within the Company's PBM segment.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined historical results of operations of the Company and its recent acquisitions of MedfusionRx, PTRX and SaveDirectRx as if the acquisitions had each occurred as of the beginning of the comparable prior reporting period. The unaudited pro forma financial information includes certain adjustments related to the acquisitions, such as increased amortization from the fair value of intangible assets acquired recorded as part of the purchase accounting, the elimination of transactions between the Company and the acquired entities, and related income tax effects.




59
SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Unaudited pro forma results of operations are as follows (dollars in thousands, except share and per share amounts):
 
Years Ended December 31,
 
2011
 
2010
Revenue
$
5,019,045

 
$
2,244,083

Gross profit
$
325,898

 
$
249,962

Net income
$
98,142

 
$
68,283

Earnings per share:
 
 
 
Basic
$
1.58

 
$
1.12

Diluted
$
1.56

 
$
1.08

Weighted average shares outstanding:
 
 
 
Basic
62,126,656

 
60,736,831

Diluted
62,951,758

 
63,136,600

This unaudited pro forma financial information is not intended to represent or be indicative of what would have occurred if the transactions had taken place on the dates presented and is not indicative of what the Company’s actual results of operations would have been had the acquisitions been completed at the beginning of the periods indicated above. Further, the pro forma combined results do not reflect one-time costs to fully merge and operate the combined organization more efficiently, or anticipated synergies expected to result from the combination and should not be relied upon as being indicative of the future results that the Company will experience.
HealthTran Acquisition
Subsequent to the end of the Company's current reporting period, in January 2012, the Company completed the acquisition of all of the outstanding equity interests of HealthTran LLC (“HealthTran”) in exchange for $250 million in cash, subject to certain customary post-closing adjustments, in each case upon the terms and subject to the conditions contained in the Purchase Agreement. HealthTran was an existing HCIT and utilizes a Company platform for its claims adjudication services. The initial accounting for this acquisition was incomplete at the time these financial statements were available for issuance as the Company had not completed its valuations for assets acquired and liabilities assumed. The Company expects to finalize its accounting for these acquisitions as soon as practicable, but no later than one year from the acquisition date.
5.
Property and Equipment
Net property and equipment was made up of the following at December 31, 2011 and 2010:
December 31, 2011
Cost
 
Accumulated
Depreciation
 
Net Book Value
 
(In thousands)
Furniture and equipment
$
6,089

 
$
(3,574
)
 
$
2,515

Computer equipment and software
49,539

 
(35,252
)
 
14,287

Leasehold improvements
9,334

 
(4,478
)
 
4,856

 
$
64,962

 
$
(43,304
)
 
$
21,658

December 31, 2010
Cost
 
Accumulated
Depreciation
 
Net Book Value
 
(In thousands)
Furniture and equipment
$
5,800

 
$
(3,295
)
 
$
2,505

Computer equipment and software
44,045

 
(29,142
)
 
14,903

Leasehold improvements
6,912

 
(3,424
)
 
3,488

 
$
56,757

 
$
(35,861
)
 
$
20,896

Depreciation expense, including property and equipment acquired under capital leases, totaled $9.5 million, $8.4 million, and $8.0 million for the years ended December 31, 2011, 2010, and 2009, respectively. Of the total depreciation expense, $2.7 million, $2.4 million, and $2.2 million was related to the data center operations and allocated to cost of revenue for the years ended December 31, 2011, 2010 and 2009, respectively.









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SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


6.    Goodwill and Other Intangible Assets
The changes in the carrying amounts of goodwill by reportable segment for the years ended December 31, 2011 and 2010 are as follows (in thousands):
 
PBM
 
HCIT
 
Total
Balance at December 31, 2009
122,122

 
19,665

 
141,787

Acquisitions (1)
78,810

 
—

 
78,810

Balance at December 31, 2010
200,932

 
19,665

 
220,597

Adjustments to purchase price allocation (2)
523

 
—

 
523

Acquisitions (3)
69,925

 
—

 
69,925

Balance at December 31, 2011
271,380

 
19,665

 
291,045

(1) Represents the acquisition of MedfusionRx in 2010 and other acquisitions.
(2) Represents adjustments to purchase price, including settlement of working capital adjustment.
(3) Represents the acquisitions of Medmetrics, PTRX and SaveDirectRx in 2011.
Definite-lived intangible assets are amortized over the useful lives of the related assets. The components of intangible assets were as follows (in thousands):
 
December 31, 2011
 
December 31, 2010
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Customer relationships
$
92,274

 
$
39,158

 
$
53,116

 
$
68,624

 
$
25,493

 
$
43,131

Acquired software
3,765

 
3,522

 
243

 
3,765

 
3,272

 
493

Trademarks/Trade names
12,320

 
2,831

 
9,489

 
11,370

 
1,252

 
10,118

Non-compete agreements
7,810

 
2,226

 
5,584

 
2,910

 
1,492

 
1,418

Licenses
1,680

 
335

 
1,345

 
1,300

 
178

 
1,122

Total
$
117,849

 
$
48,072

 
$
69,777

 
$
87,969

 
$
31,687

 
$
56,282

Future amortization associated with intangible assets recorded as of December 31, 2011 is estimated to be $17.3 million in 2012, $14.5 million in 2013, $12.6 million in 2014, $9.8 million in 2015, $4.9 million in 2016, and $10.7 million for years after 2016. These amounts do not include estimated amortization for the recently completed HealthTran acquisition.

7. Accrued Expenses and Other Current Liabilities

The Company's accrued expenses and other current liabilities are comprised of the following (in thousands):
 
 
December 31,
 
 
2011
 
2010
Customer deposits
 
$
12,253

 
$
15,376

Salaries and wages payable
 
17,095

 
12,833

Deferred revenue
 
8,286

 
11,177

Income taxes payable
 
8,088

 
—

Other accrued expenses
 
21,007

 
21,652

Total accrued expenses and other current liabilities
 
$
66,729

 
$
61,038


8.    Long-Term Liabilities
Long-term debt:
On December 16, 2011, the Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMCB”), as a lender and as administrative agent, Bank of America, N.A., SunTrust Bank, Fifth Third Bank, PNC Bank, N.A. and The Toronto-Dominion Bank, as lenders and co-syndication agents, Barclays Bank PLC, Morgan Stanley Bank, N.A., Credit Suisse AG, Cayman Islands Branch, The Northern Trust Company, PNC Bank Canada Branch, U.S. Bank National Association and U.S. Bank National Association, Canadian Branch, as lenders, the other lenders from time to time party thereto (collectively the "Lenders") and J.P. Morgan Securities LLC, as sole bookrunner and sole lead arranger, with respect to a new five-year senior unsecured revolving credit facility (the “Revolving Credit Facility”). The Credit Agreement provides that, upon the terms and subject to the conditions set forth therein, the Lenders will make loans to the Company from time to time, with an initial aggregate revolving commitment of $350 million, subject to increase from time to time up to a maximum aggregate revolving commitment of $450 million. The Company will use the proceeds from the Revolving Credit Facility for general corporate purposes. On January 3, 2012, the Company borrowed $100 million under the Revolving Credit Facility to pay a portion of the consideration

61
SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


in connection with the acquisition of HealthTran and certain transaction fees and expenses related to the acquisition.  After this borrowing, the Company had $250 million of remaining available borrowing capacity under its Revolving Credit Facility.
The interest rates applicable to the Revolving Credit Facility are based on a fluctuating rate of interest measured by reference to either, at the Company's option, (i) a base rate, plus an applicable margin, or (ii) an adjusted London interbank offered rate (adjusted for maximum reserves) (“LIBOR”), plus an applicable margin. The initial applicable margin for all borrowings is 0.375% per annum with respect to base rate borrowings and 1.375% per annum with respect to LIBOR borrowings. The applicable margin, in each case, will be adjusted from time to time based on the Company's consolidated leverage ratio for the previous fiscal quarter. During an event of default, default interest is payable at a rate that is 2% higher than the rate otherwise applicable. The Company may voluntarily, at any time and from time to time, prepay any loans outstanding in whole or in part without premium or penalty, subject to prior notice to JPMCB, as administrative agent, in accordance with the terms and provisions of the Credit Agreement.
The Credit Agreement requires the Company to maintain a consolidated leverage ratio less than or equal to 3.00 to 1 at all times. The Company's consolidated leverage ratio is defined as the ratio of (1) consolidated total debt to (2) consolidated EBITDA (with add-backs permitted to consolidated EBITDA for fees and expenses related to the HealthTran acquisition and other permitted acquisitions).  The Company is also required to maintain an interest coverage ratio greater than or equal to 3.00 to 1, where the interest coverage ratio is defined as the ratio of (1) consolidated EBIT (with add-backs permitted to consolidated EBIT for fees and expenses related to HealthTran acquisition and other permitted acquisitions) to (2) consolidated interest expense, tested at the end of each fiscal quarter for the rolling four fiscal quarter period then most recently ended.
All existing and future, direct and indirect, material subsidiaries are required to become guarantors of all of the Company's obligations under the Credit Agreement. Pursuant to a Subsidiary Guaranty dated December 16, 2011, among the guarantors party thereto and JPMCB, as administrative agent, certain material direct and indirect subsidiaries guarantee all obligations of the Company under the Credit Agreement.
As of December 31, 2011, no amount was outstanding under the Revolving Credit Facility. In connection with the Revolving Credit Facility the Company incurred approximately $1.6 million in financing costs. The financing costs are presented on the consolidated balance sheet as other assets and are being amortized over the life of the Revolving Credit Facility using the straight-line method.

9.
Shareholders' Equity
(a)
Common shares:
(i) Authorized:  Unlimited no par voting common shares
(ii) Issuance of common shares:
On September 23, 2009, the Company completed a public offering of 10,350,000 shares of its common stock. The shares were offered to the public at a price of $20.75 per share. The net proceeds to the Company from the offering totaled $203.1 million.
(b)
Stock Option Plan:
Effective on March 11, 2009, the Board of Directors of the Company adopted the SXC Health Solutions Corp. Long-Term Incentive Plan (“LTIP”), which was approved by the shareholders of the Company at the Annual and Special Meeting of Shareholders on May 13, 2009. The LTIP provides for the grant of stock option awards, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance awards and other stock-based awards to eligible persons, including executive officers and directors of the Company. The purpose of the LTIP is to advance the interests of the Company by attracting and retaining high caliber employees and other key individuals who perform services for the Company, a subsidiary or an affiliate; align the interests of the Company’s shareholders and recipients of awards under the LTIP by increasing the proprietary interest of such recipients in the Company’s growth and success; and motivate award recipients to act in the best long-term interest of the Company and its shareholders. The LTIP replaced the previous stock option plan, and no further grants or awards will be issued under the previous stock option plan. The maximum common shares of the Company allowed to be issued under the LTIP was increased by 1,800,000 on May 11, 2011, after the Company’s shareholders approved an amendment to the LTIP at the Annual and Special Meeting of Shareholders of the Company. There were 2,138,470 stock-based awards available for grant under the LTIP as of December 31, 2011.
Prior to May 2007, all stock options awarded by the Company were denominated in Canadian dollars as required by the plan in effect at the grant date. Amendments to the plan in May 2007 permitted the Company to denominate stock option awards in either Canadian or U.S. dollars. All grants made subsequent to May 2007 are denominated in U.S. dollars.
The following table summarizes activity related to stock options denominated in Canadian dollars for the year ended December 31, 2011:
 
Number of Options
 
Weighted Average Exercise Price
Outstanding, beginning of period
252,478

 
$
5.49

Granted
—

 
$
—

Exercised
(170,122
)
 
$
5.05

Expired
(834
)
 
$
5.82

Forfeited
—

 
$
—

Outstanding, end of period
81,522

 
$
6.41


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SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The Company ceased granting Canadian dollar stock options in 2007. All Canadian dollar options outstanding expire five years from the date of vesting.
The following table summarizes certain information about the Canadian dollar stock options outstanding at December 31, 2011 in Canadian dollars:
Range of Exercise Price
Options Outstanding and Exercisable
 
Weighted Average Remaining Contractual Life (Years)
 
Weighted Average Exercise Price
$ 3.30 - $ 6.17
27,116

 
1.03

 
$
3.45

$ 6.18 - $ 8.15
44,174

 
1.51

 
$
7.08

$ 8.16 - $ 12.19
10,232

 
0.11

 
$
11.35

$ 3.30 - $ 12.19
81,522

 
1.17

 
$
6.41

The aggregate intrinsic value and remaining contractual term of exercisable stock options at December 31, 2011 was approximately $4.1 million (Cdn.$4.1 million ) and 1.17 years, respectively.
The total intrinsic value of Canadian stock options exercised during the years ended December 31, 2011, 2010, and 2009 was as follows (in thousands):
 
2011
 
2010
 
2009
U.S. dollars
$
7,271

 
$
20,340

 
$
12,399

Canadian dollars
$
7,425

 
$
20,656

 
$
13,791

As of December 31, 2010, there was no unrecognized compensation cost related to Canadian dollar stock options as all options were fully vested. The total fair value of Canadian stock options which vested during the years ended December 31, 2010 and 2009 was as follows (in thousands):
 
 
2010
 
2009
U.S. dollars
 
$
329

 
$
275

Canadian dollars
 
$
348

 
$
317

The following table summarizes activity related to stock options denominated in U.S. dollars for the year ended December 31, 2011. The Company began issuing these stock options subsequent to May 2007:
 
Number of Options
 
Weighted Average Exercise Price
Outstanding, beginning of period
1,496,981

 
$
12.06

Granted
226,054

 
$
50.85

Exercised
(521,360
)
 
$
9.37

Expired
—

 
$
—

Forfeited
(22,824
)
 
$
25.93

Outstanding, end of period
1,178,851

 
$
20.42

U.S. dollar options granted during 2011, were primarily subject to a graded vesting schedule of four years. U.S. dollar options granted expire seven years from the grant date.
The following table summarizes certain information about the U.S. dollar stock options outstanding at December 31, 2011:
Range of Exercise Price
Options Outstanding
 
Weighted Average Remaining Contractual Life (Years)
 
Weighted Average Exercise Price
 
Options Exercisable
 
Weighted Average Exercise Price
 
(In U.S. dollars)
$ 5.23 - $ 6.80
211,522

 
1.15

 
$
5.75

 
109,102

 
$
5.86

$ 6.81- $ 12.28
357,250

 
1.18

 
$
8.85

 
246,000

 
$
9.55

$ 12.29 - $ 30.52
333,644

 
4.61

 
$
18.76

 
94,340

 
$
18.05

$ 30.53 - $ 59.31
276,435

 
6.13

 
$
48.58

 
13,025

 
$
39.88

$ 5.23 - $ 59.31
1,178,851

 
3.31

 
$
20.42

 
462,467

 
$
11.27

The aggregate intrinsic value and remaining contractual term of exercisable stock options at December 31, 2011 was $20.9 million

63
SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


and 1.89 years, respectively. The aggregate intrinsic value and remaining contractual term of all vested options and options that are expected to vest are $42.5 million and 3.31 years, respectively. The intrinsic value of options exercised during 2011, 2010 and 2009 was $23.3 million, $17.5 million, and $2.5 million, respectively. The total fair value of stock options which vested during the years ended December 31, 2011, 2010, and 2009 was approximately $2.5 million, $2.3 million, and $1.6 million, respectively.
As of December 31, 2011, there was $6.0 million of unrecognized compensation cost related to U.S. dollar stock options which is expected to be recognized over a weighted-average period of 2.75 years.
(c)
Employee Stock Purchase Plan:
On May 16, 2007, shareholders of the Company approved the creation of the Employee Stock Purchase Plan (“ESPP”) which allows eligible employees to withhold annually up to a maximum of 15% of their base salary, or $25,000, subject to U.S. Internal Revenue Service limitations, for the purchase of the Company’s common shares. Common shares will be purchased on the last day of each offering period at a discount of 5% of the fair market value of the common shares on such date. The aggregate number of common shares that may be awarded under the ESPP may not exceed 200,000 common shares.
During the first quarter of 2009, the ESPP was amended so that the common shares available for purchase under the ESPP are drawn from reacquired common shares purchased on behalf of the Company in the open market. Prior to the amendment in 2009, the common shares available for purchase under the ESPP were drawn from either authorized but previously un-issued common shares or from reacquired common shares, including those purchased by the Company in the open market. During 2011, 2010, and 2009, the Company delivered 6,772, 7,072, and 12,396 common shares, respectively, under the ESPP.
The ESPP is not considered compensatory as the plan terms are no more favorable than to all other share holders, and the purchase discount does not exceed the per-share costs that would be incurred through a public offering. Since the plan is not considered compensatory, no portion of the costs related to ESPP purchases is included in the Company’s stock-based compensation expense.
(d)
Restricted Stock Units:
During 2011, the Company granted 116,046 time-based RSUs and 104,662 performance based RSUs to its employees and non-employee directors with an average grant date fair value of $50.61. Time-based RSUs vest on a straight-line basis over a range of three to four years and performance-based RSUs cliff vest based upon reaching agreed upon three-year performance conditions. The number of outstanding performance-based RSUs as of December 31, 2011 stated above assumes the associated performance targets will be met at the maximum level.
At December 31, 2011, there were 279,687 time-based RSUs and 330,222 performance based RSUs outstanding. The total intrinsic value of RSUs that vested during the year was $4.8 million. At December 31, 2011, there was $11.8 million of unrecognized compensation cost related to RSUs which is expected to be recognized over a weighted-average period of 2.3 years. The following table summarizes the information about RSUs for the year ended December 31, 2011:
 
Number of Restricted Stock Units
 
Weighted Average Grant Date Fair Value
Nonvested balance as of the beginning of the per
519,492

 
$
21.28

Granted
220,708

 
$
50.61

Vested
(87,827
)
 
$
20.74

Forfeited
(42,464
)
 
$
18.15

Nonvested balance as of the end of the period
609,909

 
$
14.06

(e)
Stock-based compensation:
For the years ended December 31, 2011, 2010, and 2009, the Company recorded stock-based compensation expense of $9.4 million, $5.9 million, and $3.7 million, respectively.
The Company allocated stock-based compensation costs to the same statement of operations line item as the cash compensation to those employees. Accordingly, the allocation of the compensation costs is as follows for the years ended December 31, 2011, 2010, and 2009 (in thousands):
 
2011
 
2010
 
2009
Cost of revenue
$
650

 
$
736

 
$
664

Product development costs
61

 
236

 
182

Selling, general and administrative
8,734

 
4,923

 
2,811

Total stock-based compensation
$
9,445

 
$
5,895

 
$
3,657

The total income tax benefit, using the Company’s statutory tax rates, recognized in the statements of operations for stock-based compensation arrangements for years ended December 31, 2011, 2010, and 2009 was $3.5 million, $2.2 million, and $1.4 million, respectively.
The Black-Scholes-Merton option-pricing model was used to estimate the fair value of the options at grant date for the years ended December 31, 2011, 2010, and 2009, based on the following assumptions:

64
SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 
2011
 
2010
 
2009
Volatility
48.6 - 51.9%

 
47.9 - 48.5%

 
 
47.1 - 48.0%

Risk-free interest rate
0.86 - 2.16%

 
1.41 - 2.39%

 
 
1.96 - 2.75%

Expected life
4.5 years

 
4.5 years

 
 
4.5 years

Dividend yield
—

 
—

 
 
—

Weighted average grant date fair value:
 

 
 

 
 
 

U.S. dollar stock options
$
21.62

 
$
13.90

 
 
$
5.55

The volatility assumption is based on historical volatility at the date of grant for the period equal to the expected life of the option.
The expected life assumption is based on historical exercise patterns. The options issued to employees typically have a longer expected life of 4.5 to 5 years due to the vesting schedules, whereas options issued to directors have a shorter expected life of 1 to 2.5 years due to the immediate vesting of some of their options.
The Company does not expect to pay dividends and, therefore, no dividend yield assumption is used in calculating the fair value of stock options.
10.    Income Taxes
The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows.
 
December 31,
 
2011
 
2010
 
(In thousands)
Deferred income tax assets:
 

 
 

Non-capital loss carryforwards (“NOL”)
$
264

 
$
356

Property and equipment and intangible assets
31

 
49

Capital loss carried forward
3,362

 
3,473

Lease inducements and deferred financing
1,877

 
1,805

Investment tax credits
485

 
659

Reserves and accruals
7,006

 
5,591

Stock-based compensation
4,417

 
2,424

Other
3,044

 
1,282

Total
20,486

 
15,639

Less valuation allowance - current
369

 
558

Less valuation allowance - long term
3,234

 
3,156

Total valuation allowance
3,603

 
3,714

Total deferred tax assets
$
16,883

 
$
11,925

Deferred tax assets — current
$
9,642

 
$
6,647

Deferred tax assets — long term
7,241

 
5,278

Total
16,883

 
11,925

Deferred income tax liabilities:
 

 
 

Property and equipment and intangible assets
$
24,720

 
$
19,309

Other
375

 
415

Total
$
25,095

 
$
19,724

At December 31, 2011, the Company had gross deferred tax assets (“DTAs”) totaling $20.5 million compared to $15.6 million at December 31, 2010. Of the $20.5 million, $4.0 million of DTAs related to its Canadian operations compared to $4.4 million at December 31, 2010. The Company also had deferred tax liabilities which increased to $25.1 million  at December 31, 2011 from $19.7 million at December 31, 2010.
The balance of the valuation allowance was $3.6 million at December 31, 2011 compared to $3.7 million at December 31, 2010. The valuation allowance arising from the Canadian operations was $3.4 million at December 31, 2011 and $3.5 million at December 31, 2010. The Canadian valuation allowance decreased during the year as a result of changes in exchange rates. The amount of this valuation allowance is subject to adjustment by the Company in future periods based upon its assessment of evidence supporting the degree of probability that DTAs will be realized.
At December 31, 2011, the Company had a DTA of $0.3 million  related to state NOLs that are available to reduce future years’ taxable income and expire beginning in 2014. A valuation allowance of $0.2 million has been established against a portion of the NOLs related to one of the Company’s prior acquisitions.

65
SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The Company has unused investment tax credits of approximately $0.5 million, which can be offset against Canadian federal income taxes payable in future taxation years. These investment tax credits expire in varying amounts from 2026 up to 2029.
The differences between the effective tax rate reflected in the provision for income taxes and the U.S. statutory income tax rate are as follows (dollars in thousands):
 
Years Ended December 31,
 
2011
 
2010
 
2009
Corporate statutory rate
35.0
%
 
35.0
%
 
35.0
%
Income tax expense on income before income taxes
$
48,403

 
$
34,145

 
$
23,830

Tax effect of:
 

 
 

 
 

State and local income taxes, net of federal benefit
3,025

 
2,219

 
1,622

Impact of foreign tax rates
(73
)
 
(245
)
 
387

Cross-jurisdictional financing
(6,072
)
 
(3,984
)
 
(3,991
)
Adjustment to tax reserves
40

 
255

 
273

Other
1,185

 
431

 
(97
)
 
$
46,508

 
$
32,821

 
$
22,024

Income from U.S. operations before income taxes was $137.3 million, $92.6 million, and $66.8 million for the years ended December 31, 2011, 2010 and 2009, respectively. Income from Canadian operations before income taxes, including taxable income attributable to intercompany debt, was $1.0 million, $5.0 million, and $1.3 million for the years ended December 31, 2011, 2010 and 2009, respectively.
The components of the provision for income taxes are as follows (in thousands):
 
Years Ended December 31,
 
2011
 
2010
 
2009
Current tax expense
 

 
 

 
 

United States
$
52,297

 
$
29,256

 
$
22,100

Canada
105

 
275

 
185

Total current tax expense
52,402

 
29,531

 
22,285

Deferred tax expense (benefit)
 

 
 

 
 

United States
(6,066
)
 
1,945

 
(245
)
Canada
172

 
1,345

 
(16
)
Total deferred tax expense
(5,894
)
 
3,290

 
(261
)
Total tax expense
$
46,508

 
$
32,821

 
$
22,024

Uncertain Tax Positions
U.S. GAAP accounting guidance for uncertain tax positions prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of December 31, 2011 and 2010, the Company has an accrued liability in the consolidated balance sheets of $0.6 million, respectively, while as of December 31, 2009 the Company had an accrued liability of $0.5 million. This liability related to various uncertain federal and state income tax matters, the resolution of all of which would not have a material impact on the Company’s effective tax rate.
There were no changes in this accrued liability from January 1, 2011 to December 31, 2011, and from January 1, 2010 to December 31, 2010. The change from January 1, 2009 to December 31, 2009 was a result of recognizing accrued interest and penalties related to the liability for tax uncertainties, as well as the effect of various additions to the Company's liability for tax uncertainties.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Accrued interest at December 31, 2011 and 2010 was $0.1 million and $0.2 million, respectively. It is reasonably possible that the total amount of unrecognized tax benefits will increase or decrease within twelve months of December 31, 2011. The Company currently estimates that such increases or decreases will not be material.
The Company and its subsidiaries file income tax returns in the Canadian and U.S. federal jurisdictions, and various provincial, state and local jurisdictions. With few exceptions, the Company is no longer subject to tax examinations by tax authorities for years prior to 2007.






66
SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


11.    Earnings Per Share
The following table sets forth the computation of basic and diluted EPS for the years ended December 31, 2011, 2010, and 2009 (in thousands, except share and per share data):
 
2011
 
2010
 
2009
Numerator:
 

 
 

 
 

Net income available to common shareholders
$
91,786

 
$
64,735

 
$
46,061

Denominator for basic EPS — weighted average common shares outstanding
62,126,656

 
60,736,831

 
52,008,408

Effect of dilutive securities:
 

 
 

 
 

Restricted stock units
231,157

 
552,617

 
104,290

Stock options
593,945

 
1,847,152

 
1,482,048

Denominator for diluted EPS
62,951,758

 
63,136,600

 
53,594,746

Earnings per share:
 

 
 

 
 

Basic
$
1.48

 
$
1.07

 
$
0.89

Diluted
$
1.46

 
$
1.03

 
$
0.86

The Company calculated the number of options and restricted stock units included in the diluted EPS calculation following the treasury stock method as outlined in earnings per-share accounting guidance. Stock options and RSUs totaling 45,319 and 11,953, respectively, were not included in the computation of diluted EPS for 2011 due to their anti-dilutive impact. There were no options calculated to be anti-dilutive and excluded from computation of the diluted EPS during 2010. Stock options totaling 22,000 were not included in the computation of diluted EPS for 2009 as the exercise prices were greater than the average market price of the common shares for the periods.
12.    Supplemental Cash Flow Information
(a) Other non-cash activities (in thousands):
 
Years Ended December 31,
 
2011
 
2010
 
2009
Contingent purchase price recorded from the SaveDirectRx acquisition
4,225

 
—

 
—

Contingent purchase price recorded from the MedfusionRx acquisition
—

 
4,865

 
—

Equity shares issued as a result of the NMHC acquisition
$
12

 
$
—

 
$
4

(b) Cash paid (received) for income taxes and interest was as follows for the years ended December 31, 2011, 2010, and 2009 (in thousands):
 
Years Ended December 31,
 
2011
 
2010
 
2009
Income taxes paid
$
30,948

 
$
19,334

 
$
15,698

Interest paid
$
1,792

 
$
1,351

 
$
3,870

Interest received
$
(502
)
 
$
(746
)
 
$
(787
)

13.
Employee Benefit Plans
The Company has a 401(k) savings plan that allows eligible employees to defer a percentage of their salary, not to exceed $16,500 in 2011 , 2010 and 2009 . The Company matches an amount equal to 100% of the first 1% of eligible earnings and 50% of the next 5% of eligible earnings. All participant contributions are 100% vested. Employer contributions become 100% vested after completion of three years of service. For 2011, 2010 and 2009 the Company’s contributions to this plan were $2.3 million, $1.7 million, and $1.3 million, respectively.

14.
Commitments and Contingencies
(a)
Lease Commitments:
The Company maintains operating lease agreements for office space in its main operating locations. The Company also leases certain office equipment.





67
SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Aggregate future minimum payments in respect of non-cancellable operating lease agreements as of December 31, 2011, which extend until 2018, are as follows (in thousands):
 
Operating Leases
2012
$
4,637

2013
4,457

2014
4,181

2015
3,902

2016
3,727

After 2016
6,286

 
$
27,190

The total rental expense under operating leases for the years ended December 31, 2011, 2010, and 2009 was $6.4 million, $5.7 million, and $6.5 million, respectively. The lease renewal terms have not been factored into the commitments noted above as not renewing these leases would not have a detrimental impact on the Company. The Company terminated its Port Washington, New York lease effective May 2009, and paid an early termination fee of approximately $1.9 million. This cost was included in the purchase price of the NMHC acquisition in accordance with purchase accounting guidance in place at the time of the acquisition.
(b)
Contingencies:
On December 28, 2010, the Company completed its acquisition of MedfusionRx, a leading independent specialty pharmacy services provider. In January and February 2012, three former employees of MedfusionRx and several third parties plead guilty or were convicted of violations of the federal anti-kickback statute that occurred prior to the closing of the acquisition. While the Company believes that it is entitled to indemnification with respect to any costs or expenses arising from or relating to this matter pursuant to the terms of the MedfusionRx Purchase Agreement, we can give no assurances that such indemnification will be recoverable or will be sufficient to cover all potential civil or criminal penalties and claims arising therefrom or relating thereto. As of December 31, 2011, the Company had not recorded any contingent liability in the consolidated financial statements relating to this matter as the Company currently has assessed the likelihood of a judgment being rendered against the Company in this matter as remote.
In addition, from time to time in connection with its operations, the Company is named as a defendant in actions for damages and costs allegedly sustained by the plaintiffs. The Company has considered these proceedings and disputes in determining the necessity of any reserves for losses that are probable and reasonably estimable. In addition, various aspects of the Company’s business may subject it to litigation and liability for damages arising from errors in processing the pricing of prescription drug claims, failure to meet performance measures within certain contracts relating to its services performed, its ability to obtain certain levels of discounts or rebates on prescription purchases from retail pharmacies and drug manufacturers or other actions or omissions. The Company’s recorded reserves are based on estimates developed with consideration given to the potential merits of claims or quantification of any performance obligations. The Company takes into account its history of claims, the limitations of any insurance coverage, advice from outside counsel, and management’s strategy with regard to the settlement or defense of such claims and obligations. While the ultimate outcome of those claims, lawsuits or performance obligations cannot be predicted with certainty, the Company believes, based on its understanding of the facts of these claims and performance obligations, that adequate provisions have been recorded in the accounts where required.
(c)
Guarantees:
The Company provides routine indemnification to its customers against liability if the Company’s products infringe on a third party’s intellectual property rights. The maximum amount of these indemnifications cannot be reasonably estimated due to their uncertain nature. Historically, the Company has not made payments related to these indemnifications.

15.    Segment Information
(a) Reportable Segments
The Company manages its business in two segments: PBM and HCIT. The Company and its chief operating decision maker evaluates segment performance and allocates resources based upon revenue and gross profit. Selling, general and administrative expenses, product development, depreciation and amortization, interest and other income and interest expense are reported as corporate expenses as these are managed on a consolidated basis by the Company.
PBM Segment
The Company provides comprehensive PBM services to customers, which include managed care organizations, local governments, unions, corporations, HMOs, employers, workers’ compensation plans, third party health care plan administrators, and federal and state government programs through its network of licensed pharmacies throughout the United States. The PBM services include electronic point-of-sale pharmacy claims management, retail pharmacy network management, mail and specialty pharmacy claims management, Medicare Part D services, benefit design consultation, preferred drug management programs, drug review and analysis, consulting services, data access and reporting and information analysis.

68
SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Revenue primarily consists of sales of prescription drugs, together with any associated administrative fees, to customers and participants, through the Company’s nationwide network of participating pharmacies and the Company's own mail and specialty pharmacies. Revenue and costs related to the sales of prescription drugs is recognized when the claims are adjudicated and the prescription drugs are shipped. Claims are adjudicated at the point-of-sale using an on-line processing system. Revenue and costs primarily consists of sales of prescription drugs to customers and participants. These revenues and associated costs are recognized when the prescription drugs are shipped from the Company's pharmacy locations.
HCIT Segment
The Company is also a leading provider of HCIT solutions and services to providers, payors and other participants in the pharmaceutical supply chain in North America. The Company’s product offerings include a wide range of software products for managing prescription drug programs and for drug prescribing and dispensing. The Company’s solutions are available on a license basis with on-going maintenance and support or on a transaction fee basis using an ASP model. The Company’s payor customers include managed care organizations, Blue Cross Blue Shield organizations, government agencies, employers and intermediaries such as pharmacy benefit managers. The Company’s provider customers include over 1,900 independent, regional chain, institutional, and mail-order pharmacies. The solutions offered by the Company’s services assist both payors and providers in managing the complexity and reducing the cost of their prescription drug programs and dispensing activities. The Company’s profitability from HCIT depends primarily on revenue derived from transaction processing services, software license sales, hardware sales, maintenance, and professional services.
Financial information by segment (in thousands):
Year Ended December 31, 2011
PBM
 
HCIT
 
Corporate
 
Total
Revenues
$
4,859,243

 
$
116,253

 
$
—

 
$
4,975,496

Cost of revenue
4,602,662

 
63,346

 
—

 
4,666,008

Gross profit
256,581

 
52,907

 
—

 
309,488

Other corporate expenses
—

 
—

 
171,194

 
171,194

Income before income taxes
—

 
—

 
—

 
138,294

Income tax expense
—

 
—

 
—

 
46,508

Net income
—

 
—

 
—

 
$
91,786

Goodwill
$
271,380

 
$
19,665

 
$
—

 
$
291,045

Total assets
$
756,755

 
$
293,552

 


 
$
1,050,307

Year Ended December 31, 2010
PBM
 
HCIT
 
Corporate
 
Total
Revenues
$
1,841,600

 
$
106,789

 
$
—

 
$
1,948,389

Cost of revenue
1,681,944

 
52,390

 
—

 
1,734,334

Gross profit
159,656

 
54,399

 
—

 
214,055

Other corporate expenses
—

 
—

 
116,499

 
116,499

Income before income taxes
—

 
—

 
—

 
97,556

Income tax expense
—

 
—

 
—

 
32,821

Net income
—

 
—

 
—

 
$
64,735

Goodwill
$
200,932

 
$
19,665

 
$
—

 
$
220,597

Total assets
$
579,532

 
$
237,258

 


 
$
816,790

 
Year Ended December 31, 2009
PBM
 
HCIT
 
Corporate
 
Total
Revenues
$
1,335,961

 
$
102,673

 
$
—

 
$
1,438,634

Cost of revenue
1,197,757

 
54,277

 
—

 
1,252,034

Gross profit
138,204

 
48,396

 
—

 
186,600

Other corporate expenses
—

 
—

 
118,515

 
118,515

Income before income taxes
—

 
—

 
—

 
68,085

Income tax expense
—

 
—

 
—

 
22,024

Net income
—

 
—

 
—

 
$
46,061

Goodwill
$
122,122

 
$
19,665

 
$
—

 
$
141,787

   Total assets
$
412,915

 
$
249,165

 


 
$
662,080



69
SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(b) Geographic Information
Revenues of the Company are primarily earned in the United States. The Company’s Canadian operations represented less than 1.0% of the Company’s consolidated revenues for the years ended December 31, 2011, 2010 and 2009.
(c) Major Customers
During the year ended December 31, 2011, one customer accounted for 40% of total revenue. During the year ended December 31, 2010, one customer accounted for 10.5% of total revenue. During the year ended December 31, 2009, one customer accounted for 12.6% of total revenue and another for 11.7% of total revenue. In 2011, 2010 and 2009, these major customers were included in the PBM segment.
At December 31, 2011, one customer accounted for 16.0% of the total accounts receivable balance. At December 31, 2010, no individual customer accounted for more than 10% of the total accounts receivable balance.

16.
Financial Instruments
(a)
Credit risk:
The Company is subject to concentrations of credit risk through cash and cash equivalents and accounts receivable. The Company monitors the credit risk and credit standing of counterparties on a regular basis.
(b)
Interest rate risk:
To manage credit risks, the Company selects counterparties based on credit assessments, limits overall exposure to any single counterparty, and monitors the market position with each counterparty. The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company does not enter into derivative instruments for any purpose other than hedging identified exposures. That is, the Company does not speculate using derivative instruments and has not designated any instruments as fair value hedges or hedges of the foreign currency exposure of a net investment in foreign operations.
(c)
Fair values:
The estimated fair value of the Company’s financial instruments has been determined based on the Company’s assessment of available market information and appropriate valuation methodologies. However, these estimates may not necessarily be indicative of the amounts that the Company could realize in a current market exchange. See Note 17 for the Company’s disclosure on the fair value of derivative instruments. The Company has determined that it is not meaningful to calculate the fair value of the non-current accrued liabilities as a portion of this amount is an accrual for tax uncertainties.
(d)
Foreign exchange risk:
The Company is subject to foreign exchange risk related to its operations in Canada. The Company does not enter into derivative instruments to mitigate this risk. Exposure to fluctuations in Canadian-dollar denominated transactions is partially offset by Canadian dollar-denominated assets and liabilities.
17. Fair Value
Fair value measurement guidance defines a hierarchy to prioritize the inputs to valuation techniques used to measure fair value into three broad levels, with Level 1 considered the most reliable. For assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheet, the table below categorizes fair value measurements across the three levels as of December 31, 2011 (in thousands):
Year Ended December 31, 2011
Quoted Prices in Active Markets (Level 1)
 
Significant Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Total
Liabilities
 
 
 
 
 
 
 
   Contingent purchase price consideration
$
—

 
—

 
9,406

 
$
9,406

Year Ended December 31, 2010
Quoted Prices in Active Markets (Level 1)
 
Significant Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Total
Liabilities
 
 
 

 
 
 
 
   Derivatives
$
—

 
274

 
—

 
$
274

   Contingent purchase price consideration
$
—

 
—

 
4,865

 
$
4,865

When available and appropriate, the Company uses quoted market prices in active markets to determine fair value, and classifies such items within Level 1. Level 1 values include instruments traded on a public exchange. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability or can be derived principally from or corroborated by observable market data. If the Company were to use one or more significant unobservable inputs for a model-derived valuation,

70
SXC HEALTH SOLUTIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


the resulting valuation would be classified in Level 3.
On October 3, 2011, the Company completed the acquisition of SaveDirectRx, the exclusive mail-order pharmacy provider for PTRX, based in San Antonio, Texas. The purchase agreement includes contingent purchase price consideration in the form of an earn-out payment of up to $4.5 million contingent upon the SaveDirectRx book of business meeting or exceeding certain gross profit and revenue targets for the 2012 fiscal year. The $4.2 million fair-value of the contingent purchase price was accrued at the date of acquisition as part of the total consideration transferred. The fair value of the contingent purchase price consideration was $4.3 million as of December 31, 2011. The change in the value of the contingent purchase price of $0.1 million from October 3, 2011 was recorded to interest expense representing the change in the present value of the amount expected to be paid in the future for the contingent purchase price consideration. The Company utilized a probability weighted discounted cash flow method to arrive at the fair value of the contingent consideration based on the expected results and considering the performance targets of SaveDirectRx in 2012. As of December 31, 2011, the contingent purchase price consideration is classified as other liabilities in the consolidated balance sheet.
The Company acquired MedfusionRx, a specialty pharmacy provider on December 28, 2010. The selling members of Medfusion have the opportunity to earn an additional $5.5 million in cash, subject to the satisfaction of certain performance targets in the 2012 fiscal year. The $4.9 million fair-value of the contingent purchase price was accrued at the date of acquisition as part of the total consideration transferred. The fair value of the contingent purchase price consideration was $5.1 million as of December 31, 2011. The change in the value of the contingent purchase price of $0.3 million from December 31, 2010 was recorded to interest expense representing the change in the present value of the amount expected to be paid in the future for the contingent purchase price consideration. The Company utilized a probability weighted discounted cash flow method to arrive at the fair value of the contingent consideration based on the expected results of Medfusion in 2012. As of December 31, 2011 and December 31, 2010, the contingent purchase price consideration is classified as other liabilities in the consolidated balance sheets.
As the fair value measurement for the contingent consideration is based on inputs not observed in the market, these measurements are classified as Level 3 measurements as defined by fair value measurements guidance.
The Company has classified derivative liabilities as accrued liabilities as of December 31, 2010. The reported fair value was estimated based on quoted prices from a financial institution which are derived from movements in the underlying interest rate markets. The total change in fair value was $0.3 million for the year ended December 31, 2010, and was mostly recognized as other (income) expense in the consolidated statement of operations.
During 2011 and 2010 there were no movements of fair value measurements between levels 1, 2 and 3.
18.    Supplemental Information
 
Beginning Balance
 
Charged to Expense
 
Adjustments
 
Ending Balance
 
(In thousands)
Allowance for doubtful accounts
 

 
 

 
 

 
 

Year Ended December 31, 2011
$
3,553

 
(301
)
 
(527
)
 
$
2,725

Year Ended December 31, 2010
$
2,871

 
$
1,219

 
(537
)
 
$
3,553

Year Ended December 31, 2009
$
3,570

 
1,085

 
(1,784
)
 
$
2,871

 
Beginning Balance
 
Charged to Expense
 
Adjustments
 
Ending Balance
 
(In thousands)
Valuation allowance for deferred tax assets
 

 
 

 
 

 
 

Year Ended December 31, 2011
$
3,714

 
(111
)
 
—

 
$
3,603

Year Ended December 31, 2010
$
3,649

 
65

 
—

 
$
3,714

Year Ended December 31, 2009
$
5,712

 
(1,881
)
 
(182
)
 
$
3,649



71


ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
 
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation (under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer), pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), of the effectiveness of our disclosure controls and procedures as of December 31, 2011 (the “Evaluation Date”), which is the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the Evaluation Date such disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the 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 were effective to ensure that the information required to be disclosed in the reports filed or submitted by the Company under the Exchange Act was accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011, based on the criteria set forth in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, as of December 31, 2011, our internal control over financial reporting is effective. Our independent registered public accounting firm, KPMG LLP, has issued an audit report indicating that the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the COSO. KPMG LLP’s audit report is included in Item 8 of this Form 10-K.
There were no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.
OTHER INFORMATION
None


72


PART III

ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information relating to directors is contained in the “Matters to be Acted Upon at the Meeting — Election of Directors” section in the Proxy Statement and is incorporated herein by reference.
Information relating to executive officers is contained in the “Executive Officers” section in the Proxy Statement, and is incorporated herein by reference.
Information relating to compliance with Section 16(a) of the Securities Exchange Act of 1934 is contained in the “Section 16(a) Beneficial Ownership Reporting Compliance” section in the Proxy Statement, and is incorporated herein by reference.
Information relating to the audit committee and the audit committee financial expert is contained in the “Report of the Audit Committee” and “Statement of Corporate Governance Practices” sections in the Proxy Statement and is incorporated herein by reference.
The Company’s Code of Business Conduct and Ethics applies to all directors, officers and employees. You can find the Code of Business Conduct and Ethics on the Company’s internet website, www.sxc.com. The Company will post any amendments to the Code of Business Conduct and Ethics, and any waivers that are required to be disclosed by the rules of either the SEC or NASDAQ, on its internet site.

ITEM 11.
EXECUTIVE COMPENSATION
Information relating to executive and director compensation is contained in the “Executive Compensation” section in the Proxy Statement, and is incorporated herein by reference.
The material incorporated herein by reference to the information set forth under the subheading “Compensation Committee Report” contained in the “Executive Compensation” section in the Proxy Statement shall be deemed furnished, and not filed, in this Form 10-K and shall not be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 as a result of this furnishing, except to the extent that is specifically incorporated by reference by the Company.
Information relating to compensation committee interlocks and insider participation is incorporated herein by reference to the information under the heading “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement.

ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information relating to security ownership of certain beneficial owners and management is contained in the “Voting Securities and Principal Shareholders Thereof” section in the Proxy Statement, and is incorporated herein by reference.
Information related to compensation plans under which our equity securities are authorized for issuance as of December 31, 2011 is set forth in the table below.
Plan Category
Number of Securities to be Issued Upon Exercise of Outstanding Equity Awards
 
Weighted Average Exercise Price of Outstanding Options (1)
 
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plan approved by security holders — Long-Term Incentive Plan ("LTIP") (2)
1,870,282

 
—

 
2,138,470

Equity compensation plan approved by security holders — Employee Stock Purchase Plan (3)
—

 
—

 
—

1.
At December 31, 2011, the Company had outstanding 81,522 options denominated in Canadian dollars with a weighted average exercise price of C$6.41. There are 1,178,851 options outstanding that are denominated in U.S. dollars with a weighted average exercise price of $20.42. The remaining 609,909 securities outstanding are RSUs with a weighted average grant date fair value of $14.06
2.
The LTIP provides for the grant of stock option awards, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance awards and other stock-based awards to eligible persons, including executive officers and directors of the Company.
3.
On March 11, 2009, the Employee Stock Purchase Plan was amended to provide that all shares available thereunder would be acquired solely on the open market and there would be no further new issuances of shares.

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information about certain relationships and related transactions and director independence is contained in the “Related Party Transactions” and “Statement of Corporate Governance Practices — Board of Directors — Independence” sections in the Proxy Statement, and is incorporated herein by reference.


73


ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information on principal accountant fees and services is contained in the “Matters to be Acted Upon at the Meeting — Appointment of Independent Registered Public Accountants” section in the Proxy Statement, and is incorporated herein by reference.
 

74


PART IV

ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1) Financial Statements:
See Item 8, Financial Statements and Supplementary Data, filed herewith, for a list of financial statements.
2) Financial Statement Schedules:
All financial statement schedules have been omitted because the information either is not required or is otherwise included in the consolidated financial statements and notes thereto.
3) Exhibits Filed:
Exhibit Number
Description of Document
Reference
2.1

Purchase Agreement, dated December 1, 2010, by and among MedfusionRx, L.L.C., Medtown South, L.L.C, the members of Medfusion identified therein, Ron Cunningham, in his capacity as Selling Party Representative pursuant to Section 9.08 thereof, and SXC Health Solutions, Inc. *

Incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by SXC with the SEC on December 29, 2010
2.2

Unit Purchase Agreement, dated November 16, 2011, by and among SXC Health Solutions, Inc., HealthTran LLC, HealthTrans Data Services, LLC, ABRY Senior Equity II, L.P., ASE II-A HealthTran, L.P., ABRY Senior Equity Co-Investment, L.P., The Jack and Mary McClurg Exempt Trust, The Hutchison Family Exempt Trust, Jack W. McClurg, both in his individual capacity and in his capacity as the trustee of The Jack and Mary McClurg Exempt Trust, Louis W. Hutchison, Jr., both in his individual capacity and in his capacity as the trustee of The Hutchison Family Exempt Trust, and HealthTrans Data Services, LLC, in its capacity as the Sellers' Agent thereunder.*

Incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by SXC with the SEC on January 5, 2012.
3.1

Certificate of Amalgamation of SYSTEMS XCELLENCE INC.
Incorporated herein by reference to Exhibit 3.1 to the Annual Report on Form 10-K filed by SXC with the SEC on March 17, 2008
3.2

Certificate of Continuance of SXC HEALTH SOLUTIONS CORP. (formerly named SYSTEMS XCELLENCE INC.)
Incorporated herein by reference to Exhibit 3.2 to the Annual Report on Form 10-K filed by SXC with the SEC on March 17, 2008
3.3

Amended and Restated Bylaws of SXC Health Solutions Corp. 
Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by SXC with the SEC on June 27, 2008
4.1

Specimen of Common Stock Certificate
Incorporated herein by reference to Exhibit 4.1 to the Annual Report on Form 10-K filed by SXC with the SEC on March 17, 2008
10.1†

SXC Health Solutions Corp. Long-Term Incentive Plan
Incorporated by reference to Exhibit 10.1 to SXC Health Solutions Corp.’s Current Report on Form 8-K filed on May 19, 2009.
10.2†

Form of SXC Health Solutions Corp. Stock Option Agreement for certain Employees under the SXC Health Solutions Corp. Long-Term Incentive Plan
Incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on August 7, 2009.
10.3†

Form of SXC Health Solutions Corp. Time-Vesting Restricted Stock Unit Award Agreement for certain Employees under the SXC Health Solutions Corp. Long-Term Incentive Plan
Incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on August 7, 2009.
10.4†

Form of SXC Health Solutions Corp. Time-Vesting Restricted Stock Unit Award Agreement for Non-Employee Directors under the SXC Health Solutions Corp. Long-Term Incentive Plan
Incorporated herein by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on August 7, 2009.
10.5†

Form of SXC Health Solutions Corp. Performance-Based Restricted Stock Unit Award Agreement for certain Employees under the SXC Health Solutions Corp. Long-Term Incentive Plan
Incorporated herein by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on August 7, 2009.
10.6†

Form of SXC Health Solutions Corp. Time-Vesting Restricted Stock Unit Award Agreement for certain Employees under the SXC Health Solutions Corp. Long-Term Incentive Plan
Incorporated herein by reference to Exhibit 10.6 to the Annual Report on Form 10-K filed by SXC with the SEC on March 5, 2010
10.7†

Form of SXC Health Solutions Corp. Stock Option Agreement for certain Employees, Non-Employee Directors and Service Providers
Incorporated herein by reference to Exhibit 10.19 to the Annual Report on Form 10-K filed by SXC with the SEC on March 17, 2008

75


Exhibit Number
Description of Document
Reference
10.8†

Amended and Restated 2000 Restricted Stock Grant Plan of SXC Health Solutions, Corp., effective September 16, 2008
Incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on November 6, 2008
10.9†

Employment Agreement, effective as of June 30, 2008, among SXC Health Solutions Corp., SXC Health Solutions, Inc. and Mark Thierer
Incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on August 11, 2008
10.10†

Employment Agreement, effective as of June 30, 2008, among SXC Health Solutions Corp., SXC Health Solutions, Inc. and Jeffrey G. Park
Incorporated herein by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on August 11, 2008
10.11†

Employment Agreement, effective as of November 6, 2008, between SXC Health Solutions, Inc. and John Romza
Incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on November 6, 2008
10.12†

Employment Agreement, effective as of November 6, 2008, between SXC Health Solutions, Inc. and Mike Bennof
Incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on November 6, 2008
10.13†

Employment Agreement, effective as of November 6, 2008, among SXC Health Solutions, Inc., informedRx and B. Greg Buscetto
Incorporated herein by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on November 6, 2008
10.14†

First Amendment to the Employment Agreement, effective as of June 30, 2008, among SXC Health Solutions Corp., SXC Health Solutions, Inc. and Mark Thierer
Incorporated herein by reference to Exhibit 10.15 to the Annual Report on Form 10-K filed by SXC with the SEC on March 13, 2009
10.15†

First Amendment to the Employment Agreement, effective as of June 30, 2008, among SXC Health Solutions Corp., SXC Health Solutions, Inc. and Jeffrey G. Park
Incorporated herein by reference to Exhibit 10.16 to the Annual Report on Form 10-K filed by SXC with the SEC on March 13, 2009
10.16†

SXC Health Solutions, Inc. Deferred Compensation Plan (Effective January 1, 2009)
Incorporated herein by reference to Exhibit 10.17 to the Annual Report on Form 10-K filed by SXC with the SEC on March 13, 2009
10.17†

2007 Employee Stock Purchase Plan
Incorporated herein by reference to Exhibit 4.1 to the Form S-8 (SEC file No. 333-145449) filed by SXC on August 14, 2007
10.18†

Amendment No. 1 to the SXC Health Solutions Corp. 2007 Employee Stock Purchase Plan, dated March 11, 2009
Incorporated herein by reference to Exhibit 10.18 to the Annual Report on Form 10-K filed by SXC with the SEC on March 13, 2009
10.19†

Amendment No. 2 to the SXC Health Solutions Corp. 2007 Employee Stock Purchase Plan, dated March 2, 2010
Incorporated herein by reference to Exhibit 10.22 to the Annual Report on Form 10-K filed by SXC with the SEC on March 5, 2010
10.20

Lease Agreement between HINES VAF WESTWOOD OF LISLE II, L.P. and SXC HEALTH SOLUTIONS, INC., dated March 24, 2006
Incorporated herein by reference to Exhibit 10.1 to the Annual Report on Form 10-K filed by SXC with the SEC on March 17, 2008
10.21†

Amendment to Employment Agreement, effective as of September 1, 2009, among SXC Health Solutions, Inc., informedRx and B. Greg Buscetto
Incorporated herein by reference to Exhibit 10.32 to the Annual Report on Form 10-K filed by SXC with the SEC on March 5, 2010
10.22†

Amendment to Employment Agreement, effective as of January 1, 2010, among SXC Health Solutions, Inc., informedRx and B. Greg Buscetto
Incorporated herein by reference to Exhibit 10.33 to the Annual Report on Form 10-K filed by SXC with the SEC on March 5, 2010
10.23†

Separation Agreement and General Release dated December 13, 2010 and effective as of November 1, 2010 between SXC Health Solutions Inc., and Mike
Bennof

Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by SXC with the SEC on December 17, 2010
10.24†

Employment Agreement, effective as of June 22, 2010, among SXC Health Solutions Inc., and Joel Saban
Incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on August 5, 2010
10.25†

Second Amendment to the Employment Agreement, effective as of September 1, 2010, among SXC Health Solutions Corp., SXC Health Solutions, Inc. and Mark Thierer
Incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on November 4, 2010
10.26†

Second Amendment to the Employment Agreement, effective as of September 1, 2010, among SXC Health Solutions Corp., SXC Health Solutions, Inc. and Jeffrey G. Park

Incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on November 4, 2010
10.27†

SXC Health Solutions Corp. Incentive Plan
Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on May 17, 2010.

76


Exhibit Number
Description of Document
Reference
10.28

Form of indemnification agreement for directors and certain officers of SXC Health Solutions Corp.
Incorporated by reference to Exhibit 10.28 to the Annual Report on Form 10-K filed by SXC with the SEC on February 25, 2011
10.29†

Employment Agreement, effective as of February 16, 2008, among SXC Health Solutions Inc., and Clifford E. Berman.
Incorporated by reference to Exhibit 10.29 to the Annual Report on Form 10-K filed by SXC with the SEC on February 25, 2011
10.30†

First Amendment to the Employment Agreement, effective as of December, 22, 2008, among SXC Health Solutions, Inc. and Clifford E. Berman
Incorporated by reference to Exhibit 10.30 to the Annual Report on Form 10-K filed by SXC with the SEC on February 25, 2011
10.31†

Second Amendment to the Employment Agreement, effective as of June 17, 2009, among SXC Health Solutions, Inc. and Clifford E. Berman
Incorporated by reference to Exhibit 10.31 to the Annual Report on Form 10-K filed by SXC with the SEC on February 25, 2011
10.32

Credit Agreement, dated December 16, 2011, among SXC Health Solutions Corp., as borrower, JPMorgan Chase Bank, N.A., as a lender and as administrative agent, Bank of America, N.A., SunTrust Bank, Fifth Third Bank, PNC Bank, N.A. and The Toronto-Dominion Bank, as lenders and co-syndication agents, Barclays Bank PLC, Morgan Stanley Bank, N.A., Credit Suisse AG, Cayman Islands Branch, The Northern Trust Company, PNC Bank Canada Branch, U.S. Bank National Association and U.S. Bank National Association, Canadian Branch, as lenders, the other lenders from time to time party thereto and J.P. Morgan Securities LLC, as sole bookrunner and sole lead arranger

Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by SXC with the SEC on December 20, 2011
10.33

Subsidiary Guaranty, dated December 16, 2011, among the Guarantors party thereto and JPMorgan Chase Bank, N.A., as administrative agent.

Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by SXC with the SEC on December 20, 2011
12.1

Statement of computation of ratios of earnings to fixed charges
Filed herewith
18.1

KPMG LLP Preferability Letter (United States)
Incorporated herein by reference to Exhibit 18.1 to the Annual Report on Form 10-K filed by SXC with the SEC on March 13, 2009
21.1

List of Subsidiaries
Filed herewith
23.1

Consent of KPMG LLP
Filed herewith
31.1

Rule 13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act
Filed herewith
31.2

Rule 13a-14(a)/15d-14(a) Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
Filed herewith
32.1

Section 1350 Certification of CEO as adopted by Section 906 of the Sarbanes-Oxley Act
Filed herewith
32.2

Section 1350 Certification of CFO as adopted by Section 906 of the Sarbanes-Oxley Act
Filed herewith
 
 
 
†
Indicates management contract or compensatory plan.
 
*
The registrant agrees to furnish supplementary to the SEC a copy of any omitted schedule or exhibit upon the request of the SEC in accordance with Item 601(b)(2) of Regulation S-K.
 


77


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 24, 2012.
 
SXC HEALTH SOLUTIONS CORP.
 
 
 
 
By: 
/s/  Mark A. Thierer
 
 
Mark A. Thierer
 
 
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacity and on the dates indicated.
By:
/s/  Mark A. Thierer
Chairman and Chief Executive Officer
(Principal Executive Officer and Director)
February 24, 2012
Mark A. Thierer
 
 
 
 
By:
/s/  Jeffrey Park
Chief Financial Officer and Executive Vice President, Finance
(Principal Financial and Accounting Officer)
February 24, 2012
Jeffrey Park
 
 
 
 
By:
/s/  Peter J. Bensen
Director
February 24, 2012
Peter J. Bensen
 
 
 
 
By:
/s/  Steven Cosler
Director
February 24, 2012
Steven Cosler
 
 
 
 
By:
/s/  William J. Davis
Director
February 24, 2012
William J. Davis
 
 
 
 
By:
/s/  Anthony R. Masso
Director
February 24, 2012
Anthony R. Masso
 
 
 
 
By:
/s/  Philip R. Reddon
Director
February 24, 2012
Philip R. Reddon
 
 
 
 
By:
/s/  Curtis J. Thorne
Director
February 24, 2012
Curtis J. Thorne



78


Exhibit Index
Exhibit Number
Description of Document
Reference
2.1

Purchase Agreement, dated December 1, 2010, by and among MedfusionRx, L.L.C., Medtown South, L.L.C, the members of Medfusion identified therein, Ron Cunningham, in his capacity as Selling Party Representative pursuant to Section 9.08 thereof, and SXC Health Solutions, Inc. *

Incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by SXC with the SEC on December 29, 2010
2.2

Unit Purchase Agreement, dated November 16, 2011, by and among SXC Health Solutions, Inc., HealthTran LLC, HealthTrans Data Services, LLC, ABRY Senior Equity II, L.P., ASE II-A HealthTran, L.P., ABRY Senior Equity Co-Investment, L.P., The Jack and Mary McClurg Exempt Trust, The Hutchison Family Exempt Trust, Jack W. McClurg, both in his individual capacity and in his capacity as the trustee of The Jack and Mary McClurg Exempt Trust, Louis W. Hutchison, Jr., both in his individual capacity and in his capacity as the trustee of The Hutchison Family Exempt Trust, and HealthTrans Data Services, LLC, in its capacity as the Sellers' Agent thereunder.*
Incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by SXC with the SEC on January 5, 2012.
3.1

Certificate of Amalgamation of SYSTEMS XCELLENCE INC.
Incorporated herein by reference to Exhibit 3.1 to the Annual Report on Form 10-K filed by SXC with the SEC on March 17, 2008
3.2

Certificate of Continuance of SXC HEALTH SOLUTIONS CORP. (formerly named SYSTEMS XCELLENCE INC.)
Incorporated herein by reference to Exhibit 3.2 to the Annual Report on Form 10-K filed by SXC with the SEC on March 17, 2008
3.3

Amended and Restated Bylaws of SXC Health Solutions Corp. 
Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by SXC with the SEC on June 27, 2008
4.1

Specimen of Common Stock Certificate
Incorporated herein by reference to Exhibit 4.1 to the Annual Report on Form 10-K filed by SXC with the SEC on March 17, 2008
10.1†

SXC Health Solutions Corp. Long-Term Incentive Plan
Incorporated by reference to Exhibit 10.1 to SXC Health Solutions Corp.’s Current Report on Form 8-K filed on May 19, 2009.
10.2†

Form of SXC Health Solutions Corp. Stock Option Agreement for certain Employees under the SXC Health Solutions Corp. Long-Term Incentive Plan
Incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on August 7, 2009.
10.3†

Form of SXC Health Solutions Corp. Time-Vesting Restricted Stock Unit Award Agreement for certain Employees under the SXC Health Solutions Corp. Long-Term Incentive Plan
Incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on August 7, 2009.
10.4†

Form of SXC Health Solutions Corp. Time-Vesting Restricted Stock Unit Award Agreement for Non-Employee Directors under the SXC Health Solutions Corp. Long-Term Incentive Plan
Incorporated herein by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on August 7, 2009.
10.5†

Form of SXC Health Solutions Corp. Performance-Based Restricted Stock Unit Award Agreement for certain Employees under the SXC Health Solutions Corp. Long-Term Incentive Plan
Incorporated herein by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on August 7, 2009.
10.6†

Form of SXC Health Solutions Corp. Time-Vesting Restricted Stock Unit Award Agreement for certain Employees under the SXC Health Solutions Corp. Long-Term Incentive Plan
Incorporated herein by reference to Exhibit 10.6 to the Annual Report on Form 10-K filed by SXC with the SEC on March 5, 2010
10.7†

Form of SXC Health Solutions Corp. Stock Option Agreement for certain Employees, Non-Employee Directors and Service Providers
Incorporated herein by reference to Exhibit 10.19 to the Annual Report on Form 10-K filed by SXC with the SEC on March 17, 2008
10.8†

Amended and Restated 2000 Restricted Stock Grant Plan of SXC Health Solutions, Corp., effective September 16, 2008
Incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on November 6, 2008
10.9†

Employment Agreement, effective as of June 30, 2008, among SXC Health Solutions Corp., SXC Health Solutions, Inc. and Mark Thierer
Incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on August 11, 2008
10.10†

Employment Agreement, effective as of June 30, 2008, among SXC Health Solutions Corp., SXC Health Solutions, Inc. and Jeffrey G. Park
Incorporated herein by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on August 11, 2008
10.11†

Employment Agreement, effective as of November 6, 2008, between SXC Health Solutions, Inc. and John Romza
Incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on November 6, 2008

79


Exhibit Number
Description of Document
Reference
10.12†

Employment Agreement, effective as of November 6, 2008, between SXC Health Solutions, Inc. and Mike Bennof
Incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on November 6, 2008
10.13†

Employment Agreement, effective as of November 6, 2008, among SXC Health Solutions, Inc., informedRx and B. Greg Buscetto
Incorporated herein by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on November 6, 2008
10.14†

First Amendment to the Employment Agreement, effective as of June 30, 2008, among SXC Health Solutions Corp., SXC Health Solutions, Inc. and Mark Thierer
Incorporated herein by reference to Exhibit 10.15 to the Annual Report on Form 10-K filed by SXC with the SEC on March 13, 2009
10.15†

First Amendment to the Employment Agreement, effective as of June 30, 2008, among SXC Health Solutions Corp., SXC Health Solutions, Inc. and Jeffrey G. Park
Incorporated herein by reference to Exhibit 10.16 to the Annual Report on Form 10-K filed by SXC with the SEC on March 13, 2009
10.16†

SXC Health Solutions, Inc. Deferred Compensation Plan (Effective January 1, 2009)
Incorporated herein by reference to Exhibit 10.17 to the Annual Report on Form 10-K filed by SXC with the SEC on March 13, 2009
10.17†

2007 Employee Stock Purchase Plan
Incorporated herein by reference to Exhibit 4.1 to the Form S-8 (SEC file No. 333-145449) filed by SXC on August 14, 2007
10.18†

Amendment No. 1 to the SXC Health Solutions Corp. 2007 Employee Stock Purchase Plan, dated March 11, 2009
Incorporated herein by reference to Exhibit 10.18 to the Annual Report on Form 10-K filed by SXC with the SEC on March 13, 2009
10.19†

Amendment No. 2 to the SXC Health Solutions Corp. 2007 Employee Stock Purchase Plan, dated March 2, 2010
Incorporated herein by reference to Exhibit 10.22 to the Annual Report on Form 10-K filed by SXC with the SEC on March 5, 2010
10.20

Lease Agreement between HINES VAF WESTWOOD OF LISLE II, L.P. and SXC HEALTH SOLUTIONS, INC., dated March 24, 2006
Incorporated herein by reference to Exhibit 10.1 to the Annual Report on Form 10-K filed by SXC with the SEC on March 17, 2008
10.21†

Amendment to Employment Agreement, effective as of September 1, 2009, among SXC Health Solutions, Inc., informedRx and B. Greg Buscetto
Incorporated herein by reference to Exhibit 10.32 to the Annual Report on Form 10-K filed by SXC with the SEC on March 5, 2010
10.22†

Amendment to Employment Agreement, effective as of January 1, 2010, among SXC Health Solutions, Inc., informedRx and B. Greg Buscetto
Incorporated herein by reference to Exhibit 10.33 to the Annual Report on Form 10-K filed by SXC with the SEC on March 5, 2010
10.23†

Separation Agreement and General Release dated December 13, 2010 and effective as of November 1, 2010 between SXC Health Solutions Inc., and Mike
Bennof

Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by SXC with the SEC on December 17, 2010
10.24†

Employment Agreement, effective as of June 22, 2010, among SXC Health Solutions Inc., and Joel Saban
Incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on August 5, 2010
10.25†

Second Amendment to the Employment Agreement, effective as of September 1, 2010, among SXC Health Solutions Corp., SXC Health Solutions, Inc. and Mark Thierer
Incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on November 4, 2010
10.26†

Second Amendment to the Employment Agreement, effective as of September 1, 2010, among SXC Health Solutions Corp., SXC Health Solutions, Inc. and Jeffrey G. Park

Incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed by SXC with the SEC on November 4, 2010
10.27†

SXC Health Solutions Corp. Incentive Plan
Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on May 17, 2010.
10.28

Form of indemnification agreement for directors and certain officers of SXC Health Solutions Corp.
Incorporated by reference to Exhibit 10.28 to the Annual Report on Form 10-K filed by SXC with the SEC on February 25, 2011
10.29†

Employment Agreement, effective as of February 16, 2008, among SXC Health Solutions Inc., and Clifford E. Berman.
Incorporated by reference to Exhibit 10.29 to the Annual Report on Form 10-K filed by SXC with the SEC on February 25, 2011
10.30†

First Amendment to the Employment Agreement, effective as of December, 22, 2008, among SXC Health Solutions, Inc. and Clifford E. Berman
Incorporated by reference to Exhibit 10.30 to the Annual Report on Form 10-K filed by SXC with the SEC on February 25, 2011
10.31†

Second Amendment to the Employment Agreement, effective as of June 17, 2009, among SXC Health Solutions, Inc. and Clifford E. Berman
Incorporated by reference to Exhibit 10.31 to the Annual Report on Form 10-K filed by SXC with the SEC on February 25, 2011

80


Exhibit Number
Description of Document
Reference
10.32

Credit Agreement, dated December 16, 2011, among SXC Health Solutions Corp., as borrower, JPMorgan Chase Bank, N.A., as a lender and as administrative agent, Bank of America, N.A., SunTrust Bank, Fifth Third Bank, PNC Bank, N.A. and The Toronto-Dominion Bank, as lenders and co-syndication agents, Barclays Bank PLC, Morgan Stanley Bank, N.A., Credit Suisse AG, Cayman Islands Branch, The Northern Trust Company, PNC Bank Canada Branch, U.S. Bank National Association and U.S. Bank National Association, Canadian Branch, as lenders, the other lenders from time to time party thereto and J.P. Morgan Securities LLC, as sole bookrunner and sole lead arranger
Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by SXC with the SEC on December 20, 2011
10.33

Subsidiary Guaranty, dated December 16, 2011, among the Guarantors party thereto and JPMorgan Chase Bank, N.A., as administrative agent.
Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by SXC with the SEC on December 20, 2011
12.1

Statement of computation of ratios of earnings to fixed charges
Filed herewith
18.1

KPMG LLP Preferability Letter (United States)
Incorporated herein by reference to Exhibit 18.1 to the Annual Report on Form 10-K filed by SXC with the SEC on March 13, 2009
21.1

List of Subsidiaries
Filed herewith
23.1

Consent of KPMG LLP
Filed herewith
31.1

Rule 13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act
Filed herewith
31.2

Rule 13a-14(a)/15d-14(a) Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
Filed herewith
32.1

Section 1350 Certification of CEO as adopted by Section 906 of the Sarbanes-Oxley Act
Filed herewith
32.2

Section 1350 Certification of CFO as adopted by Section 906 of the Sarbanes-Oxley Act
Filed herewith
 
 
 
†
Indicates management contract or compensatory plan.
 
*
The registrant agrees to furnish supplementary to the SEC a copy of any omitted schedule or exhibit upon the request of the SEC in accordance with Item 601 (b)(2) of Regulation S-K.
 



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